Learn Bonds'  Instablog

SavingsBonds.com is a family owned business which offers a valuable service to its clients. If you have a question about savings bonds, they can provide you the answer. Many people find dealing with the Treasury department, the government entity which issues saving bonds, a frustrating experience. Instead, many savings bond owners prefer paying a small monthly fee to SavingsBonds.com to have easy to understand answers and help only a phone call away.

SavingBonds.com is heavily promoting CDs.

However, SavingsBonds.com appears to have shifted its focus towards making money from marketing CDs. I recently received an e-mail from them letting me know that they now offer CD rates and information on their site. When, I visit the homepage of SavingBonds.com, I see ads for CD products and links to articles about CD Rates.

Interest in savings bonds has declined by almost 80% over the last 10 years.

The chart below tracks changes in the number of searches for the term savings bonds since 2004. The number 100 represents the peak level of interest. As you can see, the peak interest in savings bonds occurs in the earliest part of the chart. From 2004 through 2009, there is a steady decline in interest in saving bonds. There is a slight pickup in interest in late 2012 (ironically because the Treasury ended selling paper savings bonds) and then the decline has continued. Right now, there is all-time low in the number of searches for saving bonds.

(click to enlarge)

Interest in savings bonds follows interest on savings bonds.

Newly purchased EE savings bonds have been paying an annual interest rate of only 0.2% for the last seven months and at minimum will continue to pay 0.2% through at least November 1st, 2012. Rates for savings bonds are set every six months on the first business day of May and November. The current interest rate is an all-time low. People are not interested in savings bonds because their rates are so low.

Top paying CDs are offering interest rates that are 8 times as high as the EE series savings bond.

CDs and saving bonds have much in common. Both products are extremely safe, accumulate interest, and require the investor to lock-up their money for a period of time. There are some differences like savings bonds have tax advantages but, overall one can say that a person that would be interested in savings bonds would also be interested in CDs.

The rates on top paying CDs have not been pushed down nearly as low as EE savings bonds. When comparing savings bonds to CDs, I like to use the EE series saving bond and the top paying 5 year CD from Learn Bonds' CD rates table.

• Interest rate on new EE series savings bond 0.2%

• Interest rate on 5 year CD being offered by Barclays 1.73%

The difference is an incredible 1.53% in favor of CDs. No wonder SavingBonds.com is having trouble with savings bonds.

With saving bonds rates so low compared to a very similar much higher yielding alternative (CDs), its hard to get people excited about investing in them. As a result SavingsBonds.com has turned to a higher rate product to engage the interest of their audience. However, I would like to suggest two ideas to SavingBonds.com to re-engerize interest in investing in Saving Bonds.

The headline rates on savings bonds are misleading. As you can see from the articles below, investors can axpect to receive a much higher rate of return than advertised by the Treasury Department.

• EE Savings Bonds Pay A Rate of 3.5% - When held for exactly 20 Years

• I Bonds Should Pay An Interest Rate of 2.0 - 2.5% Over The Next Five Years - If Current Expectations of Inflation Are Correct

Full Disclosure: Learn Bonds and SavingsBonds.com have cooperated in the past on an initiative to "Bring Back Paper Savings Bonds". However, no commercial relationship exists between the two companies.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

The guru strategy is simple.

1. Pick a really smart investor, like Warren Buffet or David Einhorn.
2. Find out what securities they are holding.
3. Buy them.

For stock investors, there are sites that make this process very easy like Guru Focus. For bonds however, the process is more complicated:

1. Find the mutual fund that you want to copy on Morningstar.
2. Click on the "Holdings" link which is under the Portfolio Tab.
3. This will give you name of issuer, the coupon rat,e and the maturity.

To find the bond's CUSIP number, which will enable your broker to buy the bond, you will need to plug this information into FINRA's Trace system.

There are two main benefits of this strategy:

First, you get to follow the investment advice of Warren Buffett or David Einhorn without having to pay a management fee or a premium. For example, Warren Buffett's company Berkshire Hathaway trades at a P/E ratio of 18, while many of the stocks it holds trade at smaller multiples, like Wells Fargo (10) and IBM (14). In the case of David Einhorn, the fees of his hedge funds are probably 2% of assets and 20% of profits. The guru strategy enables you to use their ideas and save money.

Second, the guru strategy gives more investment flexibility. As you will be owning individual securities, you will be able to chose which ones to sell and when. This compares to investing in the fund where when you buy and sell you are essentially buying and selling the whole basket of securities the fund holds. This gives you the freedom to time sales according to your tax situation and your personal view of the companies.

