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David Landes
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David Landes is the founder and CEO of BondsOnline Group, Inc. a suite of financial information and data websites for fixed income investors, and financial professionals. The sites, BondsOnline.com, PreferredsOnline.com, BondsOnlineQuotes.com, and Ratecurve.com provide levels of data and... More
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  • S&P To Cut France's Credit Rating – What It Means
    S&P To Cut France's Credit Rating – What It Means

    BondsOnline, January 13, 2012

    Dow Jones announced on Friday that “Standard & Poor's Ratings Services has notified the French government of its decision to downgrade the country's credit rating, a senior French government official said Friday, a move that marks the long-awaited blow to France's international standing and knocks the country out of the top financial league of the euro zone.

    "S&P has informed the French government that the country's cherished triple-A rating will be lowered one notch to AA+. S&P has also notified other European governments of looming ratings downgrades, according to people familiar with the matter.

    "One person familiar with the matter said an S&P notice is being circulated among euro-zone governments and that an announcement "could be imminent."

    "A senior European government official told Dow Jones Newswires that Germany is not among the countries to be downgraded by S&P."

    What does this mean?

    A downgrade of France may the most impactful event to address structural problems in Europe. France has closed ranks with Germany and held a hard line on structural reform. A downgrade may now force France to become the defender of the Mediterranean countries, instead of shadowing Germany as it does now.

    With France’s weight the supposedly “weak” countries might get additional relief from the European Central Bank. A rift between Germany and France may mark the beginning of the end of the euro crisis, but the process will still be messy and disruptive.



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jan 13 6:13 PM | Link | Comment!
  • The Eurozone Sovereign Downgrades Yesterday Muddy the Waters Even More.....
    Heard from trading desks this morning.........

    Back to the drawing board. S&P potential downgrade of the Eurozone’s 6 AAA rated nations puts a damper on the EFSF (European Financial Stability Facility). Bailout funds that are not AAA rated are not exactly in vogue in the current environment especially for Asian investors. No AAA rating and you lose a large investor base. If they are downgraded they will still have AAA ratings from Moody’s and Fitch, but given the uncertainty of the credits, it’s a much tougher call. Like it or not, since the US issues debt in their own currency, as long as we don’t run out of paper and green ink, we can pay it back. It may be in tremendously devalued dollars, and you’ve got to get Congress to agree to pay, but paper & green ink means repayment. For Euroland countries it’s not so simple, there are restrictions.  For better or worse, S&P has put pressure on governments’ to address financial issues. Claim you’re serious about debt reduction and then don’t deliver, downgrade. Claim that you have a deal to fix the Euroland? You have been warned, you better come through. The clock was ticking, S&P just sped it up a bit.

    For some reason, stocks haven't dropped on the news.
    Tags: Bonds, Income Investing
    Dec 06 11:18 AM | Link | Comment!
  • Understanding – and Using - the Yield Curve
    Fixed income investors pay significant attention to what is known as the yield curve. This curve is a linear depiction of interest rates, or the yield over varying maturities of specific types of bonds. Maturities are represented on the horizontal axis of the graph and the interest rate for each maturity is plotted on the vertical axis – so connecting the dots creates a line showing market rates.

     
    Source: Ratecurve.com.
    The chart above – which depicts US Treasury bonds – shows the shape of the yield ascending as the maturities lengthen. This is referred to as a positive, or normal, yield curve. Why normal? This is because long maturities are subject to a greater risk, hence the market demands higher returns.
     
    The yield curve chart also shows us that rates are very low – near zero for very short maturities and only slightly above 4% on the 30 year bond. Low inflation, a slow domestic economy and European economic concerns have conspired to keep demand for US Treasuries high and yields low.
     
    Changes in the Yield Curve
    Yield curves are dynamic. So if you plot a yield curve using different dates, the shape of the curves may differ and the magnitude of the interest rates would differ.
     
    For example, the chart below illustrates the yield curve today versus that of ten years ago. Both the magnitude and shape have changed. Yields are significantly lower today, around 4% versus 6%, on long maturities. The yield curve of June 9, 2000 was not only higher but it was a flat curve; rates were virtually the same irrespective of maturities. Such a shape is not “normal.”
     

    Source: BondsOnline.com
    Changes in Shape
    The slope of the yield curve has been a reasonably accurate leading indicator of economic activity base4d on expectations of the market participants (traders, investors).
     
    A sharply positive yield curve has often preceded a more robust economy. As the economy swells, investors expect that higher inflation and higher interest rates may occur. Such a result would be negative for long-term bond holders, so they demand higher rates on long maturities.
     
    A flat yield curve is a predictor of economic slowdown. Flat yield curves in the early 1990s signaled the recession of 1990-91. The flat curve noted in 2000 preceded the “dot-com” meltdown and lower economic activity shortly thereafter. The Federal Reserve often raises short-term rates in very robust economies to stem rising inflation. This action helps create a flat curve by pushing up short rates toward those of long rates.
     
    An inverted yield curve is definitely not normal. In this case, short-term rates are higher than long-term rates. This is a leading indicator of a coming recession. In the early 1980s, yields were very high, reflective of exceptionally high inflation.

    Short-term rates were about 2 points higher than long-term rates. The economy faltered mightily. Eventually inflation was moderated significantly as a result of the recession and other forces. Short-term rates declined and the yield curve turned positive, which was predictive of coming economic expansion.
     
    Comparing Various Types of Bonds
    Sometimes it’s important to compare yield curves between two types of bonds – for example, US Treasury vs. corporate bonds. This comparison helps identify risk premiums and relative value and can act as a predictor of future activity.
     
    The third chart, below, shows a comparison of Treasuries to A-rated industrial bonds. In this June 10 example, corporate bonds yielded over 1% more (another 25% higher) than Treasuries on the long end. At 10 years, the spread was particularly attractive.

     
    Source: Ratecurve.com
    Changes in the “quality spread” are particularly important. In improving or strong economic times, the quality spread narrows dramatically. A robust economy makes it easier for companies to be profitable. That means credit concerns diminish. Conversely, a slowing economy causes credit concerns to increase. Bond investors sell corporate bonds and seek the safety of Treasury issues. This is referred to as a “flight to quality”. Spreads widen as yields rise on corporate and decline on Treasuries.
     
    Counter-intuitively, one may choose to be the most conservative when spreads become very narrow, i.e., you are not being rewarded for taking more risk. Aggressive investors may find the best rewards occur when all appears darkest, when the economy is lackluster and spreads are widest.
     
    As an identifier of investment opportunities and a predictor of economic trends, these curves are great analytic tools.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: Investing for Income, Bonds
    Jul 25 10:52 AM | Link | Comment!
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