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Your Money: Taking a Cue From Bernanke a Little Too Far

June 28, 2013 by Leave a Comment

You can hardly blame them. Investors have been fleeing bonds in droves; a record $76.5 billion poured out of bond funds and exchange-traded funds during the month of June through Wednesday. That exceeds the previous record, according to TrimTabs, when $41.8 billion streamed out of the funds in October 2008 and the financial crisis was in full force.

But the rush for the exits really means one thing: investors are betting that interest rates are about to begin their upward trajectory, something that’s been expected for several years now.

Their cue came from the Federal Reserve chairman, Ben Bernanke, who recently suggested that the economic recovery might allow the central bank to ease its efforts to stimulate the economy. That includes scaling back its bond-buying program beginning later this year.

So the big fear is that interest rates are poised to rise much further, driving down bond prices; the two move in opposite directions.

A Barclays index tracking a broad swath of investment-grade bonds lost 3.77 percent from the beginning of May through Thursday, according to Morningstar. United States government notes with maturities of 10 years or longer, however, lost an average of 10.8 percent over the same period.

Making a bet on interest rates is no different from trying to predict the next big drop in stocks, or jumping into the market when it appears to be poised to surge higher. These sort of emotional moves are exactly why research shows that investors’ returns tend to trail the broader market.

And it’s also why many financial advisers suggest ignoring the noise, as long as you have a smart assortment of bond funds that will provide stability when stocks inevitably tumble once again.

“It’s a futile game to base portfolio moves on interest rate guesses,” said Milo Benningfield, a financial adviser in San Francisco. “We don’t have to look any further than highly regarded Pimco manager Bill Gross, whose horrible interest rate bet against Treasuries in 2011 landed him in the bottom 15 percent of fund managers in his category that year. Investors should take a strategic approach designed around the reason they hold bonds — and then sit tight whenever hedge funds and other institutions shake the ground around them.”

The main reason longer-term investors hold bonds, of course, is to provide a steadying force. And though today’s lower yields provide less of a cushion — the 10-year Treasury is yielding about 2.5 percent — bonds still remain the best, if imperfect, foil to stocks.

“The role of bonds in a portfolio has always been to be a ballast or a diversifier to equity risk,” said Francis Kinniry, a principal in the Vanguard Investment Strategy Group. “And that is very true today. Yields are low, but this is what a bear market in bonds looks like.”

So, yes, losses are indeed more probable than they have been in recent years. From 1976 through Jan. 31, 2013, high-quality bonds yielded an average of 7.3 percent, according to a recent Vanguard , which provided a nice cushion. For instance, if you had a portfolio of 60 percent stocks and 40 percent bonds — and stocks fell by 20 percent — the overall portfolio would have lost 9.1 percent. If the market plummeted 40 percent, the entire pile of money would be worth 21 percent less.

The situation is a bit different now. Assuming a more conservative average return on bonds of 1.9 percent — a reasonable estimate based on bond yields now, according to Vanguard — the same 20 percent drop in the stock market would cause the overall portfolio to decline by about two percentage points more, or 11.2 percent. If the market plummeted by 40 percent, the portfolio would lose 23 percent.

“Investors have been conditioned by higher bond yields going into both bear markets in the last decade to believe that bonds will substantially offset stock declines,” Mr. Benningfield added.

So perhaps the loss from the bonds somehow feels worse because it’s not something investors are accustomed to. And the memories of the stock market collapse of 2008-9 are still fresh enough.

“People are using adjectives like ‘blood bath’ and ‘devastation,’ but we are talking about a negative 3 percent return,” said Mr. Kinniry, referring to the Vanguard Total Bond Market Index fund, which is down by that amount year-to-date.

Even the big bond market sell-off in 1994, which many refer to as a “massacre,” doesn’t seem quite as violent as that moniker suggests. As Mr. Kinniry points out, the same index fund lost 5.3 percent that year, after interest rates spiked by 2.83 percent. If the same sort of situation were to play out now, he said the returns would be significantly worse because bond yields are lower than they were back then. “You might lose about 8 percent,” he said, adding that losses could be deeper depending on how quickly rates rose, among other factors. But typically, “we’re talking about single-digit losses.”

