2 Cool Fishing Forum banner

Bonds 101

23K views 70 replies 16 participants last post by  jesseetrent 
#1 ·
Bonds 101

This thread is for educational purposes only and will have no securities offered for sale. It will teach you about investing in bonds. The bond market does not receive the attention of the average investor that the stock market does. We don't have Jim Cramer and the rest of the media with all of their bells and whistles to get peoples' attention. The bond market is much larger than the stock market and should be a part of your arsenal of investment knowledge. There are great opportunities to make substantial returns in both markets and the bond market was brought to the retail investor about 20 years ago. Before then it was more of an investment tool for institutions and the ultra wealthy. There were very few middle and upper middle class individuals who owned bonds and the numbers of them that own bonds today is much lower than it should be due to simple lack of knowledge and media coverage. I believe it's so important that people learn about bonds because they have a date in the future when the issuer has a contract to return the investor's money (make sure you know about credit ratings. I'll post something later in the week). I will try to have an individual bond topic to discuss several times a week, but we'll try to stick to simple bonds. If you have any questions about bonds and fixed income please feel free to ask them here and make sure you speak with your financial advisor before you invest.

What are bonds?

A bond is a debt security, somewhat like a loan that is divided up into $1000 increments and sold to investors. When you buy a bond you are, in essence, lending money to the entity that issued the bonds. Bond issuers can be corporations, national governments, municipalities, government agencies or any other entity wishing to raise capital for operations or improvements. When you buy bonds the issuer is obligated to pay you a specific rate of interest and repay the face value (principal) when it "matures", or comes due.



There are many types of bonds to choose from: U.S. government securities, municipal bonds, corporate bonds, mortgage backed bonds, casino bonds, and many other types. Many mortgage backed bonds pay principal and interest on a monthly basis. You can receive a very strong degree of protection from the sub-prime crash by investing in mortgage backed bonds that are guaranteed by the federal government or a federal agency who guarantee on time payment of principal and interest. Beware, there are AAA rated mortgage backed bonds that are not backed by the government or a government agency that are dangerous.


Important features to consider when investing in bonds.

There are many things that an investor needs to consider before they invest in bonds: credit quality, interest rate, maturity, price, yield, call dates, and tax status. You need to use these factors to decide if a bond agrees with your financial objectives. If you're looking to buy a boat in 5 years and want to put your money to work until you're ready to visit the boat dealer, a bond with a maturity of greater than 5 years would not be consistent with your goals. If you can't afford to lose any money a bond with a high yield and low credit rating is probably not for you due to frisk of default. If you have $1 million saved for your retirement and need $50,000 a year to live happily then a bond that pays less than 5% interest is not the bond that fits your needs. These are just a few examples of how we judge whether an investment is suitable for us. There are many other considerations that you need to discuss with your financial advisor before investing in bonds. I'll post these considerations within the next week or so.
 
See less See more
#53 ·
Is inflation on the way?

There are 2 schools of thought on this subject. Some people think that the fed and treasury's big bailout will cause hyper-inflation. We have to remember that inflation is caused by to many dollars chasing to few goods. At this point in time we need to take a look at what the public is doing with their money. Some time back I explained that for the most part, the American public is broke. If they are lucky enough to have a good job they are not spending their income on buying a bunch of new junk. For the most part they are using it to live on and to pay down debt.

I guess you can compare it to a Monopoly game. If you have properties all over the board but they are all mortgaged to the bank, you don't spend the $200 you get for passing go on a new hotel for Boardwalk. You spend your $200 to get Park Place out of mortgage. This is the same situation that a large part of the American public is in. They have home equity loans that they have to pay, or they'll lose their homes. They are not going to take their pay check and spend it on new goods and services as long as they have so much debt to pay. This means that all of these dollars are not going to be chasing goods in the market place which would lead to inflation.

I believe that at some point in the future we will see some type of inflation, but I believe that it's still about 5 to 7 yrs out. Will it be true inflation, or will the "inflation" just get us back to where we were before the housing market crash? Unfortunately, my crystal ball is broken and I don't know how to fix it. One thing we have to remember is that the treasury department has been revving up the printing presses, but much of the money that has been lent out to stabilize big banks is not actual printed dollars, it is digital blips on the computer. As the banks pay it back, the fed can hit the delete button and the public will never see any of that money. Hence, much of that money will never chase goods, and never flood the economic system to cause inflation.

