Learning How
                                To Get Paid:
                                    A Banker’s Secret
          ...
Learning How to Get Paid

    find the bonds that are the best choice and         market, total return encompasses the ove...
Learning How to Get Paid

    prices rise, and as yields rise, prices fall. This       In transitioning markets, it’s the ...
Learning How to Get Paid

    local currency bonds and often in US dollars.        stantial reserves. In addition, Korea h...
Learning How to Get Paid

      bond world that you may be holding. I’ll                                  great deal of ex...
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Learning How To Get Paid:

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Learning How To Get Paid:

  1. 1. Learning How To Get Paid: A Banker’s Secret Below, I outline my solid income, potential I nvesting in the bond market isn’t just all or nothing. Whether the economy is hot and heavy or dull and depressed, there’s always a stock market-beating strategy. Then I lay out the basics of bonds, which will ensure that part of the market that’s bullish, providing the media and brokers don’t pull a fast one value and positive investment performance. over you. And last I go through the Yield Every market—even bonds—has its cycles. Letter service so that you know exactly how While market timers might advocate that to unlock the profit potential my bond advice bonds are only useful as defensive assets, ethe- offers, and I provide you with my bond real truth is that the bond market is much broker directory. more and can provide stellar returns in all market conditions, completely independent of My Strategy, Your Profit the stock market. At heart, I’m a bond guy—a man who Stocks are what Wall Street is all about. But prefers to assume the worst so I won’t be dis- while markets continue to gyrate, it’s up to the appointed. And I’m a top-down investor who bond market if you’re actually going to make looks at the economic data of a country like money. Buying bonds, though, may be tread- it’s the books of a company. As a banker, I ing into the unknown for new subscribers. And know where people like to hide their problems what Wall Street doesn’t realize is that bonds and what numbers can’t be fudged. It’s this have a secret: They can provide double- and skepticism and rigor that keeps my invest- triple-digit gains for investors in the know. ments profitable and timely. I’ve lived this advice for some time. Let’s In The Yield Letter, I’ll use my top-down end that once and for all—bonds aren’t tricky investment approach. I’ll find a broad eco- or boring once you understand a little more nomic trend and a country, company or sec- than the basics. tor that’s benefiting from that macro trend, KCI Communications, Inc., 7600A Leesburg Pike, West Bldg. Suite 300, Falls Church, VA 22043. Subscription and customer services: P.O. Box 3808, McLean, VA 22103-9823, 800-832-2330. It is a violation of the United States copyright laws for any person or entity to reproduce, copy or use this document, in part or in whole, without the express permission of the publisher. All rights are expressly reserved. ©2007 KCI Communications, Inc. Printed in the United States of America. NBS0807-NS. The information contained in this report has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. NBS0807 www.yieldletter.com Page 1
  2. 2. Learning How to Get Paid find the bonds that are the best choice and market, total return encompasses the overall recommend you buy the bonds. This may impact of coupon interest as well as price not strike you as a well-kept secret. But movements in the price of the bonds them- through some digging and evaluation, tap- selves. Buying bonds earning interest and sell- ping into the right countries or companies ing as yields fall is the real way to invest and and the right bonds at the right time could win with bonds. And this is what we’ll do fill your pockets with profits. together through The Yield Letter. But before you start investing in the bond market, let’s review the basics so that we’re all The Way of the Trade on the same footing. Bonds trade on three characteristics in the markets. The first is inflation, both now and Bond Basics in the future. The idea is that if inflation falls, Bonds are simply securities issued to bor- the current value of those future interest and row money from investors. Issuers can be principal payments will be worth more, dri- governments or corporations. Governments ving bond prices up. Expectations remain sub- represent the core of the bond market both dued; this makes for lower inflation risk and in the US and around the world—they bor- higher bond prices overall. row to make up for revenue shortfalls or Next is the credit. The bond issuer, fund large-scale projects. whether a government or a corporation, is Corporations that need money to sustain the interest and principal payer. If the market current operations as well as to expand their has a positive opinion of the issuer, backed capabilities will issue bonds. A bond is com- up by strong credit history and a good issuer posed of the principal owed and interest to rating, the yield commanded to buy the be