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Tag: Bonds

  • Stock Market Distrust Shown for Third Straight Year

    As it currently stands, the stock market is in a fairly good spot. Interest rates on fixed income and cash are low, market returns in 2013 exceeded 30 percent, and the market itself is setting record highs. Despite all of the success over the past five years, however, Americans are still not likely to invest their hard-earned money in such a “volatile” way.

    Research conducted by Princeton Survey Research Associates International and reported by Bankrate.com show that only 22 percent of Americans trust the stock market enough to be more inclined to invest in it.

    The results were compiled from phone interview with over 1,000 participants. The results showed consistency amongst all ages and income levels and are consistent with the results from similar studies published in 2012 and 2013 in which 76 percent of Americans stated they were not more inclined to invest in the stock market.

    Greg McBride, chief financial analyst at Bankrate.com, believes that this behavior is going to be detrimental to the pockets of Americans in the long-run: “Americans may be avoiding the buy-high, sell-low habit seen in previous market cycles, but only because they’re not buying at all. An overly conservative investment stance compounds the problem that so many Americans have of not saving enough for longer-range goals like retirement.”

    Rick Larrick, a professor of management at Duke University, corroborated McBride’s position about the conservative economic practices of Americans: “People would rather have pathetically low interest rates in something safe rather than (what they see as) the roller-coaster returns on the stock market.”

    Instead of investing in the stock market, Americans have been saving cash and spending their money on bonds, both of which have a low return-rate but offer more stability in the short-term. In the long-term, however, bond investments are dangerous due to the potential impact of inflation, something bonds do not adjust for.

    McBride believes that the best approach to investment is a balanced approach: “Investing over period of years in diverse portfolio is the pathway to financial stability.”

    Unsurprisingly, the study found that those most comfortable with their current economic position are wealthy males with a college education and who are newer to the job market.

    Image via Wikimedia Commons

  • Janet Yellen Approved for Fed by Senate Committee

    Thursday morning, the Senate Banking Committee approved Janet Yellen’s nomination to become the next Chair of the Federal Reserve by a 14 to 8 vote. This vote comes as no surprise to political pundits, especially seeing as Democrats hold 12 of the 22 seats on the committee and Yellen has been supported by Democrats and Republicans, alike, before the vote took place.

    In early October, Barack Obama announced Janet Yellen as his nomination to replace Ben Bernanke as Chair of the Federal Reserve when his term ends on January 31, 2014, and for good reason. Currently, Yellen holds the position as vice-chair of the Federal Reserve. Before her current role, Yellen had served as the President and Chief Executive Officer of the Federal Reserve Bank of San Francisco and as an economic adviser during the Clinton administration. Not only does Yellen have the pedigree to make her an appropriate candidate for the next chair of the Fed, but over 350 economists sent a letter to President Obama earlier this year voicing their approval of Yellen as the next nominee for Fed chair.

    Despite her credentials, however, many Republicans had voiced their opposition to her nomination. Republican Senator Marco Rubio, of Florida, has expressed his doubts that Yellen has the right monetary policy to lead the Fed during the current US financial situation: “She has championed policies that have diminished people’s purchasing power by weakening the dollar, made long-term savings less attractive by diminishing returns on this important behavior, and put the US economy at increased risk of higher inflation and another future boom-bust.”

    Senator Mike Crapo of Idaho, the ranking Republican on the Senate banking committee, also voiced concern about Yellen’s continued support of the US bond-buying program: “The long-term costs of these policies are unclear and, frankly, worrisome. The immediate benefits are questionable and markets have become too reliant on monetary stimulus.”

    While most Republicans have apprehensions and disagreements with how the Federal Reserve is handling the financial situation of the US, Yellen is most likely going to win nomination while continuing the same policies as her predecessor, Ben Bernanke. Yellen is described as a “dove”, meaning that during times of financial crisis, she will bolster Fed policies that fight against unemployment and attempt to drive spending. Conversely, Republicans would like to see a Fed chair who was a “hawk”, one who would focus more on suppressing inflation than worrying about unemployment.

