The Name is BOND
We have commented on these issues before, but feel a need to again...
Last week, ALL global asset classes sold off, and the YEN rose 2% plus because the proceeds of the asset sales where going to pay off the original asset acquisition loans made in YEN.
Aside from the YEN, the singular exception to this GLOBAL sell off were US Bonds.
A friend of mine commented that he could not fathom why US Bonds did not come under selling pressure during last weeks "carry trade" unwind...
As you and I know, US Bonds are nothing more than promise to pay the holder interim interest in current dollars plus a specific face amount in future "debauched" dollars.
Barring a US government default which has yet to occur, the US Bond is still the worlds SAFEST and most PREFERRED investment.
Here are 10 reasons why:
1. Yield and Spread: 10 year US Bonds still have a 4% spread on the "carry trade" and the 4.5% interest rate is competitive compared to other instruments.
2. No RISK, guaranteed, never a default, yet.
3. Reliable locked in long term fixed return. No fluctuations based on knee jerk market reactions or geopolitical contrivances.
The CD holder is only locked in for 2 years and then has to reinvest at prevailing rates, the 10 year holder is locked in for 10 years.
4. FDIC Maximum Insurance is $100,000. Some people have more than $100K to invest and want it insured.
5. Tax exemptions: stock sale proceeds, dividents, CD's and money markets are taxable. US treasuries are 100% exempt from Federal and State taxes.
6. Deferred reporting of the interest payments for federal taxes.
7. Liquidity: Cash on demand, the CD has to be held to maturity, the bond can be sold tommorrow.
8. No commissions or maintenance fees
9. Tax Exempt for Education Purposes
10. Pension funds and insurance companies (foreign and domestic) are in the business of matching assets and liabilities.
If you have a few hundred million of new 10 year liabilities at 3.5% , locking up 4.5% for 10 years in riskless U.S. Treasuries looks really good.
And there are at least two BIGGER reasons why the US Bond will NEVER be allowed to fail or fall far...
1. Our trading partners (Europe, Asia (China, Japan), Middle East, Canada, Mexico, etc) dependency on American consumer spending.
This has been fueled by the housing ATM through artifically low interest rates. They buy our bonds to keep rates low, we buy their goods...
Our trading partners WILL continue to buy our bonds, if they don't its game over for everyone... as they will be holding a bunch of worthless bonds, our consumption will curtail and their populace will rebel and overthrow them...
2. The Fed also manages to prop up the bond market, along with its Asian branches, the BOJ and PBOC...
In a speech entitled, "Deflation: Making Sure 'It' Doesn't Happen Here", delivered on November 21, 2002, Federal Reserve Governor Ben Bernanke explained to the world exactly how far beyond conventional levels a Fed deflationary policy response could go.
Governor Bernanke explained that the Fed would not be "out of ammunition" just because the Federal Funds rate fell to 0%...
because the Fed could create money and buy bonds of longer maturity in order to drive down yields at the long end of the yield curve as well.
Moreover, he said, "In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities.
A broad-based tax cut, for example, accommodated by a program of open market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices."
In 2003-04 the BOJ printed up 35 Trillion yen at the Fed's behest for this very purpose... and all along the Fed has "created" money and bought long bonds through open market operations...
The Peoples Bank of China must "sanitize" their remimbi or yuan through U.S. Bond purchases as well...
These are the reasons why US Bonds didn't go down or stay flat, and in fact went UP...
because the playa's at the table, knows who butters their bread and how...
and when the shit hits the fan and all else fails, its Uncle Sam and the almighty buck that despite all "appearances" and spin, still rules the table at which the other players are seated.
Why do you think when we dug up Saddam's scraggly ass from a fox hole, he was holding...
not ingots made of some shiny metal, not some new fangled "alternative" foreign currency or coin, not stock certificates, not options or futures contracts on a fungible commodity...
he was holding 7500 crisp pictures of Ben Franklin...i.e. $100 bills. End of story, class dismissed.
Last week, ALL global asset classes sold off, and the YEN rose 2% plus because the proceeds of the asset sales where going to pay off the original asset acquisition loans made in YEN.
Aside from the YEN, the singular exception to this GLOBAL sell off were US Bonds.
A friend of mine commented that he could not fathom why US Bonds did not come under selling pressure during last weeks "carry trade" unwind...
