Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Posts Tagged ‘Bonds’

What is the illiquidity premium?

Posted by hkarner - 9. November 2019

Date: 08-11-2019
Source: The Economist: Buttonwood

A primer on the rewards and hazards of investing in hard-to-trade assets

Imagine two bonds listed on different exchanges that are otherwise identical. The risk-free rate of return is 2%. Investors hold bonds for an average of one year. A central bank acts as market-maker, supplying cash on demand for bonds. To cover its costs, the price the central bank pays (the bid) is a bit below the fair value of a bond, which is the price it requires buyers to pay for it (the ask). The bid-ask spread is the cost of trading. For a-bonds it is 1%. For b-bonds, which are listed on an inefficient exchange that charges higher fees, it is 4%.

What is the yield on each bond? It varies with trading costs. Investors on average make one round-trip sale-and-purchase a year. So the yield they demand on a-bonds is 3%. That includes the risk-free rate of 2% plus 1% compensation for trading costs. By the same logic, the yield on b-bonds is 6%. The extra 3% return required on the harder-to-trade security is known as the illiquidity premium.

Illiquidity matters less if investors have longer horizons. A pioneering paper by Yakov Amihud and Haim Mendelson, published in 1986, posits that investors with the shortest horizons hold securities with the lowest trading costs; and bonds that are relatively illiquid are held by long-term investors, who can spread the higher trading costs over a longer holding period. In principle patient investors can reap a reward from illiquidity. But in practice the risks that go with it often prove to be bigger than many investors had expected. Den Rest des Beitrags lesen »

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This Year’s Hottest Trade: Buying Everything

Posted by hkarner - 23. Oktober 2019

Date: 22-10-2019
Source: The Wall Street Journal

Stocks, bonds, gold and oil have staged a rare concurrent rally

The New York Stock Exchange. The S&P 500 has risen 20% this year, even as Treasurys have rallied.

Stocks and bonds have staged a rare simultaneous ascent, logging the best performance in a quarter-century.

The S&P 500 has advanced 20% in 2019, while Treasurys have rallied. The last time the benchmark stock index rose more than 10% while the Treasury yield fell more than a percentage point in the first three quarters of the year was in 1995, according to Dow Jones Market Data.

That trend continued as the fourth quarter kicked off. Government bonds and gold notched gains last week as the S&P 500 hovered within 1.3% of its record reached in July and clinched its second straight week of gains. Den Rest des Beitrags lesen »

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Germany for First Time Sells 30-Year Bonds Offering Negative Yields

Posted by hkarner - 22. August 2019

Date: 21-08-2019
Source: The Wall Street Journal

Bond sale adds to the roughly $15 trillion of negative-yielding bonds outstanding world-wide

Germany sold 30-year bonds at a negative yield for the first time, in another sign of how investors’ desperation for safe assets is inflating their value.

The bond, set to mature in August 2050, has a zero coupon, which means it pays no interest at all. Yet investors were still willing to pay more than face value to buy €824 million ($914 million) worth of the debt, pushing the overall yield on the bond into negative territory, at minus 0.11%. Yields fall as bond prices rise.

The German sale adds to the roughly $15 trillion of negative-yielding bonds outstanding world-wide, many of which are from European governments or are state-sponsored agency bonds. It also adds to the smaller—but still significant—amount of new bonds that have been sold with a negative yield at issue.

More than $3 trillion of bonds have offered a negative yield when they were first sold since 2016, according to data from Barclays. While this is mostly government and agency debt, it also includes more than $11 billion of corporate debt, from companies such as French drugmaker Sanofi SA and German consumer-goods company Henkel AG.

The list of such bonds has even included euro-denominated debt from U.S. tobacco group Philip Morris International Inc., which sold €500 million of seven-year bonds at a yield of minus 0.18% at the end of July, according to Barclays data.

In the latest sale, Germany sold the bonds at an average price of 103.61. That means the government will pay back €795 million in 30 years’ time for the €824 million it has borrowed.

