Bonds Prove Best Financial Asset for 1st Time Since at Least ‘97

December 31, 2011, 1:35 PM EST

Article from Businessweek

By Cordell Eddings

Dec. 31 (Bloomberg) -- For the first time since at least 1997, the bond market produced the highest returns of any financial asset, beating stocks, commodities and the dollar as Europe’s sovereign-debt crisis threatened the global economy.

Led by U.S. Treasuries, fixed-income securities worldwide returned 5.81 percent, including reinvested interest, this year through Dec. 29, Bank of America Merrill Lynch indexes show. The Dollar Index tracking the U.S. currency against six peers rose 1.6 percent, while the Standard & Poor’s GSCI Total Return Index of commodities fell 1.18 percent and the MSCI All Country World Index of shares tumbled 6.9 percent with dividends.

“The year was one of tremendous volatility, brought on by increasing global and political economic uncertainties, which drove investors massive flight to quality into bonds,” Christopher Sullivan, who oversees $1.9 billion as chief investment officer at United Nations Federal Credit Union in New York, said in a telephone interview on Dec. 27. “There has been a general softening of expectations for growth and inflation worldwide, and bonds have thrived.”

The European Central Bank and the Reserve Bank of Australia led central banks that reduced interest rates as the International Monetary Fund cut its forecast for global economic growth to 4 percent for this year and next from prior estimates of 4.3 percent for 2011 and 4.5 percent for 2012.

‘Severe’ Repercussions

In downgrading its assessment of the global economy, the IMF predicted in September “severe” repercussions if Europe failed to contain a debt crisis that led to bailouts of Greece, Ireland and Portugal, and threatened to engulf Italy and Spain.

“There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super- advanced economies that will be immune to the crisis that we see not only unfolding, but escalating at a point where everybody would actually have to focus on what it can do,” Christine Lagarde, managing director of the IMF, said on Dec. 15.

Bank of America Merrill Lynch’s Global Broad Market Index, which tracks more than 19,000 securities with a market value of almost $42 trillion, posted its best year since gaining 8.92 percent in 2002.

The biggest beneficiary from the flight to safety was U.S. Treasuries, which gained 9.64 percent, the most since 2008 at the height of the financial crisis. Treasuries due in 10 years or more soared 28.7 percent, the most since gaining 30.7 percent in 1995, even as S&P lowered the nation’s AAA credit rating one level to AA+ on Aug. 5 Moody’s Investors Service and Fitch Ratings affirmed their top ratings.

‘Biggest Surprise’

“At this time last year if you asked people what the best performing security class would be, not too many people would have said Treasuries, but it’s turned out to be the biggest surprise of the year,” Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh, said in a telephone interview on Dec. 27.

U.K. bonds were the best performers among the 26 sovereign markets tracked by Bloomberg and the European Federation of Financial Analysts Societies, jumping 17 percent. They beat German debt, considered the euro area’s safest securities, by more than 7 percentage points, the most since 1998.

Government bonds globally returned 6.03 percent on average, according to Bank of America Merrill Lynch indexes.

Dollar Strength

Investment-grade corporate securities gained 5.02 percent, while high-yield, high-risk, or junk, bonds returned 3.04 percent. Speculative-grade debt is rated below Baa3 by Moody’s and less than BBB- at S&P.

The rally in Treasuries bolstered the greenback, with U.S. Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against the euro, yen, pound, Swiss franc, Canada dollar and Swedish krona, rising 1.6 percent. That followed a gain of 1.3 percent in 2010, marking the first time it advanced two years in a row since 2000-2001.

Among the 16 most-widely traded currencies, the yen was the only one to appreciate against the dollar, strengthening 5.4 percent. The biggest loser was South Africa’s rand, which depreciated 18.1 percent, data compiled by Bloomberg show.

The euro weakened 3.3 percent against the dollar, and fell below 100 yen for the first time since 2001. The 17-nation euro was the worst performer among the 10 developed-nation exchange rates tracked Bloomberg Correlation-Weighted Currency Indexes, losing 2.1 percent. The dollar advanced 1.1 percent on that basis and the yen gained 5.5 percent.

‘Big Question’

“The story of the year in currency markets has been the euro-zone crisis, and it has permeated every other capital market,” Boris Schlossberg, director of research at the online currency trader GFT Forex in New York, said in a telephone interview on Dec. 29. “Geopolitical risk will make a push for more volatility in the new year as whether the European Union as we know it will survive is still a big question.”

Commodities, as measured by the S&P GSCI Total Return Index, fell after gaining 9.02 in 2010 and 13.5 percent in 2009.

Copper slumped 21 percent this year, its first decline since 2008, as Europe’s debt crisis escalated and demand in China slowed. Cotton plunged 37 percent, its biggest loss since 2004.

“The market has come to the realization that there are, indeed, a lot of problems in Europe, and they are not going away, which could have knock-on effects for global growth,” Jeffrey Sherman, a commodities investor who helps manage $19 billion for DoubleLine Capital LP in Los Angeles, said in a telephone interview on Dec. 29.