    The biggest concern of Republicans, however, deals with the Fed’s bond-buying program. As it currently stands, the Federal Reserve purchases $85 billion of government bonds per month in an effort to drive down interest rates and encourage loans and investments. Republicans, as Senator Crapo expressed in the statement above, are worried that these investments are artificially driving-up the price of stocks and will soon result in a bubble-burst similar to the 2008 financial crisis.

    Democrats, and some Republicans (such as Bob Corker of Tennessee, Mark Kirk of Illinois and Tom Coburn of Oklahoma – who voted for Yellen’s nomination on the Senate banking committee, and Susan Collins of Maine, Orrin Hatch of Utah and Lisa Murkowski of Alaska – who have voiced that they will support Yellen’s nomination), point toward Yellen’s proven track record of intellect and success as the reasons as to why there should be no issues concerning her nomination: “She has devoted a large portion of her professional and academic career to studying the labor market, unemployment, monetary policy, and the economy. As we saw in her testimony last week, Dr. Yellen understands the challenges facing our economy and the balance the Fed must strike as we navigate the path back to full employment,” stated Senate Banking Committee Chairman Tim Johnson (D-S.D.).

    Due to her current role as vice-chair of the Federal Reserve and bipartisan support, Yellen should receive the 60 votes necessary to secure her position as the next Chair of the Fed (especially if Harry Reid is successful in changing the rules to make 51 votes the number required to secure nomination). If she is successful, Yellen will become the first woman to head the Federal Reserve since its inception over 100 years ago, a move which would be another huge step toward incorporating more women within politics in Washington, DC.

    What do you think? Is Yellen the appropriate candidate to become the next Chair of the Federal Reserve? Let us know in the Comments Section below.

    [Image via Wikimedia Commons]

  • Bonds Continue to Rise, Making Investment Wise

    There has been much talk lately of a government shutdown, and for good reason. Politicians in Washington are still debating what to do about the looming debt-ceiling crisis, with Republicans still pushing for the defunding of Obamacare in order to make things work. The biggest loser in this battle? The stock market.

    Despite the high numbers reported for the month of September, the stock market has taken a blow, mainly due to the bickering in D.C. With the uncertainty of what decision the federal government is going to make concerning the looming shutdown, investors are starting to shed their risk-making policies.

    So, where are investors turning? Bonds. This week, bonds saw their biggest price gains since July 2012, with 10-year notes rising 4/32 in price and 30-year notes rising 7/32. The biggest investor in the US market, China, bought record amounts of US bonds and mortgage back securities in July, increasing its holdings by $20.2 billion.

    There are several reasons why so much attention is being given to the bond-market currently. First, bonds generally act inversely to stocks. Thus, when stocks are bad, bonds are good. With the continuing debacle over government shutdown in Washington continuing to affect stock-investors, investment in bonds makes sense.

    If the government was to actually shutdown, investment in bonds would be the best financial move possible. With shutdown comes no discretionary budget, meaning the federal government would have to stop expenditures on contracts, subsidies, and indirect payments to defense contractors and technology companies. This means lowered forecasts for said companies, and reduced stock activity. The thought of the US not paying its bonds debts would seem absurd considering how much government debt is owned by foreign countries, such as China (who currently owns $1.277 trillion).

    All signs also point to the fact that fewer bonds will be available in the future, mainly due to the drastic cuts in the deficit that have been made – from $1.089 trillion to $700 billion over the past year. If sequester spending continues, along with increased taxed, the deficit could be reduced even further, leaving fewer bonds available for purchase. As the law of supply and demand dictates, less supply and higher demands results in higher price yield.

    Bonds themselves have three main advantages. The first is that bonds represent capital stability. As previously stated, the government is not likely to default on its bonds payments anytime soon. The second advantage is that bonds offer more liquidity than other investments. The return for bonds on the secondary-market is essentially equal to the primary market. The last advantage of bonds is that they come with a fixed interest-rate that is locked-in for the duration of the bond. With the instability of the current US market, a stable investment makes sense.

    In short, buying treasury bonds today is as sure of a bet as putting some money on Barry Bonds was back in 2001.

    Image via Wikimedia Commons