S&P 500 Payout Tops Bond Yield, a First Since ‘58
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Treasuries routinely had higher yields than stocks before 1958, according to Bernstein. When this relationship came to an end, yields were near their current levels. The S&P 500 dividend yield fell 0.58 percentage point, to 3.24 percent, in the third quarter of 1958. The 10-year yield rose about the same amount, 0.6 point, to 3.80 percent.
Two explanations later emerged for the reversal, he wrote. One held that the economy’s recovery from the 1957-58 recession showed “investors could finally put to rest the widely held expectation of an imminent return to the Great Depression.” The second was the increasing popularity of investing in growth stocks, or shares of companies whose sales and earnings rose at a relatively fast pace. Because of their expansion, the companies often paid below-average dividends.
Reversal of Fortunes Between Stocks and Bonds
Arnott takes it a step further. “In a world of deleveraging, both for the financial services arena and for the economy at large, growth is less certain,” he says. “And with the economy eroding sharply, so is inflation. If stocks don’t deliver nominal growth in dividends and earnings, then their yield ‘must’ exceed the Treasury yield, in order to give us any sort of risk premium.”
Related: Corporate and Government Bond Rates Graph - Highest Possible Returns - posts on interest rates - investing strategy
More dramatic evidence that changing in the federal funds rate do not lead to similar changes in 30 year fixed mortgage rates. It is true the last few months are very unusual times for the credit market. However, the current lack of correlation is not the exception, the graph clearly shows there is very little correlation between changes in the two interest rates.
Related: historical comparison of 30 year fixed mortgage rates and the federal funds rate - Affect of Fed Funds Rates Changes on Mortgage Rates - posts on financial literacy - Jumbo v. Regular Fixed Mortgage Rates: by Credit Score
For more data, see graphs of the federal funds rate versus mortgage rates for 1980-1999. Source data: federal funds rates - 30 year mortgage rates
‘Armageddon’ Prices Fail to Lure Buyers Amid Selling
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The selling is being compounded by hedge funds and mutual funds dumping holdings to meet redemptions, which may push prices even lower, according to analysts at UBS AG.
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Corporate debt has been pressured by “incessant selling by hedge funds and leveraged institutions as they unwind,” Bill Gross, manager of the world’s biggest bond fund at Newport Beach, California-based Pacific Investment Management Co.
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Corporate bond prices plunged to 79.9 cents on the dollar on average from 94 cents at the end of August and 99 cents at the end of 2007, according to index data compiled by New York-based Merrill Lynch & Co.
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“The de-leveraging that we’re witnessing will probably continue,” said Paul Scanlon, team leader for U.S. high yield and bank loans at Boston-based Putnam Investments LLC, which manages $55 billion in fixed income. “My sense is that’s not turning around in the very near term.”
I am not very familiar with the bond market but it does seem like the panic is in full swing but calling the bottom is always hard. I would guess the de-leveraging (and investors pulling money out of bond funds) could well lead things lower over the short term.
Related: Corporate and Government Bond Rates Graph - Municipal Bonds After Tax Return
Over the last 3 months the yields on corporate bonds have increased while treasury bonds have decreased. The chart shows the move away from lower quality bonds to higher quality though probably not as dramatically as actually has taken place as it is just an average for each month (and in September the flight to quality became extreme at the end of the month). While the Fed did not announce a formal cut in the discount rate, the average rate for overnight loans from the Fed last month was 1.81%.
The spread between 10 year Aaa corporate bond yields and 10 year government bonds increased to 196 basis points. In January, 2008 the spread was 159 points. The larger the spread the more people demand in interest, to compensate for the increased risk. The spread between government bonds and Baa corporate bonds increased to 362 basis points, the spread was 280 basis point in January. The rate on government bonds has barely change (decreasing from 3.74% in January to 3.69% now) so the change has nearly all been in increased corporate bond rates.
Data from the federal reserve - corporate Aaa - corporate Baa - ten year treasury - fed funds
Related: Bond Yields 2005 to June 2008 - 30 Year Fixed Mortgage Rates versus the Fed Funds Rate - Curious Cat Investing and Economics Search - posts on interest rates
On Wednesday of last week the United States 3 month treasury bill yield reached .03%, yet another remarkable chart from the current crisis.
via: No one wants to hold risk … - “I guess this is what a close to systemic financial crisis in the US looks like”
Daily Treasury Yield Rates show that the rate for Friday the 12th of September 1.49%, Monday the 15th 1.02%, Tuesday .84%, Wednesday .03%, Thursday .23% and Friday .99%.
