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A Seldom Discussed Investing Topics for Doctors and All Investors – Until Now?
By Dr. David Edward Marcinko MBA MEd CMP®
http://www.MarcinkoAssociates.com
SPONSOR: http://www.CertifiedMedicalPlanner.org
Now – Trading individual bonds is not like trading stocks. Stocks can be bought at uniform prices and are traded through exchanges. Most bonds trade over the counter, and individual brokers price them. But, price transparency has gotten better in the last decade.
For example, in 1999, the bond markets gained clearness from the House of Representatives’ Bond Price Competition Improvement Act of 1999. Responding to this pioneering law, the site http://www.investinginbonds.com was established. This site provides current prices on bonds that have traded more than four times the previous day. With the advent of Investinginbonds.com and real-time reporting of many trades, investors are much better off today. Many well regarded brokers including Schwab, Ameritrade, and Fidelity Investments now have dedicated websites devoted to bond trading and pricing.
Fidelity Investments chose to disclose its fee structure for all bonds, making it clear what it will cost you per trade. Fidelity charges $1 per bond trade. Some on-line brokers charge a flat fee as well, ranging from $10.95 at Zions Direct to $45 at TD Ameritrade. Depending on the number of bonds trading, one may be more complimentary than another. The trading fee disclosures, however, do not divulge the spreads between the buy and sell price embedded in the transaction that some dealer is making in the channel. Keep in mind that only by comparison shopping can assist you in finding the best transaction price, after all fees are taken into account. Other sites may not charge any fee, but rather embed the profit in the spread.
Despite the difficulty in pricing and transparency, investing in individual bonds offers several rewards over purchasing bond mutual funds.
First, bond mutual funds never mature.
Second, you know exactly what you will be receiving in interest each year. You will also know the exact maturity date.
Furthermore, your individual investment is protected against interest rate risk, at least over the full term to maturity. Both individual bonds and bond funds share interest-rate risk (the risk of locking up an investment at a given rate, only to see rates rise). This pushes bond prices down. At least with an individual bond, you can re-invest it at the higher, market rate once the bond matures.
But, the lack of a fixed maturity date on a bond mutual fund causes an open ended problem; there is no promise of the original investment back. Short of default, an individual bond will return all principal and pay all interest assuming you hold it to maturity. Bond funds are not likely to default as most funds maintain positions in hundreds of individual bonds. The force of interest rate risk to individual bond or bond mutual fund prices depends on the maturity of a bond investment: the longer the maturity of a bond or bond fund (average), the more the price will drop due to rising rates. This is known as duration.
Duration is a statistical term that measures the price sensitivity to yield, is the primary measurement of a bond or bond fund’s sensitivity to interest rate changes. Duration indicates approximately how much the price of a bond or bond fund will adjust in the reverse direction given a rise in interest rates. For instance, an individual bond with an average duration of five years will fall in value approximately 5% if rates rise by 1% and the opposite is accurate as well.
Although stated in years, duration is not simply a gauge of time. Instead, duration signals how much the price of your bond investment is likely to oscillate when there is an up or down movement in interest rates. The higher the duration number, the more susceptible your bond investment will be to changes in interest rates. If you have money in a bond or bond fund that holds primarily long-term bonds, expect the value of that fund to decline, perhaps significantly, when interest rates rise. The higher a bond’s duration, the greater its sensitivity to interest rates alterations. This means fluctuations in price, whether positive or negative, will be more prominent.
For example, a bond fund with 10-year duration will diminish in value by 10 percent if interest rates increase by one percent. On the other hand, the bond fund will rise in value by 10 percent if interest rates descend by one percent. The important concept to remember is once you recognize a bond’s or bond fund’s duration, you can forecast how it will react to a change in interest rates.
UPDATE:
The yield on the 10-year Treasury note serves as a benchmark for interest rates across the US economy. Since bond prices and yields move in opposite directions, falling yields signal higher demand for Treasuries.
Why it matters: At the most basic level, the 10-year yield is a key indicator of investors’ confidence in future US economic growth. As the Delta variant spreads and threatens to slow the economic recovery, the fall in yields means investors are souring on a mega growth spurt and snapping up safer assets rather than riskier stocks.
What does this mean for inflation? Because investors sell bonds when they think inflation is coming, the runup in bond prices means the worst of Wall Street’s inflation concerns may be over. “It feels like we have moved from thinking inflation will be transitory, to fearing growth will be transitory,” Art Hogan, chief marketing strategist at National Securities, said.
ASSESSMENT: Your thoughts are appreciated.
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THANK YOU
***
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Filed under: Breaking News, CMP Program, Financial Planning, iMBA, Inc., Investing, Touring with Marcinko | Tagged: bond funds, bonds, Certified Medical Planner™, CMP, David Marcinko MBA |
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RECOVERY?
Dow jumps over 400 points as stocks reclaim some of Monday’s lost ground.
https://www.marketwatch.com/story/dow-futures-bounce-200-points-higher-after-biggest-fall-in-8-months-11626781049?mod=home-page
SAM
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POST KABUL COLLAPSE
The benchmark 10-year Treasury note yield was at 1.27% late Sunday in New York, attracting some haven bids, with prices of government debt rising and yields moving in the opposite direction.
Ethan
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Relationship Reminder
https://www.thebalance.com/why-do-bond-prices-and-yields-move-in-opposite-directions-417082?utm_source=morning_brew
Ethan
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BONDS with Inflation Protection?
Three areas of fixed income investing now: floating rates, specifically loans of companies with high levels of debt to income; shorter-duration high yield, and non investment-grade credit with high risk premia.
These may be the three ways that you can get some degree of inflation protection, both from base rates, meaning floating rates, and also spreads.
Dr. David E. Marcinko MBA
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BONDS
When it comes to investing, it can be really tough to swim upstream. By that, I mean taking some chips off the table when the cards are hot. Nobody wants to hear about things like bonds or diversification when equities seem like they’re delivering non-stop gains, but that doesn’t mean that it’s not important. Just ask people who were loaded up on tech stocks just prior to the internet bubble bursting if they wish they could have a do-over.
Bonds, however, might not be the best solution. Since bond prices and interest rates move in opposite directions, investing when yields are near record lows could be setting investors up for losses if rates begin to normalize. Since Treasury yields hit their low back in early August 2020, long-term Treasuries are down more than 15%.
Sincerely,
Michael A. Gayed, CFA
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BONDS
As economic headwinds such as soaring inflation and tightening monetary policy have played out in the past year, “bond markets have experienced their worst annual performance since the inception of Morningstar’s fixed-income indexes,” said Dave Sekera, the chief market strategist at Morningstar Research Services.
“In fact, looking at other indexes dating back to 1976, this year was the worst performance for fixed income ever,” Sekera wrote in December. “The Morningstar US Core Bond Index (our broadest proxy for the fixed-income market) fell 11.80% for the year to date through Dec. 12, 2022. No part of the fixed-income markets was spared, as rising interest rates across the entire bond yield curve pushed down bond prices.”
Edward McQuarrie, a professor emeritus at Santa Clara University’s Leavey School of Business, says inflation is “kryptonite” for bonds. “Even if you go back 250 years, you can’t find a worse year than 2022,” he told CNBC regarding bond markets.
Luke
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