Greek Bond Swap is Just Another Temporary Solution

Article from Nasdaq

Greece is set to swap its privately-held government bonds today for new ones that will represent a three-quarters loss of the original investment. The deal will allow the country to receive 130 billion euros in funds from its second bailout. Like the money from the first bailout, those funds will eventually run out however. 

The Greek bond swap is the biggest debt writedown in history. Over 85% of private investors (essentially banks, the deal does not include bonds held by the IMF or ECB) holding 117 billion euros ($234 billion) agreed to the 'voluntary' exchange. The CEO of one major European bank described the transaction as about as voluntary as a confession during the Spanish Inquisition. The loss to bondholders is twofold consisting of a reduction in face value of 53.5% and then lower interest payments stretched over a longer period of time. All in all, private bondholders are taking an approximately 74% hit (assuming of course there isn't another writedown or Greece doesn't renounce its debt completely in the future).

Credit rating agency Moody's decided to call a spade a spade and declared Greece to be in default. Moody's line of reasoning in stating the obvious is that it considers a loss greater than 70% to be a 'distressed exchange' (that's putting it mildly) and is therefore indicative of a default. The matter is not merely academic, since there is a significant amount of credit default swaps (bond insurance) outstanding on Greek debt. On Friday, a committee of the International Swaps and Derivatives Association the regulatory authority on credit default swaps ruled that the Greek debt restructuring was a credit event, and this will trigger payouts. How much CDS holders will receive remains to be seen.

Commentary from the EU political leadership on the swap deal was more mixed than after the first Greek bailout (statements back then were upbeat and generally confident that the problem had been solved and Greece was on its way to recovery). French president Sarkozy stated, 'Today the problem is solved. A page in the financial crisis is turning.' Christine Lagarde, head of the IMF said, 'The real risk of a crisis, of an acute crisis, has been, for the moment, removed.' German officials were far more cautious however. The French may be correct as long as their words are taken literally. The problem is indeed solved for today. That doesn't mean it is solved for tomorrow.

It is actually highly unlikely that the situation in Greece will be turning around any time soon because of the massive reduction in its debt load from the bond swap. If Greece had a functioning economy, there would be hope. However Greece's economy is heavily dependent on government spending and in exchange for bailout money the IMF and ECB have demanded severe cuts in Greece's budget deficits. Greece is now entering its fifth year of recession, after GDP contracted by 7.5% in 2011. Investment fell by 21% last year after sliding 15% in 2010. For Greece to continue to operate at all, continued bailout money will be needed. Greece has effectively gone from a welfare state to a state on welfare.

Not surprisingly, some analysts are sounding a note of caution. Predictions are that the financial bleeding in Greece will show up once again later this year. Problems may arise even sooner depending on when the next election takes place (now supposedly in May) and how much power the fringe parties gain. The bond market doesn't seem hopeful either. One year Greek government bond yields were last at 1143%. Such yields represent collapse, not solvency.

Daryl Montgomery is Author: 'Inflation Investing - A Guide for the 2010s'  Organizer,  New York Investing Meetup .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Article from Nasdaq

Boomersbusting bonds

Exit stocks in 401(k)s

By GREGORY BRESIGER

Last Updated: 1:07 AM, March 11, 2012

Posted: 1:45 AM, March 11, 2012

Article from New York Post

Blame it on the boomers.

That’s how some market analysts are categorizing the meager interest returns Americans are getting on their savings accounts.

Baby boomers have been moving their retirement funds into the bond market in droves, keeping yields at historic lows.

Over the past three years, for each dollar that went into a stock fund, almost $5 went into a bond fund, according to Lipper, a fund-rating service, in a recent report.

“Perhaps it is just a matter of demographics at work, but we have seen a strong trend in mutual fund flows that suggests investors have begun earnestly diversifying their portfolios toward fixed-income products, in many cases away from equity funds,” says Tom Roseen, a senior analyst with Lipper.

Roseen added that it’s “definitely a significant change in the investment trend from 10 years ago.” And “the trend of people buying more bonds has been going on this year.”

What does this mean for stocks? Well, unlike the Internet bubble, where investors chased the phantom profits of overnight sensations, today’s equity valuations come at the same time a new study warns that nations with older populations are likely to see lower stock returns over the next decade.

“Stocks perform best when the roster of people age 35-59 is particularly large, and when the roster of people age 45-64 is fast-growing,” wrote Robert Arnott and Denis Chaves, who run Research Affiliates, MOVING ASSETS Boomers are rushing into bonds.                         an investment bank in Newport Beach, Calif.