Oil, Gold

Crude oil recorded its third straight gain, adding 8.2 percent to $98.89 a barrel in New York. Gold completed its 11th consecutive increase, the longest winning streak in at least nine decades. Bullion was at $1,564.20 an ounce in New York.

Two companies fell out of the list of the 10 biggest in the world by market value in 2011 from a year ago. Berkshire Hathaway Inc. dropped from 10 to 13 and China Mobile Ltd. slipped to 11 from nine. They were replaced by International Business Machines Corp., which jumped to six from 15, and Google Inc., which climbed to ninth from 13. Exxon Mobil Corp. remained the world’s biggest company while Apple Inc. jumped over Petrochina Co. into second.

The MSCI All Country World Index of stocks retreated after rallying 10.4 percent in 2010 and 31.5 percent in 2009. The MSCI index is valued at 12.4 times reported profit, 24 percent below the average from the past five years, according to data compiled by Bloomberg.

The S&P 500 was little changed and the Dow Jones Industrial Average climbed 5.5 percent. Both the S&P 500 and the Dow were among the 10 best performers of the 91 national indexes tracked by Bloomberg.

“Without a doubt, 2011 was the year of the coupon clipper as yield became an increasingly important source of return for both the bond and stock market,” said James Sarni, senior managing partner at Los Angeles-based Payden & Rygel, which manages $50 billion, in a telephone interview on Dec. 29.

--With assistance from Michael Weiss in Princeton, New Jersey. Editor: Paul Cox, Kenneth Pringle

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

Article from Businessweek

Bond funds, GILT funds best debt investment, says expert

Published on Tue, Dec 27, 2011 at 14:18
Article from CNBC-TV18
Updated at Wed, Dec 28, 2011 at 07:59

With all the noise around the government fiscal deficit target, borrowing programme and the general liquidity situation in the country, bond yields saw a sharp spike yesterday. Speaking to CNBC-TV18, executive director of Bank of Baroda, RK Bakshi says that with government borrowing increasing, bond yields will also have an upward bias. For the next quarter, the 10 year yield should average around 8.5%,” he said.

It is because of this that fund manager at Quantum Advisors, Arvind Chari asks investors to move out of fixed maturity plans to active funds. “Look at buying into income funds, bond funds or GILT funds which invest only in government securities,” he said.

Chari also asks fixed deposit investors to extend their maturities as the peak of the interest rate cycle comes close, because that will ensure higher returns and reduces the risk of reinvestment.

Below is an edited transcript of his interview with Latha Venkatesh and Reema Tendulkar. Also watch the accompanying video.

Q: This is a big jolt from 8.35% yesterday to 8.55% today. Where do you think bond yields will end the year itself?

Bakshi: The bond yields are susceptible to news flow quite naturally. Of course right from the beginning there have been doubts whether the fiscal targets will be maintained. We then saw the borrowing program increased to Rs 470,000 crore from Rs 417,000. So people are not sure whether it will stop at that or it will need more because alternate ways of funding the fiscal have not been able to fructify.

This Rs 15,000 crore announcement last Friday, although it is not clearly stated that it adds to the government’s total borrowing program, was not planned or calendared for this date. So this additional Rs 15,000 crore saw a big jump in yields from 8.34% like to 8.54-8.55% lines. There had been some worry there because they are all towards deficit or all to fund all companies, so that is keeping the market on tenterhooks.

Although the RBI has signaled lower rates, the government borrowing programs with the liquidity being what it is and OMO program being what it has been will definitely keep the market on up and down on news flow. Mainly it looks like if the borrowing goes onto increase, definitely there will be an upward bias.

Q: How much do you think banks like yours could be impacted due to rising NRE term deposits rates?

Bakshi: This is a big impact. It has come at a time when NRE flows had started improving because of the rupee rate becoming very attractive. Of course I cannot fault with the philosophical rationale of providing rates, but it has come at a time when the inflows have started increasing.

Q: So your margins will be hit?

Bakshi: Definitely, unless you are able to pass it on. But the credit sell is not definitely happening. We have just mentioned the quantum of increase. On a 3.5% deposit, if the increase is to 9%, then 5.5% is a major increase.

Q: Going into FY12 what's the kind of investment one should look into if you have to invest in debt?

Chari: We have been advocating investments to move from say money market funds or close ended fixed maturity plans (FMPs) into active funds. When I say active funds it would be investment into income funds, bond funds or GILT funds which invest only in government securities. We have been continuing to maintain that view because we all know we have a problem on the fiscal. Nobody believed that 4.6% number and the market still second guess as to how much will be the excess borrowing. It could be another Rs 40,000-60,000 crore of excess borrowing that the government can do, but it depends on how they are going to fund it. If the divestment route works out and SUUTI works out, then probably the demand for borrowing in the market will be lower.

Another thing that the government can do is to borrow through T-Bills. Given that we expect some reduction in CRR in either this policy or the next, that would mean that liquidity will not be as bad as it is currently. Government will spend, liquidity will come back to around Rs 1 lakh crore negative and RBI will continue to do open market operations to be able to keep the liquidity at +/-1. So a large part of increase in government borrowings can be through treasury bills and need not come to date at borrowings.

