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In focus: China makes a big shift in their bond strategy, South American banks worth owning, a 100-year-maturity bond and the SITFA
China knows you can lose money in Treasuries, but most investors do not. Most investors think that a guaranteed U.S. government bond means you can’t lose. Not true!
China very recently got rid of a lot of long-maturity Treasury bonds for shorter maturities; they sold $9.2 billion of long bonds and bought $38.2 billion of shorter maturities.
They did this for exactly the same reasons I have been pounding the table in my bond articles for the past year; when rates move up in this country, and they will, long-maturity bonds of all kinds and long-maturity bond funds will get crushed! This will be a real blood bath!
All bonds will drop in value when rates move up, there is no way around that, but the shorter maturity bonds, I like a five-year average or less, will drop a lot less than the higher paying long maturities.
You could see a 12% to 15% drop in the market value of a 30-year Treasury with as little as a one-point increase in rates. And, as you move out of the guaranteed bonds to munis and corporates, that drop will be even greater.
Keep your average maturity below the five-year mark and you can limit this drop by about as much as 50%.
The beauty of bonds is that no matter what happens to rates, or the market value of your bonds, you still get paid your interest and the principal at maturity. But, as we all know, as soon as an investor sees a drop in value on their statements they sell at a loss. It’s crazy, but true.
By limiting the downside of your bonds and bond funds, (actually, with very few exceptions I am opposed to bond funds in this market, too many problems you can’t see), but by limiting your downside you keep the unavoidable panic selling to a minimum and you end up making money.
With bonds, you have to be there at the end of the race to make any money. Sell as soon as the market drops and you might as well have given the money to your brother in law.
The Chinese seem to have a good handle on money. Do what they do, shorten your maturities now!
While we’re on bonds, recently a 100-year maturity bond, called a century bond, was issued by California. 100 years. And, here’s the best part, it only pays 4.858% yield. That’s peanuts!
Beside the fact that you’ll get killed with a capital “K” in this thing, who can possibly justify tying up your money for 100 years for 4.858%? It’s just stupid.
Please tell me none of our members bought this!
This is one of about four of this type of bond issued in the past year or so, Burlington Northern did one, Norfolk Southern, MIT and USC, but they are rare.
They are a great deal for the issuer. They lock you in at a pitiful rate for the maturity, at the bottom of the rate curve and every owner will be dead when it matures. Crazy!
Wait a year or so and you’ll be 4.858% from a five-year tax-free muni. People are panicking to get income from anywhere and will do just about anything, even something this stupid, to get something, anything on their money.
Most buyers of this type of bond are pension funds and insurance companies, but you know there will be some retired person who’s getting a half of a percent on their money markets who will see 4.858% and jump on it. Don’t be one of them. 100 years is very long time.
According to a recent MarketWatch article, while most of the banking world is still struggling to recover from the collapse, South American banks are steaming!
According to the article, the growth and strength in these banks has been fueled by a growing middle class that has had a big increase in per capita income; it’s up 56% in just 10 years, and it’s also benefiting from greater efficiency and an expanding loan portfolio.
The best of this group, Brazilian banks! They occupy the top five spots on the Banker’s List, and Itau Unibanco, Brazil’s largest bank, has its eye on the increasing cross country business in South America, and, according to the CEO, Roberto Setubal, it is rapidly expanding outside of Brazil.
Capital markets are expanding rapidly in both Columbia and Peru, and even the mature markets, Brazil and Chile, have very high growth rates. Latin American banks have also pushed developed country banks out of the top positions in retail and investment banking.
The one exception, Spain’s Banco Santander! It has increased its penetration in the Mexican market and has been building a presence in Chile, Uruguay and Argentina.
Banking in South America, take a look at it.
This week it goes to the life insurance folks at the Hartford, who, according to a Smart Money article, gave a $20-million life insurance policy to a 78-year-old woman.
You heard that right, a 78-year-old woman bought a $20-million life insurance policy, $20 million!
That’s crazy enough, but the really amazing part, top executives signed off on it in less than 30 minutes.
The Hartford figured she will live another 14 years and pay $1 million per year in premiums, and, according to a Hartford spokesman they could make a tidy profit on the deal.
For the sake of their careers in the life insurance business, I hope they’re right. This could be a real career ender if they’re wrong!
$20 million is a lot of insurance. Her beneficiaries must be loving this!
Article by Investment U