Related: Corporate and Government Bond Yields - Curious Cat Investing and Economics Search - Credit Crisis Continues (April 2008)
Fannie Mae (the quasi government mortgage giant) is raising fees for mortgages it buys. Banks and mortgage lenders often sell the mortgage to Fannie Mae shortly after completing the loan. Mortgages get more expensive - again
And Fannie doubled its “adverse market delivery charge” to 0.5%. That is an across-the-board fee assessed against every loan Fannie buys, according to a Fannie spokeswoman. Fannie first instituted the charge this spring.
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The added fees will be passed on to borrowers and could mean quarter-point increases in interest rates.
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Fannie will also eliminate buying Alt-A loans by the end of 2008. Alt-A loans, a category between prime and subprime, accounted for about 11% of the company’s loans during the last years of the boom. They have been used mostly by people who couldn’t or wouldn’t document their incomes, their assets or both. These buyers will find it harder to obtain financing once Fannie stops buying the loans.
According to Yun, however, the cutback in Alt-A will hurt people buying second homes to rent out or resell, rather than first time homeowners. “These are people who often rely on their good credit to buy investment properties putting little or no money down,” he said.
Related: Mortgage Rates Rising - Fed Funds Rate Changes Don’t Indicate Mortgage Rate Changes - Jumbo and Regular Mortgage Rates By Credit Score - Homes Entering Foreclosure at Record
I commented on, WaMu Free Checking: The High 3.3% APY May Be Worth A Look, yesterday:
I agree it is worth considering. It has FDIC insurance. But the bank is not very stable. The stock price, for example, was above 40 in the last year. It is below 5 now. But as long as your entire deposit is covered by FDIC you are in safe (though if a bank goes under - not that likely - there can be a delay in getting your money). Normally a bank’s assets would be bought out by another bank.
And today I read of the second largest bank failure in the history of the USA, IndyMac Bank seized by federal regulators:
Regulators said depositors would have no access to banking services online and by telephone this weekend, but could continue to use ATMs, debit cards and checks. Online banking and phone banking services are to resume operations Monday.
Federal authorities said based on a preliminary analysis, the takeover of IndyMac would cost the FDIC between $4 billion and $8 billion.
It is important to make sure your deposits are FDIC insured (in the USA), and to know the limits of the coverage.
FDIC Failed Bank Information Information for IndyMac Bank, F.S.B., Pasadena, CA
IndyMac was a huge mortgage focused bank. Their stock price had fallen from a high of nearly $30 in the last year to below $5 in April, $2 in May and $1 in June. It is a very good thing we have the FDIC.
Related: Credit Crisis (August 2007) - Credit Crisis Continues - Homes Entering Foreclosure at Record
Over the last 2 months the yields on bonds have increased the discount rate has continued to decline.
The spread between corporate bond yields and government bonds has decreased a bit as treasury yields have increased 37 basis points compared to just 4 and 6 basis point increased in corporate bond yields.
Data from the federal reserve - corporate Aaa - corporate Baa - ten year treasury - fed funds
Related: Bond Yields 2005-2008 - 30 Year Fixed Mortgage Rates versus the Fed Funds Rate - Initial Retirement Account Allocations
This year, the average discount rate has fallen every month while the average 30 year mortgage rate has climbed all but 1 month (a 5 basis point drop). In January, 2008 the discount rate averaged 3.94% and 30 year conventional fixed rate mortgages averaged 5.76%. In May, 2008 the discount rate had fallen to 1.98% (for a 196 basis point drop) and 30 year conventional fixed rates had risen to 6.04% (for a 28 basis point increase).
The chart shows the federal funds rate and the 30 year conventional fixed rate mortgage rate from January 2000 through May 2008 (for more details see: historical comparison of 30 year fixed mortgage rates and the federal funds rate).
Related: Affect of Fed Funds Rates Changes on Mortgage Rates - real estate articles - Bond Yields 2005-2008 - Jumbo and Regular Mortgage Rates By Credit Score
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The recent drastic reductions again emphasize (once again) that changes in the federal funds rate are not correlated with changes in the 30 year fixed mortgage rate. In the last 4 months the discount rate has been reduced nearly 200 basis points, while 30 year fixed mortgage rates have fallen 18 basis points.
I have update my article showing the historical comparison of 30 year fixed mortgage rates and the federal funds rate. The chart shows the federal funds rate and the 30 year fixed rate mortgage rate from January 2000 through April 2008 (for more details see the article).
There is not a significant correlation between moves in federal funds rate and 30 year mortgage rates that can be used for those looking to determine short term (over a few days, weeks or months) moves in the 30 year fixed mortgage rates. For example if 30 year rates are at 6% and the federal reserve drops the federal funds rate 50 basis points that tells you little about what the 30 year rate will do. No matter how often those that should know better repeat the belief that there is such a correlation you can look at the actual data in the graph above to see that it is not the case.
Related: real estate articles - Affect of Fed Funds Rates Changes on Mortgage Rates - How Not to Convert Equity - more posts on financial literacy
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