“Bonds follow a similar pattern, with an age shift: They’re best when the roster of people age 50-69 is growing quickly,” Arnott and Chaves wrote in the January/February issue of the Financial Analyst Journal, a publication of CFA Institute, an organization of investment professionals.

Why do the investing habits of those in or near retirement tend to drive down stock prices?

“As they slide into retirement,” Arnott and Chaves write, “they begin to sell assets in order to buy goods and services that they no longer produce — either directly, through their own investments, or indirectly, through their pension benefits. They tend to liquidate their riskiest assets (stocks) before their less-risky assets (bonds),” according to the study.

That seems to be happening in the US right now.

Still, advisers, who agree that the boomers are a part of the change, say the downward pressure on stock prices could be self-perpetuating. “Poor markets over the last decade, including the memory of the meltdown of 2008 or the flash crash, could hurt the stock market,” says Kevin McDevitt, an analyst with Morningstar. Indeed, the generation comprising the children of the boomers could perpetuate the trend.

“People are still skittish about 2008. And they also made very good money in bonds last year, while stocks didn’t return anything,” says Charles Hughes, an adviser in Bay Shore on Long Island. He notes that Barclays Bond Index returned some 7.8 percent last year while the stock market was unchanged. That, together with memories of 2008, are why stock funds aren’t popular, he says.

“Investors are worried about getting burned again as they did in 2008,” Lipper’s Roseen agrees. “And there are plenty of boomers who are worried about losing too much money just before they need it for retirement,” Roseen says.

Article from New York Post

Investing in Bonds: Three Steps to Smarter Bond Investing

by Alexander Green, Investment U Chief Investment Strategist

Monday, March 5, 2012: Issue #1722

Article from Investment U

At our Oxford Club Chairman’s Circle conference at The Ritz-Carlton in Naples last week, I noted a decided optimism about the outlook for the bond market. This enthusiasm is almost certainly misplaced.

We’re at the tail end of the biggest 30-year rally in bonds the nation has ever seen. Recall that three decades ago, Fed Chairman Paul Volcker pushed the prime rate all the way up to 21.5% to squelch inflation. Long-term Treasury yields reached 16%. But from that pinnacle, long-term yields have plummeted to around 3% today. Bond prices have soared accordingly.

It isn’t just unlikely that today’s bond buyers will see annual double-digit returns going forward, it’s mathematically impossible. And yet I sense that many fixed-income investors don’t understand this.

It’s not unusual to meet an investor who has plunked money in a bond fund because “its long-term track record is excellent.” They don’t seem to realize that it’s also irrelevant. Never has the old saw, “Past returns are no guarantee of future results,” been more apropos.

This doesn’t mean you should avoid bonds altogether, of course. But if you’re going to buy bonds, now more than ever you need to be smart about it. Here’s what you should do:

1. Ladder your maturities. You should buy two-year, five-year and 10-year bonds. If rates go up – as they will eventually – your bond prices will fall, temporarily. But you will get your principal back at maturity and be able to reinvest your principal at higher rates. And paltry as bond yields are today, they still beat the heck out of the 0.05% that the average money market fund is paying.
2. Keep a close eye on expenses. In the world of fixed-income investing, keeping a Scrooge-like eye on expenses is essential. Why? Because it’s difficult to work magic in the button-down world of fixed-income investing. Managers rarely earn their fees. And 12b-1 fees can eat away at your returns like termites in an antebellum house. My advice is to stick with individual bonds, Vanguard funds (whose expenses are one-sixth of the industry average) and low-cost ETFs.
3. Avoid leveraged bond funds. Ever wonder how bond yields can be so low and yet the yield on your closed- or open-end bond fund is higher, even after expenses? Open your eyes. Unless you’re holding junk bonds, your fund manager is using leverage, the fixed-income equivalent of buying stocks on margin. By borrowing cheap, he or she is leveraging the portfolio to add yield. This works just fine while bond prices are flat or rising. But when bond prices fall – as they will when interest rates rise – these shareholders will take a shellacking. Consider yourself forewarned.

Some fixed-income investors tell me they feel safe for now since Bernanke has pledged to keep interest rates low through 2014. Think again. The Fed has only announced its intention to keep rates low. (Future economic conditions could quickly change that.) The Fed is also keeping long-term bond yields artificially low by buying these instruments to goose the economy.

Inflation could tick up. The Fed could raise rates and/or quit buying long-term Treasuries. In the end, the Federal Reserve sets short-term interest rates, but not bond yields and prices.

Know this. Understand it. And act accordingly. Bond investors today should be in a defensive posture, capturing higher yields than what’s available in cash instruments, but prepared for that point in the future when bond yields will rise and prices will fall.

Good Investing,

Alexander Green

Article from Investment U