Both of these reasons are equally true for bond gurus such as Bill Gross and Jeff Gundlach, as they are for stock gurus like Warren Buffett and David Einhorn

There are two main drawbacks of this strategy.

First, you could be trading on 4 ½ month old information. Mutual funds are required to disclose their holdings every 3 months. However, they have two months after the close of a quarter to report their holdings. Imagine the case where a mutual fund entered into a trade two weeks after the reporting period, and held the position for only a month. If you chose to buy and sell based on the fund's disclosure documentation, you could be entering the trade 4 months after the fund and selling it 3 months after the fund closed its position.

To minimize the probability of this happening, we recommend that the funds you follow:

• Report holdings within two weeks of the end of their quarter
• Have low portfolio turnover, under 25%.
• This information is available about a fund from Morningstar.

The second main drawback is purchasing one or several securities of a portfolio can lead to performance which is significantly different than the overall portfolio. Jeff Gundlach's Doubleline Total Return Fund often buys bonds which have opposite price behavior, which lowers the portfolio's overall volatility. In other words, you could be buying bonds which the fund is purchasing for "insurance" rather than expressing the portfolio manager's view as to the market's direction.

To avoid this, we recommend funds whose manager is tasked with finding the best of a particular type of security, like "High Yield Bonds" or "Convertible Securities".

The above drawbacks apply equally to stock and bond funds.

One More Drawback For Bond Funds

With stocks, individual investors and professionals will receive similar pricing when buying and selling. However, this is not true with bonds. Its not unusual for a retail investor to pay 1% more than a professional to buy the same security. Unless a fund has a big sales load, this additional cost can eliminate the advantage of not paying management fees.

If you have a strong preference for buying individual bonds instead of funds, looking at what the bond gurus are buying is a great way to get ideas. However, trying to exactly copy the trading activity of a particular fund is not possible due to the reasons mentioned above.

For more see the investment ideas section at Learn Bonds, which you can find here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Emerging market credit spreads have shrunk by 30% since the financial crisis, while the spreads on many developed market bonds have widened significantly. Why have emerging market bonds done so well?

Luz Padilla, portfolio manager of the DoubleLine Emerging Markets Fixed Income Fund (DBLEX / DBLENX) made a strong case for emerging market bonds during a conference call Learn Bonds participated in on October 9th, 2012.

Ironically, many emerging market bonds are now considered safer than their developed market equivalents. Emerging markets are growing, and many emerging market governments are showing tremendous financial restraint. Here are three factors that are leading to higher ratings for emerging market debt, and why you may want to consider investing (the 4th comes later):

1. Growth: Emerging markets are expected to grow at 4 times the rate of developed markets. In 2012 72% of global GDP growth is coming from emerging markets.

2. Financial Responsibility: Emerging market economies are much tighter with their spending than developed economies. Fiscal balances (the difference between government revenues and spending) are smaller and as a result, they have manageable debt loads. The average debt to GDP ratio is 34% in emerging market economies. This is in sharp contrast to developed markets, where the average is closer to 100%.

3. Rating Improvements: Due to the two factors mentioned above, the credit ratings of many emerging market have improved. 60% of emerging market corporate debt is now rated investment grade. That compares to less than 40% in 2000. The low default rates seen since the global financial crisis has also reinforced investor confidence in the asset class.

These factors have caused spreads to come down significantly. Since the financial crisis, emerging market spreads have tightened by 30%. During that same time developed market spreads have widened by 3 times. Countries like Mexico and Brazil now trade at a lower credit spread than many European developed countries like France.

Since emerging market debt has performed very well over the last several years, some investors are concerned that the market is overheating. They think that "dumb money" is chasing the higher yields offered by emerging market debt without taking in account the risks. This perhaps accounts for some of the demand, however an increasing portion of buyers are local and institutional. This brings us to the 4th reason you may want to consider emerging market bonds:

4. New Sources of Demand: Emerging market institutional players like pension funds and insurance companies are now large buyers. As the supply of investments that offer high credit quality and good yields in the US has disappeared, many US institutions are expanding their horizons to include emerging market debt.

Much of that money has gone into emerging market government debt. Luz Padilla of DoubleLine indicated in the call that while there may be less opportunities in emerging market government debt, there are still opportunities in emerging market corporate and local currency debt.

The DoubleLine Emerging Markets Fixed Income Fund is LB Rated and you can find our report here. I have also included the slides from the presentation below:

Download File Here

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.