Another phenomenon that is occurring in the United States today is a change in consumer habits when it comes to spending. A couple of years ago we would hear about the average Americans' savings were becoming a smaller and smaller percentage of their earnings. For the first time in a long time we are seeing the rate at which Americans savings are on the increase. Dollars that sit in bank accounts don't chase goods and cause inflation. Weather your from the inflation school of thought, or the deflation side, it's still too early to tell if we'll see the hyper-inflation that so many of us are worried about.

If you are worried about it, bone up on your knowledge about TIPS (Treasury Inflation Protected Securities) and be ready to pull the trigger if and when inflation comes. They are bonds issued by the treasury that give a yield equivalent to inflation. I wouldn't invest in them right now because they are not yielding anything as we are still going through a deflationary period.

 
#59 ·
If you are worried about it, bone up on your knowledge about TIPS (Treasury Inflation Protected Securities) and be ready to pull the trigger if and when inflation comes. They are bonds issued by the treasury that give a yield equivalent to inflation. I wouldn't invest in them right now because they are not yielding anything as we are still going through a deflationary period.
Man you must be psychic. I was just reading up on some TIPS last weekend. The Vanguard one I read about looked pretty good.
 
#54 ·
as a licensed broker, don't you think that blogging about investments and especially very specific investments (inverse floaters) is probably a bad idea?

You are obviously trolling for a potential inverse buyer. My opinion but FINRA might see it the same way. Don't you think? How many customers have you picked up from this thread?
 
#55 ·
At the beginning of this thread, it states, this is thread is for informational purposes only. This thread is not an offer for securities or a recommendation to invest in anything.

The only reason this thread is here is because several 2coolers requested it. After about the third request and seeing that most investors in this world are uninformed about bonds, I figured I would go throught the red tape to put up an an EDUCATIONAL thread.

Trolling? I can certainly find better places to "troll" than a fishing site. As a matter of fact, I'd say I'd have quit by now because it would have been construed as a dismal failure. I don't get clients from educating on 2cool. If I was trolling I would have my name and a phone number at the bottom of each post. My name and phone number are nowhere to be found here. This thread was put up as a favor to 2coolers who asked for it, and I've taught them about all kinds of bonds.

Thanks CAMOKID, Glad to see you're so grateful.
 
#62 ·
Hey Camo...

Please don't mess this up for the rest of us. I enjoy reading.

BTW, don't the Tri-Star guys do the Street Talk Live radio show on at 6pm on AM700 KSEV? Not bad group to be associated with. I like the show.

Again, I enjoy this thread. Educate, please. Don't bash.
 
#65 ·
Sorry for the pic not showing up but a major move happened on the ten year. I got this of the wires a little while ago.

21. There apparently is a new wrinkle to the intermediation trade between buying from Treasury to sell to the Fed with real money, including central banks, now in on the act. Indeed, several Street sources relay central banks were aggressive offers into this morning's coupon pass, with one letting go of a large block of old 5-years. Other offers too are coming in from embedded Asian real money longs -- in the higher coupons -- also looking to sell size without unduly upsetting the market, and especially considering the illiquidity in off- the-run bids from the Street.

Whether influenced or not by the much higher tenders coming in on the Fed Passes ($45 bln tendered for $7.4 bln bought in today's pass for a 16.2% hit rate), fast money has been tattooing the bid and especially so in the belly with the 10-year most leaned on. Note as well, earlier this week the Bank of England (BoE) gilt pass too saw a need to offer paper at or below the market's bid side in order to get sales off.

QE is in trouble it would seem.
 
#66 ·
To finish the story. Of course a birdy told me that bernake and company could just nationalize Moody's and S&P and make this go away.LOL and of course Bill Gross would like nothing better than to drive this straight up the obama administration rear end.
Pimco's Gross: Sell-off driven by fears US could lose AAA

Thu May 21, 2009 1:39pm EDT

Email | Print | Share
| Reprints | Single Page
[-] Text [+]

Market News

Wall St slides as jobs, Fed data temper optimism
Reports hint U.S. recovery will be a rutted road | Video
Global stocks slip, pound tumbles | Video
More Business & Investing News...

NEW YORK, May 21 (Reuters) - Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said market fears that the U.S. is at risk of losing its AAA credit rating is sending the U.S. dollar, stocks and bonds under severe selling pressure on Thursday.
Asked what is driving the market declines, Gross told Reuters via email that investors fear the U.S is "going the way of the U.K. -- losing AAA rating which affects all financial assets and the dollar."
(Reporting by Jennifer Ablan; Editing by Diane Craft)
 
#67 ·
Geithner Vows to Cut U.S. Deficit on Rating Concern (Update2)