The last time Germany sold similarly long bonds was last month, when it tapped its outstanding August 2048 issue again, and investors bought the debt at a yield of 0.3%. The first sale of these bonds, in September 2017, achieved a yield of 1.3%.

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Investors Ponder Negative Bond Yields in the U.S.

Posted by hkarner - 13. August 2019

Date: 12-08-2019
Source: The Wall Street Journal

Last week’s slide in Treasury yields is deepening worries about lackluster growth, low inflation

A steep slide in U.S. government-bond yields last week wrong-footed investors and left some pondering what was once unthinkable: whether interest rates in America could one day turn negative.

Historically, people who lent money out got more money back later, a way to compensate for inflation, for the risk of not being repaid and for forgoing other investments.

Now, though, there is more than $15 trillion in government debt around the world with negative yields. That means, essentially, that savers holding these bonds are paying the government to store their money.

So far, the U.S. has avoided that fate. Less than a year ago, the Federal Reserve was hiking short-term interest rates, and investors were betting that yields—which rise when bond prices fall—on longer-term debt would continue climbing as U.S. growth showed signs of accelerating and as unemployment plumbed historic lows.

The trade dispute between the U.S. and China, slowing global growth and financial-market turmoil late last year changed that. The Fed pivoted in the beginning of 2019 and, late last month, cut short-term rates for the first time since 2008. Den Rest des Beitrags lesen »

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About to Retire? Check Your Stock Exposure—Quickly

Posted by hkarner - 6. August 2019

Date: 05-08-2019
Source: The Wall Street Journal

We ran a simulation showing how various portfolio allocations performed for someone who had retired in 2000—and it was revealing

There are a lot of people thinking of retiring now because the bull market has boosted their 401(k)s.

But they may need to re-evaluate their allocations. And quickly.

Over the past decade, the S&P 500 has returned more than 13% on an annualized basis. And studies show that this is exactly when a lot of people choose to retire—the height of a bull market, when their portfolio is plump.

But those same studies show that people who retire at bull-market peaks have a higher chance of running out of money. That is because they wrongly assume big returns will continue to pile up—and then they lose a big chunk of cash when bear markets arrive.

So, investors about to retire may want to re-evaluate how their money is allocated. To assist in that effort, we ran a simulation showing how various portfolio allocations performed for someone who had retired in 2000, the beginning of a bear market, followed by another later in the decade. Den Rest des Beitrags lesen »

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Lega-Chef Salvini will Parallelwährung in Italien

Posted by hkarner - 5. Juni 2019

Dominik Straub aus Rom, 3. Juni 2019, 09:00 derstandard.at

Partei fordert Ausgabe staatlicher Schuldtitel in kleiner Stückelung – diese könnten den Euroaustritt einleiten, warnen Experten

Rom – Sollte es in naher Zukunft zu einem Ausscheiden Italiens aus der europäischen Einheitswährung kommen, dann kennt man inzwischen das genaue Datum, wann der erste Schritt dazu eingeleitet wurde: am 28. Mai 2019. An diesem Tag hat die italienische Abgeordnetenkammer einen Antrag verabschiedet, der es der Regierung erlaubt, die zweistelligen Milliardenschulden des italienischen Staates gegenüber den einheimischen Unternehmen unter anderem auch durch die Ausgabe von sogenannten Mini-Bots in kleiner Stückelung zu begleichen. Bot ist die Abkürzung für Buono ordinario del tesoro: Staatsanleihen mit kurzer Laufzeit (maximal zwölf Monate), die normalerweise zur Erhöhung der kurzfristigen Liquidität des Staates dienen. Der Nennwert der bisherigen Bots lautet auf mindestens 1.000 Euro – und genau das ist der Haken der neuen Mini-Bots: Bei diesen läge der Nennwert bei 100 Euro oder noch tiefer. Experten warnen: Sind die neuen Mini-Bots erst einmal ausgegeben, könnten sie schnell als Zahlungsmittel verwendet werden – und so zu einer Art Parallelwährung werden.

