Investing in forest land suitable for producing lumber can provide you income, diversification, inflation protection and more. Timber investing requires careful study of the industry, market and individual parcels, and it’s generally a long-term play, with years required to realize a profit. Timberland is also highly illiquid, so you might need a year or more to turn your asset into cash should you need it. Talk to a financial advisor to learn how investing in timber and other real assets can help you achieve your long-term objectives.
Timber Investment Basics
Investing in timber involves owning land that’s used to grow trees that can be processed into lumber. Timber, which is considered a real asset, is vital to the production of paper, utility poles and furniture, as well as the construction of homes and other buildings.
Timber sales are infrequent, as it can take decades for trees to grow large enough to be harvested. In fact, you may only make a handful of timber sales in your life as a timberland investor. Timber investors can generate income more regularly by selling seeds or renting land for livestock to graze on. Timberland can also be used for recreation.
More than 500 million acres of commercial timberland exist in the United States, according to the United States Department of Agriculture. An acre of timberland can cost from $1,500 to $2,000, with prices varying by location, road access and the type and maturity of trees. The value of timber also varies by tree variety, size and quality. According to TimberUpdate.com, which tracks prices and trends in the timber industry, prices can range from about $5 per ton for low-quality small trees to as much as nearly $50 per ton for mature, straight trees that can be sawn into knot-free boards for decorative uses.
Pros and Cons of Timber Investing
Timberland has a number of features that make it attractive to investors. These include:
Income from selling timber to sawmills
Inflation protection similar to other commodities
Diversification and risk management from owning an asset not correlated to stocks, bonds and other asset classes
Favorable capital gains tax treatment for most income
Appreciation as trees grow into more mature specimens that command higher prices
Sustainability, since trees generally benefit the environment
Owning timberland can also give you the opportunity to personally enjoy an investment. A section of timberland can even provide a site for building a second home or even a primary residence.
But owning timberland also may involve some or all of the following limits and risks:
Long time frames waiting for trees to be mature enough to harvest
Unpredictable prices when you sell trees due to commodity cycles
Time, money and attention required to plant and tend trees and maintain the property
Risk of fires, floods, hurricanes and other natural disasters
Low liquidity compared to most other investments can also be an issue. It can easily take a year or more to sell a parcel of timberland and turn your investment into cash.
Investing in Timber ETFs
Rather than directly buying timberland yourself, you can buy shares of exchange-traded funds (ETFs) focused on timber. These specialized ETFs invest in shares of companies that own or lease timberland and harvest the trees for lumber or other forest products. Buying shares of timber-focused ETFs allows you to get asset diversification, inflation protection and other timber investment benefits without the challenge and illiquidity of owning and managing the timberland yourself. You will also get additional diversification within the asset class because these ETFs own shares of a number of timber-related companies, reducing your exposure to weather, fire and other risks.
Timber ETFs include the iShares Global Timber & Forestry ETF and the Invesco MSCI Global Timber ETF.
Bottom Line
Timberland investments offer a way to diversify your portfolio with real assets that can produce both income and capital gains. But buying and owning timberland requires an in-depth knowledge of the industry and significant time and attention. Timberland is also a long-term play, often requiring years or decades to generate a profit.
Investing Tips
A financial advisor can help you evaluate alternative approaches to achieving diversification, inflation protection and other benefits of owning timberland. If you don’t have a financial advisor yet, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors in your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
SmartAsset’s Investment Return & Growth Calculator takes a lot of the guesswork out of forecasting how your investment will perform over time. Enter the amount of your initial investment, the timing and amount of any additional contributions, your anticipated rate of return and the number of years you plan to let the investment grow. The calculator will give you an estimate of how much your portfolio will be worth, assuming all those factors play out as planned.
Mark Henricks
Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
Bonds remained in selling mode after Friday’s jobs report. 10yr yields rose in Asia and Europe before hitting the highest levels of the day just before the domestic session opened. A glut of corporate bond issuance created additional headwinds, but they were no match for the weaker ISM Services data (50.3 vs 52.2). That was good enough to get both Treasuries and MBS back to “unchanged” levels or slightly stronger.