Share | Email | Print | A A A

By Robert Schmidt


May 22 (Bloomberg) -- Treasury Secretary Timothy Geithner committed to cutting the budget deficit as concern about deteriorating U.S. creditworthiness deepened, and ascribed a sell-off in Treasuries to prospects for an economic recovery.
"It's very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term," Geithner said in an interview with Bloomberg Television yesterday. He added that the target is reducing the gap to about 3 percent of gross domestic product, from a projected 12.9 percent this year.
The dollar extended declines today after Treasuries and American stocks slumped on concern the U.S. government's debt rating may at some point be lowered. Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. "eventually" will lose its AAA grade.
Geithner, 47, also said that the rise in yields on Treasury securities this year "is a sign that things are improving" and that "there is a little less acute concern about the depth of the recession."
The benchmark 10-year Treasury yield jumped 17 basis points to 3.36 percent yesterday and was unchanged as of 12:18 p.m. in London. The Standard & Poor's 500 Stock Index fell 1.7 percent to 888.33 yesterday. The dollar tumbled 0.5 percent today to $1.3957 per euro after a 0.8 percent drop yesterday.
Gross's Warning
Gross said in an interview yesterday on Bloomberg Television that while a U.S. sovereign rating cut is "certainly nothing that's going to happen overnight," markets are "beginning to anticipate the possibility." Nobel Prize-winning economist Paul Krugman, speaking in Hong Kong today, nevertheless argues it's "hard to believe" the U.S. would ever default.
Britain's AAA rating was endangered when Standard & Poor's yesterday lowered its outlook on the nation's grade to "negative" from "stable," citing a debt level approaching 100 percent of U.K. GDP.
It's "critically important" to bring down the American deficit, Geithner said.
In its latest budget request, the administration said it expects the deficit to drop to 8.5 percent of GDP next year, then to 6 percent in 2011. Ultimately, it forecasts deficits that fluctuate between 2.7 percent and 3.4 percent between 2012 and 2019.
Early Stages
Ten-year Treasury yields have climbed about 1 percentage point so far this year, in part after U.S. economic figures indicated that the worst of the deepest recession in half a century has passed. The yield on 30-year bonds has jumped to 4.31 percent, from 2.68 percent at the beginning of the year.
The Treasury chief said it's still "possible" that the unemployment rate may reach 10 percent or higher, cautioning that the economic recovery is still in the "early stages."
"The important thing to recognize is that growth will stabilize and start to increase first before unemployment peaks and starts to come down," he said. While "these early signs of stability are very important" this is "still a very challenging period for businesses and families across the United States," he said.
Initial claims for unemployment insurance fell by 12,000 in the week ended May 16 to 631,000, according to Labor Department statistics released yesterday. Still, the number of workers collecting unemployment checks rose to a record of more than 6.6 million in the week ended May 9.
As of April, the unemployment rate was 8.9 percent, the highest level since 1983. The economy has lost 5.7 million jobs since the recession started in December 2007.
Municipal Bonds
Also yesterday, Geithner said the U.S.'s $700 billion financial rescue package can't be used to aid cities and states facing budget crises.
The law "does not appear to us to provide a viable way of responding to that challenge," Geithner told a House Appropriations subcommittee in Washington. Among the hurdles: money from the Troubled Asset Relief Program was designed for financial companies, he said.
Geithner said he will work with Congress to help states such as California that have been battered by the credit crunch and are struggling to arrange backing for municipal bonds and short-term debt.
The municipal bond markets are "starting to find some new balance and equilibrium," he said.
 
#68 · (Edited)
Words wont fix this for turbo and ben. This is a pic of the /zn 5min at 8:00AM today. It looks like they are selling into bens bid. Interestingly enough the /ES is moving in correlation with this. I expected to see a pop in equities. I am staying in my short positions a little longer if this turns real nasty.
 

Attachments

#69 ·
LMAO!! When does QE2 start.

WASHINGTON -- A government program designed to rid banks of bad loans, part of a broader effort once viewed as central to tackling the financial crisis, is stalling and may soon be put on hold, according to people familiar with the matter.
The Legacy Loans Program, being crafted by the Federal Deposit Insurance Corp., is part of the $1 trillion Public Private Investment Program the Obama administration announced in March as a way to encourage banks to sell securities and loans weighing on their balance sheets to willing investors

May 26 (Bloomberg) -- The highest-graded bonds backed by commercial mortgages may be cut by Standard & Poor's, potentially rendering the securities ineligible for a $1 trillion U.S. program to jumpstart lending.
As much as 90 percent of so-called super senior commercial- mortgage backed bonds sold in 2007 may be affected as the ratings firm changes how it assesses the debt, New York-based S&P said today in a report. About 25 percent of the bonds sold in 2005, and 60 percent of those sold in 2006 may be cut.
 