Austritt in Trippelschritten

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Italy’s Politics Fail to Rattle Its Financial Markets

Posted by hkarner - 14. Mai 2018

Date: 13-05-2018
Source: The Wall Street Journal

A likely government coalition, once considered a threat to the Italian economy and the eurozone, hasn’t stopped its stocks and bonds

Italy may be led by a coalition of the hard-right League party, led by Matteo Salvini, left, and the antiestablishment 5 Star Movement, led by Luigi Di Maio, right.

In Italy, a political pairing that investors once considered a worst-case scenario is set to become the new government, yet Italian stocks continue to outperform all other major developed markets this year.

The anticipated government coalition between the hard-right League party and the antiestablishment 5 Star Movement, a combination long considered by analysts to pose a major risk to the country’s economy and the eurozone itself, hasn’t stopped Italian stocks and bonds from outperforming.

The country’s headline stock index, the FTSE MIB, is up 11% this year, well above the eurozone’s broader Euro Stoxx 50 index and the S&P 500, each up around 2%. Den Rest des Beitrags lesen »

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Stocks and Bonds Are Going Nowhere Fast, Stranding Investors

Posted by hkarner - 8. Mai 2018

Date: 07-05-2018
Source: The Wall Street Journal

Despite a strong economy and robust corporate earnings, investors aren’t piling in—but they aren’t bailing either

Traders working on the floor of the New York Stock Exchange on Friday after the U.S. Labor Department reported the unemployment rate fell to its lowest level since December 2000.

U.S. stocks and bonds appear deadlocked despite a positive response to April’s “Goldilocks” jobs report, reflecting the conflicting impulses of a strong economy against rising interest rates and creeping fears about inflation.

Lingering concerns over the durability of the global growth story and the likelihood of tightening monetary policy have left many investors in a rut, neither inspired to pour money into the market nor convinced they should bail out just yet.

Markets’ inability to get a meaningful boost from the glut of strong corporate earnings over the past few weeks has sapped confidence further. And other events that likely would have jolted the markets last year, such as the unemployment rate falling to its lowest level in nearly two decades and Apple Inc. announcing an additional $100 billion in share buybacks, have failed to spark a sustained rally. Den Rest des Beitrags lesen »

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Cashing In: Why Cash Should Be in Your Portfolio Again

Posted by hkarner - 6. April 2018

Date: 06-04-2018
Source: The Wall Street Journal

As volatility returns to the markets and interest rates rise, cash is turning out to be a safe asset

The Federal Reserve’s rate increases and the Trump administration’s fiscal profligacy have pushed up the yield on cash and cash-like instruments to the highest level in years.

Holding cash is investment heresy after a decade of the lowest interest rates in history. It is time to consider the sacrilegious and add cash back into portfolios.

The value of cash was demonstrated in the first quarter: Both stocks and bonds lost money—the first quarter that has happened since the aftermath of Lehman’s failure in 2008. Cash turned out to be the safe asset. Den Rest des Beitrags lesen »

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The Clock Is Ticking Faster at Tesla

Posted by hkarner - 29. März 2018

Date: 28-03-2018
Source: The Wall Street Journal

Downgrade of Tesla bonds puts Elon Musk in a tough position

A Tesla Model 3.

Tesla will soon need money again. The trouble is, raising it suddenly looks a lot more challenging.

Moody’s Investors Service downgraded Tesla’s debt on Monday afternoon, citing persistently negative cash flow and continued production issues with the Model 3 mass-market sedan. Moody’s is keeping a negative outlook on the credit due to “the likelihood that Tesla will have to undertake a large, near-term capital raise in order to refund maturing obligations and avoid a liquidity shortfall.”

Tesla’s bonds due in 2025, issued just last summer, were quoted near 90 cents on the dollar after hours. Meanwhile, the stock is down 23% in about a month, making equity more expensive. There are plenty of reasons that Tesla’s magic touch with the capital markets is fading fast. Den Rest des Beitrags lesen »

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