Still, some advisers suggested taking a closer look at your overall allocation to stocks, particularly if you’re not well diversified, since bonds will provide less protection.

For most investors, holding bonds through low-cost index funds remains the most prudent course. People who invest in individual bonds don’t have to worry about fluctuations in their price because they can continue to hold the bond and collect their interest payments until maturity, at which point they’ll collect its face value (unless, of course, the bond issuer defaults). But you need to have a good pile of cash — some experts say $500,000, even more — to assemble a diversified portfolio of municipal and corporate bonds (though you don’t need quite as much for Treasuries, since they’re backed by the government).

You can figure out how sensitive your fund is to interest rates by looking at its duration, which essentially measures how long it will take to receive all of your money back, on average, from interest and your original investment. Generally speaking, for every percentage point that interest rates rise (or fall), a bond’s value will decline (or increase) by its duration, which is stated in years. Bond funds with shorter durations are less susceptible to interest rate risk — the faster a bond matures, the thinking goes, the more quickly you can reinvest the money at a higher interest rate.

That means a fund like the Vanguard Total Bond Market Index fund, which has a duration of 5.5 years, would decline by about 5.5 percent. But since the fund also pays investors income — it has a yield of about 1.7 percent — it would actually only post a total loss of about 3.8 percent. (Future returns would be one percentage point higher, too, thanks to the rise in rates).

But if even that feels too risky, experts say you can put some of your bond money into a diversified index fund with an even shorter duration. The trade-off, of course, is that you will earn less income. That might not matter once you remind yourself why you own bonds at all.

Article source: http://www.nytimes.com/2013/06/29/your-money/before-dumping-bonds-consider-why-you-have-them.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Media Decoder: NPR Series on Race Aims to Build a Wider Audience

April 15, 2013 by Leave a Comment

Matt Thompson, editor of the NPR team covering race, ethnicity and culture.Doby Photography/NPR Matt Thompson, editor of the NPR team covering race, ethnicity and culture.

NPR’s race, ethnicity and culture reporting initiative will make its broadcast debut this week with a four-part series called “Changing Races” for the morning and evening news programs.

The digital part of the initiative, a blog called Code Switch, started a week ago. NPR — using a two-year, $1.5 million grant from the Corporation for Public Broadcasting to hire a team of six reporters, editors and bloggers — is ramping up its reporting on the topic as part of its efforts to appeal to a broader swath of listeners.

Gary E. Knell, in a telephone interview, said that since becoming NPR’s chief executive in December 2011 he has been working on diversifying the public radio audience beyond its traditional loyal base. That loyalty “is a great thing but it can also lead to complacency,” he said, noting that a recent survey found that 25 percent of the public “had never heard of NPR.”

The race, ethnicity and culture reporting, Mr. Knell said, is part of NPR’s strategy to “do better about mirroring America” by bringing in more voices and engaging minority communities more deliberately.

By giving the coverage a dedicated home on the NPR site and establishing it as its own reporting desk, “it gives permanence to the issues,” Mr. Knell said. “We want this emphasis on growing audiences and widening our presence to make a statement.”

The “Changing Races” series will explore the effects of the country’s shift to a multicultural society, looking at cities where demographics have changed, and, for example, the rise of Korean hip-hop, among other topics, said Matt Thompson, the team’s editor. Future reporting, he said, will augment NPR’s existing coverage of the issues, “in a way that’s more nuanced, deeper and more comprehensive than we’ve ever been able to do before.”

Audiences for NPR’s “Morning Edition” and “All Things Considered,” the nation’s most-listened-to radio news programs, have fluctuated in recent years, dropping around 5 percent from spring 2011 to spring 2012, according to Arbitron ratings figures, and rebounding last fall. Fall 2012 ratings put “Morning Edition” with a cumulative weekday audience of 13.4 million and “All Things Considered” at 12.5 million.

NPR’s diversification efforts have also included a marketing campaign to reach younger listeners and the use of more reports from NPR member stations, as a way of “making sure we’re covering more of America,” Mr. Knell said.