#70 ·
No Bond Safe From Obama's 'Shared-Sacrifice' Plan: David Reilly

Share | Email | Print | A A A

Commentary by David Reilly



June 3 (Bloomberg) -- Bondholders have a new risk to contend with -- the Obama administration's policy of "shared sacrifice."
The government's approach to the bankruptcies of General Motors Corp. and Chrysler LLC illustrates how this new, unstated policy works: Bondholders are told to give up legal rights, and cash, as part of a government-mandated tradeoff that favors a politically connected special-interest group.
The big threat is that this policy will extend to all bonds, including Treasury and municipal debt, not just corporate obligations.
That sounds alarmist, even extreme. After all, the government has gone to incredible lengths to assure U.S. creditors -- specifically, central banks that own trillions of dollars in Treasuries and other government-guaranteed debt -- they won't have to bear any financial-crisis pain.
Yet with California in a budget crisis, worries over all kinds of supposedly safe debt abound. And Wall Street's disenchantment runs so deep in the wake of GM and Chrysler that once-unthinkable scenarios are being discussed.
One example: a speech by well-known hedge-fund manager David Einhorn at last week's Ira W. Sohn Investment Research Conference. While focusing much of his talk on ratings companies and a bet his firm has made against Moody's Corp., Einhorn also attacked President Barack Obama's policy toward bondholders and the danger it poses to creditors of all stripes.
The president, Einhorn said, had introduced a "quixotic idea" into credit markets: "that creditor recoveries in troubled situations can be determined by an arbitrary sense of shared sacrifice rather than legal agreements and long- established prior practice."
Just How Far
Einhorn raised the question of just how far the administration would go in pursuing this new policy, especially if the interests of bondholders again came into conflict with politically favored groups.
"When teachers and firefighters are losing jobs and benefits, will municipal bondholders be asked to share in the collective sacrifice?" he asked. "Might the shared-sacrifice theory eventually extend into the U.S. Treasury market during a crisis?"
This chilling thought reflects a sentiment in credit markets that the rule of law is being eroded.
That theme was echoed at the Sohn conference by Paul Singer, head of Elliot Associates LP, one of the biggest and most successful hedge-fund managers.
Singer's funds have used the courts to enforce their rights as creditors. He spoke of his concern the law will be circumvented.
Can't Lose Capital
As Singer lamented, when that happens, capital tends to find a new home. That would be worrisome, given that the U.S. needs to raise trillions of dollars to fund all the Obama administration's bailout and stimulus plans.
In the meantime, debt investors will have to consider new risk factors when weighing an investment. These include the size of a company's workforce; the proportion that is unionized; whether or not the company, or a sizeable part of the unionized workforce, is in a political swing state; and whether it has operations in the home district or state of an important congressional committee chairman.
The GM case showed that these issues, not usually considerations for investors, can be just as important as a bond's yield-to-maturity or covenants.
Union Fund Wins
In the run-up to GM's Monday bankruptcy filing, bondholders were told they would do far worse in a government-organized and -financed restructuring than would a health-care trust fund for GM's unionized retirees. That was the case even though bondholders were owed $27 billion versus $20 billion for the trust, and even though bondholders' claims were legally equivalent to those of the trust.
True, the government sweetened the offer to bondholders at the last minute and agreed to put more taxpayer money into a new GM. Still, that deal wasn't anywhere near as good as the upgraded offer given to the trust, which is represented by the United Auto Workers union.
The deal certainly didn't represent, as Obama said during a Monday press conference, an "equitable outcome" for bondholders.
Bondholders were given a 10 percent stake in the new GM and warrants to purchase additional shares down the road. The employee trust fund, meanwhile, received a 17.5 percent equity stake, as well as $6.5 billion in new preferred stock. This preferred stock pays a 9 percent dividend. So the trust will receive $585 million each year, while bondholders stew.
No Fair Shake
Much of the ultimate recovery for bondholders and the trust depends on the value ascribed to GM's new stock, years into the future. No matter how you cut it, though, bondholders don't get a fair shake.
"The UAW gets a recovery of five times the bondholders' under reasonably upbeat scenarios," CreditSights Inc. analyst Glenn Reynolds wrote in a research note. "This is just the fact."
So bondholders now know how the Obama administration's "shared-sacrifice" policy will work out for them. After GM, they can't say they weren't warned.
(David Reilly is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: David Reilly at dreilly14@bloomberg.net
Last Updated: June 3, 2009 00:01 EDT
 
This is an older thread, you may not receive a response, and could be reviving an old thread. Please consider creating a new thread.
Top