ISM Non-Manufacturing
50.3 vs 52.2 f’cast, 51.9 prev
Factory Orders
0.4 vs 0.8 f’cast, 0.9 prev
S&P Global Services PMI
54.9 vs 55.1 f’cast, 53.6
10:50 AM
Weaker overnight but bouncing back after soft PMI data. 10yr down .3bps at 3.697. MBS up 1 tick (0.03)
12:31 PM
Sideways to slightly weaker after ISM-driven rally. 10yr roughly unchanged at 3.70%. MBS showing down a quarter point, but illiquidity is also worth about a quarter point at the moment.
03:25 PM
Sideways to slightly stronger with MBS unchanged and 10yr yields down almost 1bp at 3.69.
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The report below was prepared by my firm and is part of ongoing effort to provide investors important information on auto sector bonds. My firm LPL Financial does not cover individual bonds but hope the following may help with your investment decision making.
On March 30, President Obama and the Auto Task Force declared that viability plans submitted by both Chrysler and GM did “not establish a credible path to viability”. GM is being provided 60 days of working capital to develop a more aggressive restructuring and credible plan while Chrysler has 30 days to work an agreement with Fiat or face bankruptcy proceedings. The news raises the risk of GM filing for bankruptcy in mid- to late-May and bankruptcy risk increased today (April 1) following a NY Times story indicating President Obama believes a quick, negotiated bankruptcy is perhaps the best path.
GM Bonds
For bondholders, GM’s viability plan had included a reduction of debt to two-thirds but the rejection means that bondholders will have to endure deeper cuts. GM bonds dropped several points on the news since the rejection introduces new uncertainty as to how to how much bondholders would receive either via bankruptcy or a debt exchange as both Ford and GMAC have already done. GM senior bondholders had been striving for 50 cents on the dollar while GM was targeting a price in the low 30s (roughly the two-thirds reduction). Prior to the Obama Administration’s announcement GM intermediate and long-term debt traded between 20 and 30 cents on the dollar. So the two-thirds reduction was roughly already priced in but bonds dropped several points given the new uncertainty that bondholders could receive less. GM intermediate and long-term debt is currently trading in the 10 to 17 range.
For bondholders the decision boils down to sell now or wait for more favorable pricing as a result of either bankruptcy or a government led restructuring. Even a government led restructuring may not be as quick and easy as government rhetoric indicates. A March 31, Wall Street Journal points out that prior “pre-packaged” bankruptcies still average seven months in duration, a fair amount of time to go without receiving interest payments.
And this time is likely no different as bondholders will argue their claim versus other parties particularly the UAW. In 2003 GM issued bonds to help make up for a pension shortfall. At the time, the $13 billion deal was the largest bond issue in history. Bondholders essentially helped GM help the UAW and this point will not go without debate.
While its unlikely bondholders get wiped out, they should expect to receive no more than 10 to 30 cents on the dollar absent a prolonged battle in bankruptcy court that turns out favorably. And income-seeking investors should be aware that bondholders will likely receive the bulk of compensation in the form of stock, not bonds, in a newly restructured GM.
Ford Bonds
Ford Motor Corp bonds benefited from the news as the elimination of one or more of the big three was viewed positively for what looks to be one of the survivors. Long-term Ford bonds still remain deeply depressed at 28 to 30 cents on the dollar, reflecting still high levels of risk to Ford, but are up roughly 10 points over the past month according Trace reporting. Ford Motor Credit Corp (FMCC) bonds were unchanged to only slightly higher. FMCC bonds are viewed as having as higher recovery values in the event of bankruptcy. Ford’s recently completed debt exchange increased its liquidity but should car sales remain at such depressed levels, bankruptcy still remains a longer-term risk. For now, bondholders are focusing on increasing sales as a result of a Chrysler or GM bankruptcy. Longer-term a leaner and more efficient GM may have a competitive advantage to Ford. So Ford still faces substantial risks in addition to those posed by a weak economy.