A version of this article appeared in print on 04/15/2013, on page B6 of the NewYork edition with the headline: NPR Series on Race Aims To Build a Wider Audience.

Article source: http://mediadecoder.blogs.nytimes.com/2013/04/14/npr-series-on-race-aims-to-build-a-wider-audience/?partner=rss&emc=rss

Filed Under: Media Business Tagged With: , ,

Tomato Imports Deal Reached by U.S. and Mexico

February 4, 2013 by Leave a Comment

The United States and Mexico have reached a tentative agreement on cross-border trade in tomatoes, narrowly averting a trade war that threatened to engulf a swath of American businesses.

The agreement, reached late Saturday, raises the minimum sales price for Mexican tomatoes in the United States, aims to strengthen compliance and enforcement, and increases the types of tomatoes governed by the bilateral pact to four from one.

“The draft agreement raises reference prices substantially, in some cases more than double the current reference price for certain products, and accounts for changes that have occurred in the tomato market since the signing of the original agreement,” Francisco J. Sánchez, the United States under secretary of commerce for international trade, said in a statement.

The agreement will be open for public comment until Feb. 11. The Commerce Department estimated it would take effect March 4.

Estimates are that nearly half of tomatoes eaten in the United States come from Mexico. Last fall Florida tomato growers asked the Commerce Department to end a 16-year-old agreement that had suspended an antidumping investigation that began in the mid-1990s. The agreement had been amended several times over the years, but Florida growers contended it set the minimum price of Mexican tomatoes so low that the Florida growers could not compete.

The Florida growers said the new agreement addressed their three main concerns: pricing of Mexican tomatoes, the number of growers covered and enforcement.

“We believe that the Department of Commerce and Mexico have struck a deal that meets those three tests, and we’re hopeful and optimistic that we’ll be able to compete under fair trade conditions,” Edward Beckman, president of Certified Greenhouse Farmers, a trade association, said in a statement. “Much work remains to have the agreement fully and faithfully implemented, and continuous monitoring and enforcement will be critical.”

Martin Ley, a Mexican tomato producer who was on the negotiating team, said the agreement required significant concessions from the growers he represents.

“Even though no dumping or injury to the U.S. industry was demonstrated by our competitors, over the last year our growers worked with our government to overhaul the whole Mexican industry, broaden the coverage and develop tough enforcement schemes,” Mr. Ley said.

He said the agreement will be discussed by more than 600 Mexican growers this week. “While concessions on price will impose hardships on our industry, we are hopeful that over the long run we will be able to continue to supply the United States with what are acknowledged to be the best tomatoes in the market,” Mr. Ley said.

The new agreement covers all fresh and chilled tomatoes, excluding those intended for use in processing like canning and dehydrating, and in juices, sauces and purées.

It raises the basic floor price for winter tomatoes to 31 cents a pound from 21.69 cents — higher than the price the Mexicans were proposing in October — and establishes even higher prices for specialty tomatoes and tomatoes grown in controlled environments. The Mexicans have invested billions in greenhouses to grow tomatoes, while Florida tomatoes are largely picked green and treated with a gas to change their color.

The Mexican and United States governments will both carry out mechanisms to increase enforcement of the new agreement.

The dispute unfolded in the heated politics surrounding the presidential election, with Mexican growers charging that the Commerce Department was courting voters in the important swing state of Florida. Instead, the timing of the negotiations ensured that the government could win those votes and bring the controversy to a conclusion satisfactory to the Mexicans after the election was over.

The Mexicans enlisted roughly 370 American businesses, including Wal-Mart Stores and meat and vegetable producers, to argue their cause. Those businesses feared a bitter trade war like the one the Mexicans waged over trucking, which imposed stiff tariffs on American goods headed south.

If the old agreement had expired, it would effectively have led to the resumption of the antidumping investigation, and so Mexico fought hard for a new agreement, offering to substantially raise the minimum price and increase the number of Mexican growers covered by it.

Article source: http://www.nytimes.com/2013/02/04/business/united-states-and-mexico-reach-deal-on-tomato-imports.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,