Welcome to the end of the week and another edition of Happy Hour! Just sit back, relax, and enjoy your end of the week roundup of interesting reads in the land of money.
Falling Rates
If you thought 2014 would be the year of higher rates, so far you’d be wrong. Treasury rates are falling. More worrying, high yield/junk bond rates are down near 5%.
A good start for your bond fund’s performance this year. You might think now is a good time to put more money into bonds. Be careful about chasing yield. They’re called junk bonds for a reason.
Remember, as rates fall, bond prices rise. But with falling rates, you’re taking on the same amount of risk for a tinier and tinier return. Put another way, there’s a point where you run out of people willing to pay a higher price for more risk.
When that happens, things tend to reverse course…eventually. We saw that last year. The talk of QE unwind sent bond prices falling and everything tied to rates followed suit.
Why are rates falling now? Take your pick:
- Russia
- Europe
- EM
- Slow economy
- The Fed
- Low dividend yields
- Bad winter
- Bond short squeeze
The most likely cause, the economy isn’t growing nearly as fast as everyone expected along with a sprinkling of everything else. Since the news of QE unwind till now, bond rates finally seesawed back to that reality.
On the other side, it’s cheaper to borrow. That’s good for businesses, home buyers, and the economy. Good companies can get great rates to grow the business. Sub par companies can rollover debt at lower rates, which lower costs. Mortgage rates are at the lowest point of the year, just in time for the buying season. It’s not all bad news.
Last Call
- Some of You Must Fail – M. Housel
- When Saving Trumps Investing – A Wealth of Common Sense
- What Baby Boomers’ Retirement Means For the U.S. Economy – FiveThirtyEight
- Interview with Alice Schroeder, Author of The Snowball: Warren Buffett and Business of Life – Reddit
- A Sensible Approach to ‘Smart Beta’ – Morningstar
