The Rise in Treasury Bond Rates

Do-it-yourself investors are closely watching Treasury bonds and wondering whether the recent rise in yields is the beginning of the often forecasted upward move or merely a blip that will shortly reverse. As part of this process, observers pay careful attention to the Treasury bond auctions. As shown on the Bloomberg calendar, this past week has been a heavy week in Treasury issuance, culminating with yesterday's 30-year Treasury (the so-called "long bond") auction. The results, as reported by Bloomberg, were not so good:

Results are very weak for the monthly 30-year bond auction which tailed by two basis points. The auction stopped out at 3.820 percent vs. a 1:00 ET bid of 3.798 percent. Coverage wasn't bad at 2.73 but dealers got stuck holding a 55 percent share of the $13 billion offering, the largest share in nearly a year. Given the recent run of less downbeat economic news, today's results point to investor expectations that rates at the very long end may begin to rise. Demand for Treasuries is easing following the results.

To gain some perspective on yields, a useful source is the "Daily Treasury Yield Curve Rates" published by the U.S. Treasury.

Treasury issuance, although a big part of the puzzle, is not the only part- there is also supply from other areas. In the corporate sector:

Investment-grade companies issued $33.1 billion of new notes on Tuesday and Wednesday, with the latter's $19.2 billion one-day total the highest daily volume for U.S. high-grade bonds in 19 months, according to data provider Dealogic (Holdings) PLC.

Alas, nobody said this was easy. In effect, we are trying to put together a puzzle where we don't have the picture on the box. My feeling is that yields will go a bit higher - 10-year yield slightly above 3% - but the overriding factor will be, as always, how the economic data plays out.

Where do you think yields are headed?

Related post: When Will Interest Rates Rise?

Soccer and Personal Finance

Soccer, personal finance and creativity - what's not to like? Rupee Manager shows how the different parts of a soccer team relate to the different parts of a financial game plan.

In my opinion, it is a terrific way to turn on the light bulb for many people who focus on only one part of their finances and think they have all the bases covered - like the soccer team with excellent strikers but glaring weaknesses elsewhere.

My posts from the last 2 days are related, especially the bottom line showing the impact of increasing your saving rate, working slightly longer, and getting a bit higher return on your investments. Many times, it's not about just doing one thing well but doing several things in small increments.

I believe Rupee Manager's succinct post is worth sharing in the classroom with young people learning the basics of financial literacy. What do you think?

Work More Years, Increase Saving, Invest More Aggressively?

Yesterday's post was a question of which 3 events would impact an investor's nest egg the most under assumed conditions. The 3 events were: work an additional 2 years, increase savings rate from 8% to 10%, or increase return on assets from 6% to 8%.

Kevin at "Invest it Wisely" first guessed #3 - increase return, but then changed his answer to #2 - increase savings rate. Actually he was right the first time. Before everybody starts tsk tsking and thinking, "yeah, that's what always happens when you change your answer," actually behavioral scientists find that changing answers on tests (better known as second guessing) actually improves scores.

Anyways, for the example, the person will have a nest egg of $420,000 if he doesn't change his behavior. The respective options work as follows (according to "Fiduciary Benchmarks" data):

1. work 2 more years $490,000
2. Increase savings rate from 8% to 10% $540,000
3. Increase return from 6% to 8% $ 560,000.

What if all 3 options are taken? Then the nest egg would more than double to $850,000! It is worth pointing out that working extra years and increasing the savings rate are under the control of the person. For return, he is somewhat at the mercy of the market. It illustrates the importance of asset allocation. From a financial planners point of view, if the so-called "number" required for retirement was $800,000 or so, a bigger allocation to stocks would typically be recommended.

Do You Know Biggest Impact On Retirement Savings?

Adapted from Kiplingers 10/2010, chart 50, taken from Fiduciary Benchmarks.

A QUIZ:

First the assumptions:

-45 years old
-earning $50,000/year
-contributes 6% of pay and employer matches 50%
-investment return equals 6%/year
-retires at 65

Suppose he can do one of the following:
1. work 2 more years, i.e. until he is 67 years old,
2. increase saving rate from 6% to 10%,
3. increase return from 6%/year to 8%/year.

Which of the 3 do you think would have the biggest impact on his retirement savings?

Would You?

As evidence I read pretty much everything, I will admit to reading "Date Lab" just about every Sunday in The Washington Post magazine. It brings together people judged to be compatible, pays to send them on a date which they then rate, and ends up following up to see if they got back in touch.

