Bond Fund Seminar (01-16-14)
Welcome: Good Evening Ladies and Gentlemen. Thank you for coming tonight
Global Macro Economic Trends
Two secular trends threaten to end the U.S. Golden Age of economic growth.
- The size of the working age population.
- Population growth.
- Income inequality.
- Aging population and the Labor Participation Rate of all Americans.
- Subpar growth in the rest of the world
- Productivity
Quantitative Easing of Monetary Policy:
- Purchase of $75 billion per month of U.S. Treasury Bonds and Mortgage Backed Securities
- Fed Fund Rate:
- Inflation rate at less than 2.5%
- Unemployment rate of over 6.5%
- 10 year U. S. Treasury yields.
- Q.E. tapering.
Global Economic Recovery:
- Synchronized monetary stimulus.
- Europe’s manufacturing PMI.
- Global job growth.
- Corporate private sector.
- Consumer sector.
- Government sector.
The End of the 32-Year Super Cycle in Bonds:
- Only in the second time in the past 40 years (last time 1998)* that equities are up and bonds are down. (* Source: JP Morgan, US Strategy, June 2013).
- Early stages of Economic Recovery:
- Risk free trade.
- Equity premium.
- Inverse relationship between equities and interest rate.
- Growth in equity cash returns: consumer discretionary, technology, and healthcare stocks.
- Global job growth.
- Corporate private sector.
- Consumer sector.
- Government sector.
The End of the 32-Year Super Cycle in Bonds:
- Yield reassessment.
- Record out flows from bond mutual funds and exchange traded funds (ETFs) in 2013.
- Volatility Risk
- Perpetual maturity of bond funds and their inherent interest rate risk.
- Tax selling of bond funds
Income Alternatives:
- Individual bond holdings.
- Treasury and Junk Bonds versus Municipal bonds.
- Types of Municipal Bonds:
- General Obligation Bonds.
- Revenue Bonds: essential services, such as sewer and water systems.
- Municipal Bonds-Unique Asset Class.
Summary:
The potential end of the 32-Year Super Cycle in bonds as a result of synchronized global stimulus policies, and some indications of early stages of economic recovery should re-shift income oriented investors to individual bond holdings with set maturities. In an interest rate environment where monetary policies can overwhelm major secular trends of low GDP growth rates, high unemployment and low inflation rates, at times these types of corrective measures, in my opinion can lead to rapid interest rate swings that have the potential to generate total return losses for bond funds holders as opposed to individual bond holders.
Securities offered through Purshe Kaplan Sterling Investments, Member FINRA/SIPC, Headquartered at 18 Corporate Woods Blvd., Albany, NY 12211
NOT FDIC INSURED. NOT BANK GUARANTEED. MAY LOSE VALUE, INCLUDING LOSS OF PRINCIPAL. NOT INSURED BY ANY STATE OR FEDERAL AGENCY.