GMAC Bonds
GMAC is a separate legal entity from GM and should GM file bankruptcy, or be subject of a government-led restructuring outside of bankruptcy court, it does not entail an automatic bankruptcy filing for GMAC. On the surface, a bankruptcy or restructuring would be a negative for GMAC but it depends on which path GM takes. Should GM file chapter 11 bankruptcy it would need to line up private investors for Debtor-in-Possession (DIP) financing. DIP financing is interim financing that provides needed cash while a company is in the process of restructuring. Given the still credit constrained environment such financing would likely be difficult if not impossible to obtain. In such an environment consumers are unlikely to purchase GM cars, justifiably concerned over future viability. A government supervised restructuring, where the Treasury would provide financing while GM restructures, would likely lessen or eliminate that effect as consumers continue to purchase GM autos knowing the entity would still exist in some form. Given GMAC’s reliance on GM auto sales, anything to promote sales would be beneficial.
On that note, the US government announced it would guarantee the warranties of GM vehicles during the restructuring period. This news coupled with President Obama’s statement that, “We will not let our auto industry simply vanish” suggests that some form of GM will exist in the future. Both are positives for continued auto sales during a restructuring. Furthermore, it appears that GMAC, and its role in assisting consumer financing, remains a key tool for the government in efforts to turn around the economy. In late 2008 and early 2009, GMAC reached important milestones by 1) receiving Federal Reserve approval to become a bank holding company and 2) shortly after, receiving a $6 billion capital injection from the US Treasury. Unlike many banks, GMAC prepared to boost lending by lowering minimum FICO scores for loan qualification to 621 from 700. It appears that GMAC has become an important vehicle for Treasury to foster consumer lending. Concurrent with the events above GMAC concluded a debt exchange that reduced its debt load (a requirement for bank holding company status), extended bond liabilities, and subordinated other bond claims. The debt exchange enabled GMAC to post a profit for the fourth quarter but removing the extraordinary item GMAC lost $1.3 billion for the quarter.
Bonds have come under pressure again following the GM/Chrysler news but remain above the lows for the quarter. Still, current bond prices, particularly those maturing beyond one-year, reflect a significant probability of default. In the cash market, GMAC’s benchmark 6.75% due 12/14 closed March 30 at a 45 price, according to Trace, suggesting a 40% probability of default if one assumes a 30 cent on the dollar recovery (Moody’s forecast for high yield bonds). Credit Default Swap (CDS) spreads are bit more bearish and require a 31% upfront payment, an increase from
Despite all the bankruptcy news, a couple of potential positive developments could benefit GMAC. To our knowledge, GMAC has yet to borrow from the Fed. As a bank holding company it could gain access to the Fed’s discount window and even pledge auto loans as collateral. GMAC could also have access to the FDIC’s Temporary Liquidity Guarantee Program (TGLP) and issue bonds at very low government guarantee rates. These liquidity sources could amount to $10 to $80 billion in additional liquidity but remain untapped as of yet.
Lastly, the newly launched Term Asset Lending Facility (TALF) included auto loans as one of the lending areas it directly seeks to improve. The TALF should be a source of liquidity for both GMAC and FMCC.
GMAC Smartnotes
GMAC Smartnote pricing has been particularly depressed due to market illiquidity. While Smartnotes contain an estate feature, they were issued in small denominations on a weekly basis. Their small size makes them elatively illiquid, particularly in the current environment where bond dealers are reluctant to hold bond inventory let alone illiquid bonds. As a result, GMAC Smartnotes trade, in some cases much lower in price than similar non Smartnote GMAC bonds.
For example, the GMAC Smartnotes 6.75% due 6/2014, a very similar bond to the benchmark issue (same coupon rate but 6-months shorter in maturity) listed earlier has recently traded between 26 and 29 according to Trace reporting, a dramatic difference. GMAC bonds remain a high-risk play due to its dependence on GM and the potential path of any restructuring. The potential path of any GM restructuring (Ch. 11 vs. government led), whether GMAC receives additional capital injections from the Treasury, and the severity of the economic downturn will play a role in GMAC bond pricing. These many moving parts, including a politically influenced government role, make handicapping future bond performance difficult at best.
Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus contains this and other information about the investment company. You can obtain a prospectus from your financial representative. Read carefully before investing.
Government bonds and Treasury Bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Municipal Bonds are subject to availability and change in price; subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise and are subject to availability and change in price.High yield/junk bonds are not investment grade securities, involve substantial risks and generally should be part of the diversified portfolio of sophisticated investors.Stock investing involves risk including loss of principal.
Bonds began the day on the back foot as UK inflation crushed forecasts. Treasuries sold in sympathy, but found their footing before the start of the US session. From slightly lower opening yields, the rest of the day was spent selling, apart from a brief bounce surrounding the 5yr auction and Fed Minutes release. Yields were less than 3bps higher at the 3pm close and haven’t gone much higher after hours. No one likes higher rates, but today is best viewed through the lens of in-range volatility. MBS can’t quite make that claim as 5.0 coupons are a bit lower than they were yesterday, but 10yr yields traded under yesterday’s ceilings. Nothing was decided in the bigger picture. The Fed is data dependent. Inflation is still too high. Corporate earnings suggest a resilient economy. And we’re waiting until early June for more relevant econ data.
S&P Manufacturing PMI
48.5 vs 49.0 f’cast, 50.2 prev
Services PMI
55.1 vs 51.5 f’cast, 53.6 prev
09:44 AM
MBS down an eighth of a point, underperforming. 10yr also losing ground, near AM highs, but still down 0.6bps at 3.692.
11:57 AM
Steady weakness throughout AM hours and another pop of selling following debt ceiling progress headlines. 10yr up 2.8bps at 3.726. MBS down 9 ticks (.28).
02:04 PM
No major reaction to FOMC Minutes. 10yr up 2.3bps at 3.721. MBS down a quarter point.
03:24 PM
Modest gains until about 2:40pm, but losing ground since then. 10yr up 3bps at 3.728. MBS down 3/8ths with almost an eighth of that due to illiquidity.
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Many consider the 2000s to be a “lost decade” for stock market investors. This view is not surprising since the 2000s marked the biggest loss for the S&P 500 of any decade, including the 1930s. However, it wasn’t what you invested, as much as how you invested that mattered the most in the 2000s. Some investors found success in the 2000s and those lessons can be applied to the 2010s.
What is the best investment for the 2010s?
We are often asked: What is the best investment for the 2010s? However, the question itself implies the wrong approach to how to best invest in the 2010s. The most effective approach to investing is not likely to be holding any single investment for the whole decade. Instead, a consistent approach to saving and tactically buying and selling a number of investments suited to different environments and conditions is more likely to result in investment opportunities for the decade as a whole.
Our outlook for the 2010s is for modest buy-and-hold returns and the likelihood of volatility as many factors influence the markets. However, to illustrate our point about successful investing let’s look at the 2000s when positive returns were even harder to come by. The 2000s offered tactical investors many opportunities to add value beyond the lackluster performance of the indexes; we expect the 2010s will also offer similar opportunities.
How much of a lost decade were the 2000s?
It depends on how consistently you saved and tactically you invested. As you can see in [Chart 1] with $120,000 invested in the S&P 500 at the beginning of the decade, it was only worth $109,082 (including dividends) 10 years later, for a loss of about $11,000. Looked at this way, the 2000s were certainly a lost decade — or, at the least, a decade of losses.
However, that wasn’t the only investor experience during the 2000s. It may seem that those investing money over the course of the 2000s probably wish that they hadn’t. In fact, for those that added to their investments over the course of the decade the experience was very different. For those that consistently invested $1,000 per month in the S&P 500 the decade produced a modest gain of over $8,000 instead of an $11,000 loss. The same $120,000 placed in the same investment provided very different results. While the gain isn’t big, it calls into question whether the 2000s were a lost decade. [Chart 2]
Source: LPL Financial, Bloomberg
This is a hypothetical example and is not representative of any specific situation. Your results may vary. The rates of returns used do not reflect the deduction of fees and charges inherent to investing.
