borrowing cost

President Obama Just Laid out his Student “Bill of Rights”

“I take it personally because when I look out at all of you, I see myself,” President Obama told students at Georgia Tech today. “I remember the fact that it took me ten years to pay off all our student loans. We were paying more for our student loans than our mortgage. Even after Malia and Sasha were born, we were supposed to be saving for their college education, but we were still paying off ours.”

Goldman Sachs is sounding the alarm on a crucial barometer for the markets

(Traders in the Standard What a difference a couple of months make.

The year kicked off with investors again predicting this was the year Treasury bond yields would finally, after so many false starts, dart higher as the Federal Reserve raised official borrowing costs.

Instead, the bond market has parted ways with equities big league, with lower yields signaling the sort of concern about the country’s economic prospects and companies’ profit margins that is starkly absent from a giddy, record-loving stock market.

“Not long ago we were often asked why our 2.5% end-March 2017 forecast for 10-year US Treasury yields was so low,” Goldman Sachs strategists Francesco Garzarelli and Rohan Khanna wrote in a research note. “Now, the most recurrent questions are how much further can bond yields fall?” Also: What will make them move higher?

Treasury bonds are considered a safe investment, and their yields move opposite to their price. Despite slightly higher yields following the French election, 10-year benchmark rates stood about 2.30%, below a postelection peak near 2.60%.

Stocks, in contrast, have defied gravity, chasing frequent record highs despite concerns about firms’ profitability, a weak investment backdrop, and the prospect of additional interest-rate increases from the Federal Reserve.

To highlight the bearish trend in the US government bond market, the Goldman analysts contrasted its moves with those of its comparable foreign counterparts.

“In the big picture, US Treasuries have represented a bearish force for global fixed income since last June, and particularly since the election of President Trump,” the Goldman strategists wrote. “More clouds have gathered over the size and the timing of the Trump Administration’s fiscal expansion, and the news on the inflation front has been more mixed of late.”

(Goldman Sachs)
As for the matter of when yields might actually turn higher, Garzarelli and Khanna are telling clients the pace of Fed tightening will be key: “The level of US yields is ultimately set by the Fed, the only major central bank that we expect to tighten policy this year and next.”

For Wall Street traders, prepping for bond yields to rise has been like waiting for Godot. But they’ll keep doing it.

NOW WATCH: This man spent 6 weeks working undercover in an iPhone factory in China — here’s what it was like



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Fixed Income – Are You Facing an Inconvenient Truth?

The baby boomer generation (born 1945-1964) is charging into retirement. About 10,000 new baby boomers retire each day, and according to the Pew Research Institute, that number will remain above 10,000 per day at least through 2019. Yet as boomers kick off their shoes to enjoy life in retirement, they’re met with a glaring paradox: at the time they want attractive interest rates to produce retirement income from their portfolios, little yield is to be found. Truly, an inconvenient truth.

There’s no need for despair or frustration though, because there are a number of viable alternatives to fixed income. In fact, the low interest environment may help investors achieve a higher total return (income plus growth) as folks are encouraged to keep a greater portion of their portfolios in equities for longer.

I’ve always had a hard time accepting the widely-held belief that investors should gradually shift their portfolios to fixed income as they age. It’s an old investment adage that worked when interest rates were high in the 1980’s and 1990’s but makes little sense today. For many, I think it does more harm than good to rotate into fixed income simply because of age — notable growth that investors often need gets “left on the table.”

Toward the end of this piece, I’ll talk about achieving yield through equity investing. But first, a brief note on global interest rates and where I see them heading from here.

Don’t Hold Your Breath: Interest Rates Likely to Remain Low for Some Time

Global interest rates are about as low as they have been at any point in history. For small businesses, corporations and highly qualified borrowers that’s a great thing — at least in theory. The economic benefit of low borrowing costs is huge, but only to the extent that banks are actually willing to lend (Dodd-Frank and post-crisis regulation hasn’t made that easy).

For investors though, the low rate environment means there are few places you can earn a decent yield with little risk. If you take a look at some of the traditionally ‘safer’ bonds available on the market (government bonds of stable economies), you’ll find that yields are scraping the bottom and hardly paying much more than the long-term inflation rate:

Since the 2008 Financial Crisis Yields Have Plummeted 

Quantitative easing programs in the U.S., and now in Europe and Japan, are designed to keep downward pressure on longer-term interest rates to, hopefully, spur corporate borrowing and lending activity. The collateral damage to investors however, is that yields are paltry.

The municipal bond market isn’t much brighter. Normally, you could take home a higher yield as municipals are slightly riskier than Treasuries (and you get a boost from favorable tax treatment). They have charted a similar course to Treasuries, and in many cases it’s questionable whether the added risk is worth a couple of percentage points in yield.

