Outside Economics

Fixed Income - Bond Markets

Posted by Wendell Brock, MBA, ChFC on Thu, Oct 29, 2015

Anticipation is building as the Fed nears a decisive move to raise interest rates before year end. Some believe that the Fed may have missed its chance to raise rates, which would have conveyed a sense of confidence about the nation’s economy.

As rates have settled at 50-year lows for sometime now, pension plans are a distinctive few that have not benefited from the low, single-digit rates. This is so because pension funding and growth projections are primarily based on the interest earned. So when rates are low for an extended period of time, growth estimates decline and shortfalls evolve. The concern is that most fiscally strapped municipalities are struggling to meet shortfalls in pensions, thus increasing liabilities and hindering cash reserves.

Credit spreads continued to widen between U.S. government bonds and corporate high-yield bonds, somewhat of an indicator of the credit market’s health.  Questionable corporate earnings tend to pull corporate bonds down, feeding into higher stock volatility and price uncertainty.

Various fixed income analysts are closely following the $1.5 trillion of corporate bonds maturing in 2016 & 2017, representing nearly 20% of the entire $7.8 trillion corporate bond market. Questions arise as to how capable companies will be to pay that debt off, and where will rates be should additional debt be needed to fund maturing bonds.

If the Fed raises rates before year end, the riskier bonds (junk bonds), which have had the highest yields in the past few years, their yields will push higher and prices will fall. Investors should monitor how much they have in riskier paper; they may want to reduce their exposure some in the coming months.

Another area of bond risk is the global high-yield bonds from emerging markets. These have become popular as their yields have been much better than the treasuries. However if rates begin to rise, it is likely they will rise too, as they are in constant competition for investment money. This is one reason why a well-diversified portfolio is helpful. It will limit exposure in any one area and should provide proper cross correlation of investments.

Alternative investments can be a terrific option to add to an income based portfolio, some providing yields of as much as 7.5% or more, with relatively low risk. Because they are hard/real asset backed, the price should not change when rates move. Alternative investments can be a part of well diversified portfolio and provide a base that is typically not subject to market volatility.


Sources: Bloomberg, Moody’s, Reuters, Market Watch


To Remember 

"God gets to judge; I get to serve." - personal motto of Dell Loy Hansen  

Topics: Bonds, Fixed Income, Federal Reserve, Bond Market

China, Currency and the World Market

Posted by Wendell Brock, MBA, ChFC on Fri, Oct 23, 2015

International trade in the world market is conducted around the world using the U.S. dollar as the reserve currency. Trade is critical to nearly all countries the world over. Here in the U.S. there are some products that we produce far more than we can consume and we have to sell our goods overseas. It is the same for other countries; China as a manufacturing center, produces anything they want to in any amount. The main ingredient in manufacturing is labor and they have a lot of very cheap labor; therefore, they need to export their goods and U.S. is their biggest customer.

As countries produce and market their goods, the natural tendency is for their currency to appreciate, making the products they produce more expensive for other countries to buy. Small increases can produce stable growth, large increases can setup a financial bubble.

Since the financial crash in 2007 the yuan appreciated, in real trade-weighted terms a whopping 40% through May 2015. This partly reflected nominal appreciation against the U.S. dollar, with effective appreciation against the euro, yen, Korean won, and other currencies.[i] During this time period the U.S. dollar gained strength mostly because we were the best option compared to the other world currencies.

China’s biggest drop in its currency valuation in over 20 years occurred last month due to export concerns and China’s economic growth. The decline of foreign reserves illustrates the cost to China as it tries to prop its economy and alleviate the outflow of capital from the country, which has now threatened the nation’s economic position. The shrinkage in foreign reserves means less money flowing into China’s financial system. Many economists believe that it is inevitable China will see continuous capital outflows and continued depreciation of its currency in the ensuing months.Chinas-Drop-In-Tsys

Federal Reserve data released in September showed that China started to liquidate U.S. government Treasuries as early as July. During the same period, several nations maintained their holdings in U.S. Treasuries. China actively reduced its position in Treasuries by over 2.5 percent in less than one month, amounting to a $30 billion reduction. China has been and continues to be the single largest foreign holder of U.S. government Treasuries worldwide, amounting to nearly $1.25 trillion in value. U.S. Treasuries are the single most liquid securities held by foreign entities worldwide.