The S&P 500 is an unmanaged index, which can not be invested into directly. Past performance is no guarantee of future results.
Source: LPL Financial, Bloomberg
This is a hypothetical example and is not representative of any specific situation. Your results may vary. The rates of returns used do not reflect the deduction of fees and charges inherent to investing.
The S&P 500 is an unmanaged index, which can not be invested into directly. Past performance is no guarantee of future results.
More importantly, those investors that used a tactical asset allocation approach (here represented by the performance for a decade of the LPL Financial SAM/Research Recommended Mutual Fund Models Growth with Income Diversified and Diversified Plus Portfolios) as they consistently invested $1,000 per month ended up with a gain of $41,000 over the decade. This is $52,000 better than the $11,000 loss represented in the first example on the same $120,000. No lost decade here!
It’s How You Do It
In summary, it isn’t what you invested in; it is how you invested that mattered over the 2000s. We believe this is the secret to investing success in the 2010s, as well. Even if the 2010s offer only a repeat performance of the “lost” 2000s, investors can find opportunities to invest and profit by consistently saving and tactically managing the investments in their portfolio. Rather than look back with regret at what may have been a lost decade, we encourage investors to look forward with newfound wisdom and invest for success in the 2010s.
Important Disclosures
This was prepared by LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Investing in international and emerging markets may entail additional risks such as currency fluctuation and political instability. Investing in small-cap stocks includes specific risks such as greater volatility and potentially less liquidity.
Stock investing involves risk including loss of principal Past performance is not a guarantee of future results.
Small-cap stocks may be subject to higher degree of risk than more established companies’ securities. The illiquidity of the small-cap market may adversely affect the value of these investments.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise, are subject to availability, and change in price.
Save more, spend smarter, and make your money go further
Let’s say you want to build your own stock market index fund based on the S&P 500. Easy: download a list of all the companies in the index (from 3M to Zions Bancorp) and their market cap, and start investing. Every stock in the index will be easy to buy in whatever quantity you want.
Now, after the success of your first index fund, you decide to create an emerging market fund, concentrating on the world’s up-and-coming economies. Again, no problem. We have the internet, after all, and we can just print off a list of all the stocks in China, India, Chile, Hungary, and so on, pull out a pile of Benjamins, and go to town.
That won’t work, says Raman Subramanian, Executive Director of Index Research at MSCI. Subramanian oversees the index underlying the the two largest emerging markets: ETFs, from Vanguard (VWO) and iShares (EEM). “You can go to any of the emerging markets and download the listed stocks there,” says Subramian. “But there can be some potential issues.”
So how do you build an emerging markets index, anyway? And, can it shed any light on how you should invest your money?
Who’s emerging?
The first order of business for Subramanian, or any emerging markets indexer, is to decide which countries count as emerging markets. This is not as easy as it sounds: no two indexes agree on which countries are emerging.
MSCI uses three criteria to classify a country as developed, emerging, or frontier (“frontier” is an euphemism for “not really emerging yet”).
Wealth. A country has to have a GDP per capita above a certain threshold to be considered developed; below that, it’s emerging or frontier.
Market structure. In order to be included in the index, a country has to have an active stock market with many companies listed and few or no limits on foreign ownership.
Accessibility. How easy is it to participate in country’s market? “If you’re a US investor and want to invest in India, how do you go about setting up that account?” says Subramanian. “What are the regulations?” To determine market accessibility, MSCI surveys market participants about their experience.
A wealthy country with market structure or accessibility issues might be classified as “emerging.” MSCI puts Taiwan and South Korea in this category. (They redo the list annually.)
Pick of the list
Now that we have a list of economies to put on our index, we just go out and buy all the stocks, and…. Wait, that won’t work, either, because some stocks are hard to buy. They might be stocks of very small companies or companies closely held by a small number of shareholders, with few shares trading freely. If you include those stocks in your index, it makes it harder to invest in the entire index and drives up the cost of trying.
So MSCI excludes companies that it considers insufficiently “investable.” To be investable, your stock has to trade on at least 4 out of 5 days, and at least 15% of the stock has to trade freely, not be held by controlling interests or otherwise out of circulation.