Municipalities Have Also Seen Yields Decline Rapidly 

The Fed is set to raise interest rates later this year (we think), but it’s also apparent to us that the this rate hike cycle will be gradual. In other words, I wouldn’t count on interest rates shooting up in the next couple of years to levels that will placate investors seeking income. Depending on your goals and risk tolerance, it could make sense to pursue alternatives.

A Viable Alternative to Fixed Income: Dividend Paying Stocks

I’ve written that dividend stocks look attractive to me in an aging bull market — they have tended, historically, to reduce downside volatility in the near-term, achieve equity-like growth over the long-term, all while generating a relevant portion of total returns in the form of cash. As of the end of Q1, the Zacks Dividend Strategy had a yield of 3.01% compared to the 10-US Treasury, which pays 2.19% as I write this.

While more volatile than fixed income, equities also give investors a higher probability of seeing portfolio growth over time. Periods like the 2008 financial crisis and bear markets tend to make retirees more reluctant to hold a high percentage of a portfolio in equities — which is understandable. But for an investor entering retirement with income needs that span 20 – 30 years, the reality is that you probably need more growth than you think. That’s where equities can make a big difference.

Bottom Line for Investors

Don’t expect the interest rate environment to turn around any time soon. Japan and Europe are in the early stages of an easing program, as are China and Australia, and the U.S. is barely getting a toe in the water when it comes to tightening. For investors in search of yield, it could make more sense to look to dividend-paying stocks, and perhaps some corporate bonds, to generate income. Doing so could also help you achieve better long-term growth rates, a win-win. 

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AUSTERITY 101: The Three Reasons Republican Deficit Hawks Are Wrong

Congress is heading into another big brawl over the federal budget deficit, the national debt, and the debt ceiling.

Republicans are already talking about holding Social Security and Medicare “hostage” during negotiations—hell-bent on getting cuts in exchange for a debt limit hike.

Days ago, U.S. Treasury Secretary Jacob Lew asked whether our nation would “muster the political will to avoid the self-inflicted wounds that come from a political stalemate.”

It’s a fair question. And there’s only one economically sound answer: Congress must raise the debt ceiling, end the sequester, put more people to work, and increase our investment in education and infrastructure.

Here are the three reasons why Republican deficit hawks are wrong. (Please watch and share our attached video.)

FIRST: Deficit and debt numbers are meaningless on their own. They have to be viewed as a percent of the national economy.

That ratio is critical. As long as the yearly deficit continues to drop as a percent of the national economy, as it’s been doing for several years now, we can more easily pay what we owe.

SECOND: America needs to run larger deficits when lots of people are unemployed or underemployed – as they still are today, when millions remain too discouraged to look for jobs and millions more are in part-time jobs and need full-time work.

As we’ve known for years – in every economic downturn and in every struggling recovery – more government spending helps create jobs – teachers, fire fighters, police officers, social workers, people to rebuild roads and bridges and parks. And the people in these jobs create far more jobs when they spend their paychecks. 

This kind of spending thereby grows the economy – thereby increasing tax revenues and allowing the deficit to shrink in proportion.

Doing the opposite – cutting back spending when a lot of people are still out of work – as Congress has done with the sequester, as much of Europe has done – causes economies to slow or even shrink, which makes the deficit larger in proportion. 

This is why austerity economics is a recipe for disaster, as it’s been in Greece. Creditors and institutions worried about Greece’s debt forced it to cut spending, the spending cuts led to a huge economic recession, which reduced tax revenues, and made the debt crisis there worse. 

THIRD AND FINALLY: Deficit spending on investments like education and infrastructure is different than other forms of spending, because this spending builds productivity and future economic growth.

It’s like a family borrowing money to send a kid to college or start a business. If the likely return on the investment exceeds the borrowing costs, it should be done.

Keep these three principles in mind and you won’t be fooled by scare tactics of the deficit hawks.

And you’ll understand why we have to raise the debt ceiling, end the sequester, put more people to work, and increase rather than decrease spending on vital public investments like education and infrastructure. 

washingtonpost.com
Puerto Rico says it cannot pay its debt, setting off potential crisis in the U.S.
A default on the island’s massive debts could roil the stock and municipal bond markets and raise borrowing costs for state and local governments.

The governor of Puerto Rico has decided that the island cannot pay back more than $70 billion in debt, setting up an unprecedented financial crisis that could rock the municipal bond market and lead to higher borrowing costs for governments across the United States.

Puerto Rico’s move could roil financial markets already dealing with the turmoil of the renewed debt crisis in Greece. It also raises questions about the once-staid municipal bond market, which states and cities count on to pay upfront costs for public improvements such as roads, parks and hospitals.

For many years, those bonds were considered safe investments — but those assumptions have been shifting in recent years as a small but steady string of U.S. municipalities, including Detroit, as well as Stockton and Vallejo in California, have tumbled into bankruptcy.

In addition, with as much as $73 billion in debt, the island’s debt obligation is four times that of Detroit, which became the largest U.S. city to file for bankruptcy in 2012.