One cause of volatility in our markets in part due to the actions of governments. Allowing their currency to rise and then suddenly devaluing it that can cause such volatility in our markets. Changes in currency valuation cause uncertainty in the markets and investors react by converting their investments to cash. In time, investors regain the previous confidence and put their money back in the market. Bidding it back up. China’s devaluation of their currency caused our markets to head south. This reflects two questions: 1. With China now as an economic powerhouse, how does the U.S. make room for two at the top? and 2. Think of what the rest of the world goes through when the U.S. market has a cold or our government does something unpredictable; how do we, as the U.S. population, now cope with a more unstable government? Our government stability is so very important in the world. Perhaps you may have other questions to ask? please ask in the comments below.

Economic growth is important to all countries, it is their life blood. Trading with other countries is a critical part of that growth. China is certainly a market to be watched closely, considering their size, the amount of U.S. Treasuries they own, and the products they produce. There economy now is almost the size of the United States – any day now, they will be the largest economy in the world.

[i] Is China in danger of falling into the trap that killed Japan? 10/16/2015 By Jeffrey D. Sachs

Source: Federal Reserve

To Remember:

"Bull markets are born in pessimism, grow in skkepticism, mature in optimism and die in euphoria, I don't see any signs of euphoria." Sir John Templeton

Year End Income Tax Planning

Posted by Wendell Brock, MBA, ChFC on Fri, Oct 16, 2015

As year end approaches, another income tax season is just over the horizon. The importance of gathering necessary tax items is essential. Starting in early autumn gives you time to act; you can implement any additional tax planning strategies to help lower your bill. Some strategies may take a few weeks to properly implement. Even though not much may have changed since 2014, it is always clever to have accurate estimates and tax items prepared for 2015.


Federal Tax Rates

For the most part, federal tax rates for 2015 remain the same as they did last year. Federal tax rates start at 10% and increase to a top rate of 39.6%. Keep in mind that the beginning and end points are increased slightly to account for inflation. Higher income individuals may also be susceptible to an additional Medicare tax on wages and self-employment income, as well as the 3.8% net investment income tax which can result in a higher marginal federal tax rate for 2015.


Employer Qualified Retirement Plans

Whether you are a self-employed individual or a W-2 employee, it is important to tally up any contributions that may have been made to your retirement accounts over the year. Most employer retirement accounts allow for year end contributions until December 31st. So any additional contributions that you can make to a company qualified plan such as a 401(k) or a 403(b) should be made before the end of the year. It’s a good idea to estimate how much more you can contribute then spread out the additional contributions between now and year end.


Charitable Contributions

Now is a good time to line out your charitable contributions for the year. If you are not pleased with the way the federal government spends your tax dollars, then the best method to combat that is to donate money to charities that do support causes you are interested in. The tax deduction may produce a significant reduction in your income tax bill; sometimes providing just enough of an additional tax deduction to lower your tax marginal rate. These contributions need to be made by year end in order to qualify.


Investment Portfolios

For investors that hold securities as various types of positions, it is important to identify any investments that may have either significant losses or significant gains, which should be realized before the end of the year. With the market being as volatile as it has been, it is also important to identify any investment positions that may yield some type of tax benefit before year end.


Alternative Minimum Tax (AMT)

Affecting more and more people every year, Alternative Minimum Tax (AMT) should be carefully considered when implementing tax planning strategies going into the New Year. Originally enacted in 1969, AMT was never indexed for inflation, thus it continues to affect more and more taxpayers each and every year. AMT is essentially an additional tax on top of the standard tax tables. There’s a good chance that taxpayers taking significant deductions at the state and local levels (such as state tax free municipal bond income), claiming multiple dependents, exercising stock options, or recognizing a large capital gain for the year, may eventually be affected by AMT.


Income tax planning throughout the year pays off, those who pay attention to it often pay fewer taxes for the year. Those who do no planning and just report the numbers on the form pay the most. There is no law that says that you have to pay the maximum. Year end planning save you money, the challenge is will you make the time to do it. After all it’s your money; you are the one who earned it! Tell us about your favorite tax planning strategy; what strategy(ies) do you use to save income taxes?  If you would like to learn more, click on the link below:

Tell Us About Your Favorite Savings Tip

To Remember:

Success is getting what you want; Happiness is wanting what you get!  Warren Buffet

Sources: Tax Foundation, IRS


Wendell W. Brock, MBA, ChFC

Subscribe by Email

Follow Me

Most Popular Posts

Other Sites I Follow, hobbies, fun and info:

gold-vs-silver-1.jpg  Nauvoo Mint brokerage services for precious metals


john Mauldin chair


Outside Economics is not a registered investment advisory firm (RIA) and does not act as an RIA. Outside Economics does not provide any specific investment advice. Any information obtained from this website or through one of  Outside Economics' representatives should be reviewed by a professional.

Subscribers Note: We do not sell our email list. Period. Thank you for subscribing.

Recent Posts