How much are investors in VWO or EEM missing out on by not owning these companies? Not much. The MSCI index captures almost 98% of the total market cap of the listed countries. “What is excluded is basically very small companies, illiquid companies,” says Subramanian.
In short, emerging markets indexes aren’t easy to build, but they’re constructed on a simple principle: own the most liquid securities in the most accessible markets.
How to beat the index
I became interested in this question of how to build an emerging market index because (a) I am a huge nerd, and (b) recently I interviewed an investment guru who argued that there is great opportunity for active managers to outperform in emerging markets because the markets are inefficient.
That argument doesn’t hold up, because, as I explained, the record of active managers in emerging markets is the same as it is everywhere else: ludicrously bad. Most managers underperform the index; the ones who outperform are an annually rotating cast whose good fortune is mostly indistinguishable from luck.
But learning how the MSCI index is constructed gave me a new idea: couldn’t I start an active fund specializing in those unloved securities that MSCI and the other indexes won’t touch? Small companies, illiquid stocks, frontier markets. Sure, they’re risky. That’s the point: you have to take risks to get higher returns.
Bad idea, says Larry Swedroe, director of research at Buckingham Asset Management and author of the Wise Investing series. “The more inefficient the market is, the higher the trading costs are,” says Swedroe, who has written frequently about active management in emerging markets. “The round-trip in emerging markets is extremely expensive.”
In other words, to pull off my trick, I have to outperform by a margin big enough to cover my costs—the curse of every active manager. Vanguard’s ETF, VWO, charges an expense ratio of 0.2%. I don’t even want to think about what my expenses would be.
Subramanian agrees. “Sometimes active managers will try to capture that illiquidity premium by going into those stocks,” he says. “But then the question becomes, can they sell it?” The big problem is market impact: if my illiquid stocks do well and I try to sell them, I’ll depress the market price, causing a hefty chunk of my gains to vanish.
As for those frontier markets, Swedroe steers clear. “The reason they’re called frontier markets is because generally they don’t have the rule of law and international investors are not well protected,” he says. “If those things are not present, you shouldn’t invest no matter what the risk premium is.”
The bottom line
Costs matter in investing: they compound just as surely as gains, and for this reason, low cost is an excellent predictor of above-average mutual fund performance. If you want to invest in emerging markets, there is no way to do so at low cost other than by using an index fund (or, to be scrupulous, a passive index-like fund such as those from Dimensional Fund Advisors).
Vanguard’s ETF, remember, charges 0.2% annually. Its actively managed competitors tend to charge between 1.5% and 2%. This, more than any arcane argument about market efficiency, is why indexing works in emerging markets: it doesn’t involve throwing away 1.5% of your money every year in pursuit of elusive market-beating strategies.
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.
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Bonds Improve on Late Day Risk Aversion; Thoughts on Liquidity Bonds began the day in slightly weaker territory, but eventually turned green with help from a flight-to-safety in Europe. A few hours later, US markets did the same thing, resulting in even better gains for Treasuries. 10s dropped under 3.40% and MBS gained more than an eighth of a point. In other news, we’re seeing more and more confusion (and misinformation) regarding the notion of illiquidity in the bond market. Today’s video for MBS Live members discusses that in greater detail. Econ Data / Events Jobless Claims 191k vs 197k f’cast, 192k prev Market Movement Recap 08:46 AM modestly weaker in Europe. Additional selling on corporate issuance and First Republic pre-market rally. 10yr up 6bps at 3.513. MBS down 3 ticks (0.09). 12:11 PM Slow, steady gains in bonds with MBS outperforming 10yr Treasuries. MBS up almost a quarter point. 10yr just hit ‘unchanged’ at 3.451. 01:38 PM Off the best levels, but still stronger on the day. MBS up an eighth. 10yr down .2bps at 3.449. 03:45 PM Yields drop to best levels on flight-to-safety trading heading into the 3pm CME close. Stocks fell in concert. 10s down 6+ bps at 3.387. MBS up nearly a quarter point.
