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Bonds: Different Strategies for a Common Goal

October 28, 2011 9:27 pm / Leave a comment

Skip long-term treasuries and buy more stocks: That’s the sentiment (and title) behind an article by Forbes on September 27.

Forbes reported news of the Federal Reserve voting “to revive a half-century-old procedure to push down long-term interest rates and make it cheaper for businesses, municipalities and consumers to borrow funds… [by directing] $400 billion from the sale of short-term Treasury and invest it in those with maturities of six to 30 years.”

Furthermore, the article indicated that the decision was made when the yield for the S&P 500 exceeded that of the 10-year Treasury bond. At the time of the article, by the end of closing week September 30th, the 10-year T-bond was 2.23% and the S&P 500 yield was 4.35%. The significance of this (or the good news) is that the S&P 500 yield has only exceeded the bond yield 20 times since 1953 on a quarterly basis, according to Sam Stovall of Standard & Poor’s, the article added. The bad news is that this happened when the US government’s credit rating dropped for the first time since regulatory demand began in the 1930s and now investors are dumping government bonds- once the safest form of risk- like last year’s Netflix envelops. (more…)

Municipal Bond CDS: Friend or Foe?

January 13, 2011 7:09 am / Leave a comment

Credit-Default Swaps: A term not heard very often by the public but is, instead, increasingly growing with anticipation for many investors- some would even say growing in fear.

Credit default swaps, or CDSs, are insurance-like contracts between banks that insure against default on a loan or bond. CDSs are credit derivatives of either corporate or municipal bonds, and like insurance, they offer collateral in the form of premiums to offset risk. This difference between collateral and risk is the “spread”, and therefore, the spread is the trade or swap. For further explanation on the complete makeup and history of credit default swaps, read “Credit Default Swaps: From Protection To Speculation.” (more…)