Bond Madness
Bond Madness, well in this market we have money chasing investment, especially fixed income investments, looking for yield, and often these invesments are overpriced and make no sense. Like all bubbles this probably ends badly.
Here are a few examples
10 Year Bonds of These Nations
1. Japan .60% okay the central bank wants weaker currency and inflation to climb to 2.5%, which would kill these bonds, debt to GDP is 225.8%. The debt will not default probably, but if rates did rise Japan would face problems. I own some Japan etfs, that invest in Japan equities, would avoid the bonds. Lower Yen will help many Japanese Companies.
2. Italy 3.79% debt to GDP 118.1% unemployment 18-20%, low to none economic growth, 2010 Austerity has now been dropped. The bonds have rallied since they have agreed on a leader, all of the parties, they also want to spend more, both right and left. Who ever owns these bonds are brave.
3. Spain 4.10% Unemployment has been over 20% since the recession 2008, hit 27% in April, youth unemployment is really scary at 40-50%, this can quickly hurt this generation. No balanced budget seem on the horizon.
4. UK 1.77% unemployment 7.4%, slow economic growth, no much risk in the bonds but if the economy recovers then 2-4% inflation could be in the cards.
5. US 1.76% the US central bank is doing quantitative easing, they will try to keep rates low, money supply will increase. The US economy has growth though low 1-3% going forward. Debt is high and growing, and will continue to grow who wants to cut spending, raise taxes, or a bit of both. Better to just ignore the debt, the 10 year debt is safe, but if the economy does rebound then inflation will run 2-4% so you get nothing after inflation.
6. France 1.71% Debt to GDP86%, France does not have a debt problem yet, then again they have not had a balanced budget since 1974. Debt to GDP will continue to rise, so not sure why you want to take the small risk for just 1.71%.
Believe they will try to reinflate their economy also so inflation will rise, even it stays at 2%, you make nothing after inflation.
Corporate Debt
I have some holdings in short term corporate debt, and there is probably better value, however many corporate debts are also very expensive. Many of these have been overscribed and offer very low rates compared to the risk.
1. Heinz In a recent LBO (leveraged Buyout), they offered 3.1 billion of 7.5 year bonds at 4.25%. Heinz is a good company but now will be saddled with debt, this is how lbo make sense for the people buying the company. You will probably get your money back, but you are buying into a company with a high debt level, and you only get 4.25% for the risk.
2. Apple issued bonds paying 10year 2.415%, 3 year .511%, 30 year 3.883%.
The 3yr bond you will not even match inflation, same goes for 10 year bond, and the added risk. However the 30 yr. seems likely insane. Now Apple is a fantastic company however there are many strong tech companies that have not lasted 20 years. Go and look back at some of the strongest tech companies 30 years ago, some of them no longer exist. All of that for just 3.883%, that seems insane. Time will tell?.no that is way overpriced.
Bond Madness, well in this market we have money chasing investment, especially fixed income investments, looking for yield, and often these invesments are overpriced and make no sense. Like all bubbles this probably ends badly.
Here are a few examples
10 Year Bonds of These Nations
1. Japan .60% okay the central bank wants weaker currency and inflation to climb to 2.5%, which would kill these bonds, debt to GDP is 225.8%. The debt will not default probably, but if rates did rise Japan would face problems. I own some Japan etfs, that invest in Japan equities, would avoid the bonds. Lower Yen will help many Japanese Companies.
2. Italy 3.79% debt to GDP 118.1% unemployment 18-20%, low to none economic growth, 2010 Austerity has now been dropped. The bonds have rallied since they have agreed on a leader, all of the parties, they also want to spend more, both right and left. Who ever owns these bonds are brave.
3. Spain 4.10% Unemployment has been over 20% since the recession 2008, hit 27% in April, youth unemployment is really scary at 40-50%, this can quickly hurt this generation. No balanced budget seem on the horizon.
4. UK 1.77% unemployment 7.4%, slow economic growth, no much risk in the bonds but if the economy recovers then 2-4% inflation could be in the cards.
5. US 1.76% the US central bank is doing quantitative easing, they will try to keep rates low, money supply will increase. The US economy has growth though low 1-3% going forward. Debt is high and growing, and will continue to grow who wants to cut spending, raise taxes, or a bit of both. Better to just ignore the debt, the 10 year debt is safe, but if the economy does rebound then inflation will run 2-4% so you get nothing after inflation.
6. France 1.71% Debt to GDP86%, France does not have a debt problem yet, then again they have not had a balanced budget since 1974. Debt to GDP will continue to rise, so not sure why you want to take the small risk for just 1.71%.
Believe they will try to reinflate their economy also so inflation will rise, even it stays at 2%, you make nothing after inflation.
Corporate Debt
I have some holdings in short term corporate debt, and there is probably better value, however many corporate debts are also very expensive. Many of these have been overscribed and offer very low rates compared to the risk.
1. Heinz In a recent LBO (leveraged Buyout), they offered 3.1 billion of 7.5 year bonds at 4.25%. Heinz is a good company but now will be saddled with debt, this is how lbo make sense for the people buying the company. You will probably get your money back, but you are buying into a company with a high debt level, and you only get 4.25% for the risk.
2. Apple issued bonds paying 10year 2.415%, 3 year .511%, 30 year 3.883%.
The 3yr bond you will not even match inflation, same goes for 10 year bond, and the added risk. However the 30 yr. seems likely insane. Now Apple is a fantastic company however there are many strong tech companies that have not lasted 20 years. Go and look back at some of the strongest tech companies 30 years ago, some of them no longer exist. All of that for just 3.883%, that seems insane. Time will tell?.no that is way overpriced.