Absence of Data Leaves Even More Focus on The Fed If there happened to be some significant economic data today, or on the next two mornings, financial markets might wait to see what it implied before diving head-first into the pastime of overanalyzing Fed rate hike odds. With essentially no relevant data between now and then, the task at hand is clear: get in position for the Fed (if you’re not already) and react to any major developments in the banking sector. Monday’s early trading suggests markets are actually right about where they want to be after a bit of overnight volatility surrounding the UBS takeover of Credit Suisse. Econ Data / Events No significant econ data Market Movement Recap 09:16 AM 10s are currently down 2.6bps at 3.412. MBS are unchanged (5.0 coupons). 11:27 AM More legitimate weakness after an early bout of illiquidity. MBD down 3/8ths with at least a quarter point of losses vs AM highs. 10yr yields are up 3.2bps at 3.47. 02:13 PM Weakest levels of the day with MBS down just over half a point and 10yr yields up 5.4bps at 3.492. Stocks are up about 2/3rds of a percent.
Stocks and Bond Yields Moving Higher Together; Fed on Deck Today’s trading session turned out to be every bit as simple as it seemed like it would be this morning. Why so simple? There were clear indications that improved sentiment in the banking sector was fueling a ‘risk-on’ trading pattern in Europe (i.e. stock prices and bond yields moving higher together). This extended to US markets, but especially to Treasuries. MBS actually outperformed, which isn’t too shocking considering Treasuries were the star performers when the market was trading in a risk-off direction. Econ Data / Events Existing Home Sales 4.58m vs 4.20m f’cast, 4.0m prev Market Movement Recap 08:58 AM Weaker overnight. Europe trades risk-on. 10yr up 10+ bps at 3.587. MBS down 3/8ths. 10:41 AM Moderate improvement since 9am, but still weaker on the day. MBS down less than a quarter point. 10yr up 8bps at 3.562. 01:40 PM Respectable 20yr bond auction without any major reaction in the bond market. 10yr up 10bps at 3.583 and MBS down just over a quarter point. 03:45 PM Stocks at highs. 10yr yields up 12.3bps at 3.606, near highs. MBS outperforming despite a brief scare due to illiquidity. Still down just over a quarter point.
You Have Gone Zero Days Without a Systemic Contagion Flare-Up As of Tuesday, the global financial market was able to say it had gone “2” days without a systemic banking contagion flare up. But that number dropped to “0” in the overnight trading session as investors aggressively sold Credit Suisse stock. Other EU banks were dragged down as well. US investors sold stocks first and asked questions later. Once those questions were asked, the move began to reverse, but not nearly enough to erase the day’s bond market gains. Any time this “days without a flare up” sign has a “0” on it, bonds should be doing well. If that number starts ticking higher, rates might feel like doing the same. Econ Data / Events Retail Sales -0.4 vs -0.3 f’cast, +3.2 prev Core Y/Y Producer Price Index 4.4 vs 5.2 f’cast, 5.4 prev NY Fed Manufacturing -24.6 vs -8.0 f’cast, -5.8 prev Market Movement Recap 11:02 AM Sharply stronger overnight on Credit Suisse cliff diving. Fed Funds Rate outlook leading the way so 2yr notes are down 44bps while 10s are “only” down 26bps to 3.42. Remember 3.42? MBS are lagging, which is to be expected amid another flight to safety. 5.5 coupons are up roughly 5/8ths with an eighth point margin of error due to illiquidity. 01:01 PM Rally continues. 10yr down almost 27 bps at 3.42. MBS up 2/3rds of a point in 5.5 coupons. 02:38 PM Plenty of weakness since 1pm with additional selling now after Swiss regulators are said to release a statement soon on a Credit Suisse backstop. MBS up only a quarter point on the day, down a half point from highs. 10yr yields still down 17bps at 3.517, but up more than 10bps from lows. 04:01 PM MBS gradually recovering since 2:30pm ET. Back up by roughly half a point, or slightly more after adjusting for illiquidity. 10yr down 21.6 bps at 3.47.