Q: Basically what does it mean for investors? Should they get into fixed income kind of funds, and within the fixed income category what are you advising? We are seeing a lot of mutual funds even offer FMP plans. What should an investor do for maximizing his returns on the fixed income front?

Chari: Let us take a normal investor who does not do mutual fund at all. So he is a fixed deposit investor, who is going to remain a fixed deposit investor. What we have been recommending them is to extend maturities at the peak of their rate cycle. So if you are doing 1 year FD or 1.5 year FD, extend it to 3-4 years. We have economic data points to point out that the economic down turn is there for sure, so RBI, if not now, will ease in the next 3-6 months. So rates are headed downwards despite the fiscal worries and worries on oil. So if you are a FD investor, extend your maturity so that you can lock in this 9.5-10% for a three year period and so your reinvestment in next year is that much lower.

If you are a mutual fund investor, depending on your risk appetite - long term government yields are volatile as you saw 9-8.24% and 8.25 8.5% in 3 weeks. So you will have to live with that volatility but the trend that we are seeing is downwards, yields are headed downwards despite the fiscal

Q: So which particular fund one should go through?

Chari: Depending on risk appetite, there are short term income funds which invest in 2-3 year maturities which are also available at 9-9.5% for an AAA PSU. So if you have less risk appetite but you still want to play, go into active funds because as bond yields come down, bond prices go up. So apart from the interest that you get, you also get capital gains.

Q: What is the name of the fund that people should look for?

Chari: It will be called short term income fund or short term debt fund. In the long term you will have long term income funds, which will invest both in government bonds as well as income funds. You will have to plan it based on your liquidity requirements. Even if you are doing fixed maturity plans, you should do it for a longer period, extend your maturity period.

Q: What are you expecting in the next quarter, the 10 year yield to average? Do you think it will go towards 9% or do you think it will remain between 8.25-8.5%?

Bakshi: On a balanced factor it should be around a median of 8.5%, it should not go towards 9%.

Article from CNBC-TV18

US savings bonds to go paperless

It's your last opportunity to slip a paper savings bond into a child's Christmas stocking.

By Giselle SmithonWed, Dec 21, 2011 9:59 PM

Article from Finances.msn.com

Since 1935, grandparents have been giving their children's children U.S. savings bonds for birthdays, holidays and graduations. An investment that also provides valuable lessons about saving money, a paper savings bond can be placed in a box with a bow, or at least tucked inside an envelope.

As of Jan. 1, this gift-giving tradition won't be the same because, like so many other things in our financial lives, U.S. savings bonds are going paperless.

Children didn't necessarily appreciate the bonds when they opened them -- "It was one of those things, like getting underwear," my friend Lorie recalls -- but they usually did later.

As Pocket Changed blogger Caleb Wojcik wrote:

Every Christmas my grandparents gave me savings bonds. "Can I spend it?" I would ask. "Not yet," my mom would say, "but someday." At the time I was confused, but now I realize how thoughtful a gift it was.

In 2012, the bonds will no longer be available for purchase at banks and other financial institutions and can be bought in electronic form only at TreasuryDirect.gov.

Value of savings bonds

Savings bonds are debt securities issued by the U.S. Treasury Department. About 7 billion paper bonds have been sold and circulated, Joyce Harris, a Treasury Department spokeswoman, told CNNMoney.

"U.S. savings bonds are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government," says the U.S. Securities and Exchange Commission website.

One reason for their popularity as gifts is that minors are allowed to hold U.S. savings bonds in their own names. With electronic savings bonds, parents will have to set up accounts for anyone under 18, but minors can own savings bonds via linked accounts.

Going paperless will save money

Part of an "all-electronic initiative," the switch to paperless savings bonds is projected to save the department as much as $120 million over five years by eliminating printing, mailing, storage and fees paid to financial institutions for processing applications.

If you want to convert your Series E, EE or I paper bonds to electronic securities, you can do so via the SmartExchange program, which walks you through the process and spells out the advantages of going digital. As you do with other financial accounts, you'll have 24-hour access to your savings bonds.

Another advantage of electronic savings bonds: You can purchase them in any value, from $25 to $5,000, in penny increments. Paper bonds were available only in specific denominations. So you can purchase a $50.11 bond for your grandson's 11th birthday, for example.

Will paper savings bonds be missed? The move to digital penalizes people who aren't computer-savvy, Allen Schwartz told the St. Petersburg Times, such as his 88-year-old mother-in-law. "She's disabled, legally blind, has no computer and can't do things online," he said.

MainStreet's Matt Brownell argued that children can get a better rate of return -- and learn more about investing -- if you give them an old-fashioned stock certificate.

Series I bonds purchased with tax refunds will still be available in paper form in 2012, according to the Treasury Department, but that may change in the future as well, UPI.com reported.

If you received paper savings bonds as a child, and would like to share that experience with your children or grandchildren, it's not too late to buy them for one last generation's Christmas stockings. 

Who knows, years from now your gift may have added value in being one of the last paper savings bonds issued.

Article from Finances.msn.com