Anyways...this week the guy featured in Date Lab is a 22-year-old financial consultant; and I got to thinking that this guy was not even born when the 1987 crash occurred, was 14 during the dot.com bust, and still in college when the 2008 meltdown occurred.

My question is pretty simple: would you take financial advice from a 22-year-old?

Who's Afraid of the Big Bad Wolf?

The first Friday of each month, at 8:30 am EST, the Bureau of Labor releases the employment report for the previous month. Tomorrow's the day for August employment.

This is the "Big Bad Wolf" of the investment markets. Just about every month, but especially these days, traders hunker down in front of their terminals waiting for the release of the numbers. Some believe the whole future of the economy will be revealed by the number. And, of course, this goes on just about every month. What is our house made of - straw or bricks? Ooh...scary stuff.

If you watch CNBC, and the hype surrounding the number, you'll understand why the stock market is so volatile; and you'll be able to answer those who question why stock prices clearly rise and fall much more than the underlying values of the businesses they represent - something that many cite as evidence that the market can't be efficient.

The last I heard, economists are predicting that non-farm payroll will be down -100,000. If job loss is less or if, hard to imagine this, the economy added jobs, stocks should rally and bond yields increase. Part of the process, of course, is looking at other numbers in the report like the unemployment rate, hours worked, average wage and the number of long-term, chronically unemployed, which is setting a record.

Adding to the importance of the numbers, of course, is that we are in election season.

If you want to see the numbers and the report as it is released, you can go directly to the BLS site and see the report at 8:30 am. It is an interesting report in that it gives breakdowns in terms of demographics, ethnicities, and even industries - information that can be useful for the trader.

You'll notice that the unemployment rate and the number of jobs lost or gained are determined by separate surveys - a household survey and a business establishment survey.

So buckle up - here comes the "Big Bad Wolf."

Don't Bailout

I've been raising some pessimistic issues recently to see how people feel about the investment markets and to play the devil's advocate. Periods where negative news comes in waves test investors, especially do-it-yourselfers.

As I make my way around the blogosphere, I must say I am impressed with the number of young people commenting that today's market represents an opportunity. This shows, in my opinion, they have studied their market history.

I recently revisited some sites and decided that it is worth posting my response to an excellent post at Generation X Finance in response to a reader's question of whether he should get out of the market.

In the comment section I wrote:

In November 1972 I was 25 years old. The S&P 500 closed at 115.49 on my birthday. Today it is at 1022.58. In 1972 there were no cell phones, offices weren’t equipped with PCs, families drove station wagons. In 1972 our immediate threat was the Soviet Union. The threat of a nuclear war occupied the country. Viet Nam was raging and young people were viewed as out of control. In 1974 OPEC quadrupled the price of oil overnight and there were gas lines everywhere as gas was rationed. In 1987 the stock market crashed – the market dropped 24% in one day! I saw people quit the investment business that day. They just walked down the hall and turned in their resignations.

Moving into 2000 people predicted widespread computer crashes – planes weren’t supposed to be able to fly and mass transport was expected to break down. Corporate governance was at an all time low as companies manipulated their earnings. In 2001 we had the terrorist attacks. This resulted in two wars for the U.S. Some people predicted that people would never fly again.

Today everyone has cell phones, workers have PCs on their desks, incredible breakthroughs are being made in bio tech, houses are being revamped to be environmentally friendly. The car you drive 5 years from now will be vastly different from the car you are now driving.

Today is different. We live in an information age. Kids now have the capability to solve the energy crisis literally in their garage.

Do you think 35 years from now people will look back and say 2010 was not a good time to invest?

I won’t be around. so I’ll frame it in terms of 25-year-olds. You guys have no idea about what type of products are forthcoming and the companies that will be formed and the advances that will be made. This puts an investor at a disadvantage because he can always see the problems explicitly in front of him, but what can’t be seen are the industries and products that will be formed.

One thing is for sure, though – there will always be an excuse to not invest. If I was 25 years old, I would be in the market big time.

This type of exercise, trying to put the present into perspective, is useful, I think, when markets go down a lot - and even after they have risen to what might seem to be lofty levels.

The idea of what is seen and what is not seen is actually an important concept in economics and is getting some notoriety in behavioral economics. For those not familiar with the concept, you can read the original by Fredic Bastiat at "The Broken Window" , or view the youtube video to get a more modern version.