As you and I know, US Bonds are nothing more than promise to pay the holder interim interest in current dollars plus a specific face amount in future "debauched" dollars.
Barring a US government default which has yet to occur, the US Bond is still the worlds SAFEST and most PREFERRED investment.
Here are 10 reasons why:
1. Yield and Spread: 10 year US Bonds still have a 4% spread on the "carry trade" and the 4.5% interest rate is competitive compared to other instruments.
2. No RISK, guaranteed, never a default, yet.
3. Reliable locked in long term fixed return. No fluctuations based on knee jerk market reactions or geopolitical contrivances.
The CD holder is only locked in for 2 years and then has to reinvest at prevailing rates, the 10 year holder is locked in for 10 years.
4. FDIC Maximum Insurance is $100,000. Some people have more than $100K to invest and want it insured.
5. Tax exemptions: stock sale proceeds, dividents, CD's and money markets are taxable. US treasuries are 100% exempt from Federal and State taxes.
6. Deferred reporting of the interest payments for federal taxes.
7. Liquidity: Cash on demand, the CD has to be held to maturity, the bond can be sold tommorrow.
8. No commissions or maintenance fees
9. Tax Exempt for Education Purposes
10. Pension funds and insurance companies (foreign and domestic) are in the business of matching assets and liabilities.
If you have a few hundred million of new 10 year liabilities at 3.5% , locking up 4.5% for 10 years in riskless U.S. Treasuries looks really good.
And there are at least two BIGGER reasons why the US Bond will NEVER be allowed to fail or fall far...
1. Our trading partners (Europe, Asia (China, Japan), Middle East, Canada, Mexico, etc) dependency on American consumer spending.
This has been fueled by the housing ATM through artifically low interest rates. They buy our bonds to keep rates low, we buy their goods...
Our trading partners WILL continue to buy our bonds, if they don't its game over for everyone... as they will be holding a bunch of worthless bonds, our consumption will curtail and their populace will rebel and overthrow them...
2. The Fed also manages to prop up the bond market, along with its Asian branches, the BOJ and PBOC...
In a speech entitled, "Deflation: Making Sure 'It' Doesn't Happen Here", delivered on November 21, 2002, Federal Reserve Governor Ben Bernanke explained to the world exactly how far beyond conventional levels a Fed deflationary policy response could go.
Governor Bernanke explained that the Fed would not be "out of ammunition" just because the Federal Funds rate fell to 0%...
because the Fed could create money and buy bonds of longer maturity in order to drive down yields at the long end of the yield curve as well.
Moreover, he said, "In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities.
A broad-based tax cut, for example, accommodated by a program of open market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices."
In 2003-04 the BOJ printed up 35 Trillion yen at the Fed's behest for this very purpose... and all along the Fed has "created" money and bought long bonds through open market operations...
The Peoples Bank of China must "sanitize" their remimbi or yuan through U.S. Bond purchases as well...
These are the reasons why US Bonds didn't go down or stay flat, and in fact went UP...
because the playa's at the table, knows who butters their bread and how...
and when the shit hits the fan and all else fails, its Uncle Sam and the almighty buck that despite all "appearances" and spin, still rules the table at which the other players are seated.
Why do you think when we dug up Saddam's scraggly ass from a fox hole, he was holding...
not ingots made of some shiny metal, not some new fangled "alternative" foreign currency or coin, not stock certificates, not options or futures contracts on a fungible commodity...
he was holding 7500 crisp pictures of Ben Franklin...i.e. $100 bills. End of story, class dismissed.
Comments
All U.S. Treasuries (Bill, Notes, Bonds, TIPS, Zero Coupon Bonds) are exempt from state and local taxes, but are fully taxable on the federal level.
However, on certain Treasuries, taxation is deferred as the interest paid does not become taxable until the bond matures or is redeemed.
The interest income may also be subject to the Alternative Minimum Tax (AMT) and investors should consult their tax adviser.
Regarding maturity or redemption:
Some Treasury securities carry call provisions that allow the bonds to be retired prior to stated maturity.
Securities will typically be called when prevailing interest rates drop, making reinvestment less desirable for the buyer.
Investors should understand the existence and specifics of any call options associated with U.S. Treasury securities.
Buy US Bonds, help your country, be a Patriot, help finance deficit spending, government cronyism, boondoggling and senseless acts of war....
This has been a public service announcement.