This post will pass along some interesting snippets of conversation about interest rates from a financial conference I attended on Friday. This article will close with a few easy-to-use, educational resources on fixed-income investing for you.
There was a fascinating discussion on the fixed-income markets* at the Archway Investment Fund Forum at Bryant University.
HERE ARE SOME OF THE VIEWPOINTS:
Interest rates are projected to stay low until 2015. That’s good for borrowers but bad for others such as individual savers, pension funds, etc.
Causes of Low Rates
The Federal Reserve intervenes in fixed income markets in two ways:
- The overnight rate is kept near zero.
- By purchasing long-term Treasury bonds and mortgage-backed securities, the Fed lowers the ten and thirty-year rates.
There are other reasons for record low rates:
- There is massive deleveraging (paying down debt) throughout the economy. This is a legacy of the credit bubble.
- Regulators are forcing banks to delever.
- Each generation in the U.S. goes through a financial crisis and is forced to delever. Similarly, each generation in Europe, in its own cycle, has a crisis and is forced to delever. However, every 1.5 generations, both the U.S. and Europe go through a crisis that leads to deleveraging at the same time. We are going through one of these periods now and that’s why the recession is so severe.
Panic. Treasuries are seen as the safest investment around the globe. Whenever there is bad news, everyone rushes to buy Treasuries, driving down interest rates. Ironically, even when a ratings agency downgraded the U.S. Federal government, investors panicked and bought Treasuries.
Other Opinions on the World Economy
Italy, Spain, and France need to make painful cuts. Japan and Europe are losing population. One participant was optimistic about the U.S. because the country has population growth, productivity, and labor mobility.
When will rates go up?
- When economic growth is greater than expected
- Inflation is expected in the next two to three years
RESOURCES FOR FIXED INCOME INFORMATION
- “Investors’ 10 most common mistakes” by Barry Ritholtz, Washington Post. I liked this quote from the article, ‘Reaching for yield: there are few mistakes more costly than ‘chasing yield’…” “There are three common ways to chase yield: 1.) by buying longer-dated bonds: 2) by buying junkier, riskier paper; or 3) by using leverage, which amplifies your gains but also amplifies your losses.”
- Two slide shows from Investopedia: “Top 6 Uses of Bonds” Slideshow. “8 Ways to Lose Money in Bonds” Slideshow
- Morningstar’s Investing Classroom. There is a curriculum in the form of a slideshow for bonds.
*Fixed Income and Alternative Investments Panel: Erica Vaters, Fidelity; Howard Jones, BlackRock; Joseph Fazziono, United Technologies; and Tom Tzitzouris, Strategas Research Partners.