paid. Bonds range in maturities from a bond will be lower and less risky. As percep- few months to many decades, with bills refer- tions of credit rise or fall, the issuer’s bonds ring to maturities less than one year and will fall or rise in yield. notes referring to maturities from one to 10 The Federal Reserve is making it harder for years. But whatever the maturity, all can be companies and other issuers to fail, so credit called bonds. expectations should improve, driving yields When you buy a bond, you’re set to receive lower. And with cash aplenty and lenders eager, principal at the maturity and interest (typically the probabilities of default are reduced in the in the form of regular coupons) while you market for riskier bonds. This means less of a hold the bond. Coupons are usually paid once premium in yield is going to be demanded. a year, yet some markets including US Trea- Third—and most important in the market surys pay investors semi-annually. now—is competition for assets. Bond issuers In addition to bonds that pay coupons, have to compete against other issuers when they there are also bonds that pay their interest at go to the market to borrow money and sell maturity. These types of bonds are referred to bonds. In addition, from day one to the final as zero-coupon bonds or strips. When you payment and maturity, bonds from various mar- purchase this type of bond, you pay a fraction kets compete against other bonds as well as of the maturity value of the bond with the dif- stocks, cash and other assets to attract investors. ference between the purchase and maturity If stocks are performing well, bond yields values being your interest. will tend to rise to attract more buyers. And if For the uninitiated, the idea of buying cash or other alternatives become more entic- bonds often is simply to buy and hold the ing, bonds can suffer as yields are driven bond to maturity and clip the interest higher and prices fall. coupons. But bonds are more; they can pro- In the bond market, the price and yield of vide us returns that eclipse stocks. In the bond each issue move hand-in-hand. As yields fall, www.neilsbonddesk.com Page 2
  3. 3. Learning How to Get Paid prices rise, and as yields rise, prices fall. This In transitioning markets, it’s the bonds that inverse relationship between price and yield lead the rest. As countries repair credit and becomes more pronounced the longer the attack local inflationary pressures, bond maturity of the bond. traders tend to notice, driving prices up and Short-term bonds move much less than yields down. This allows companies to benefit longer-term bonds. Fewer future cash payments from an emergence of available capital and a are affected by the higher or lower yields for a reduction in funding costs. Then the broader short-term bond and the effective discounting markets of equity stock can begin to reflect a of the future cash flows to the bond’s present potential further turnaround. value. The rule of thumb is the longer the Buying bonds of countries just as they’re bond, the greater the price to yield changes. fixing past woes is a surefire way to profit It’s important, when investing in the bond from economic turnarounds. All it takes is the market, to look at these components that willingness to look beyond the stock market drive bond yields and prices. In The Yield Let- and mistaken notions of bonds to capitalize on ter, we’ll look at how inflation, credit and the power of positive change in bond markets competition affect our recommended debt. around the world, while Wall Street is still There’s more to the bond market than just peddling its lousy stocks straight bonds. Whether it’s bond funds or In The Yield Letter, I’ll lead you down the Income Deposit Securities (IDSes), which are path to investing in foreign bonds. Nations composed of common stock and a bond, ranging from Korea to Mexico and even the there’s a bounty from which to choose. In The US have bonds that pay 10 percent or more Yield Letter, I’ll recommend and cover bonds, and should give you the opportunity to profit bond funds, IDSes and more. from rising prices—giving you even greater returns. Going Global Another area we’ll look at in The Yield Let- Currency Concerns ter is foreign bonds. Buying bonds around the Beyond the bond market itself, the cur- world is like buying stocks, because bonds can rency that denominates the bond can also be viewed as the country’s core assets. As issu- play a vital role. Governments around the ing countries’ fundamental conditions improve world issue bonds in their own market, in or falter, their bonds will most closely reflect their own currency, as well as in the global their changing fortunes. bond market in other currencies. For bond If a country’s government is faltering, the investors, currency can be a double-edged falling tide of the economy will be a difficult sword, either adding or subtracting to bot- environment for any company to remain tom-line profits. buoyant, just as a rise in fortune will be sup- In the case of countries that are fixing their portive for most commercial ventures. By economic and financial ills, investing in their focusing on the bond market, investors can bonds can provide windfalls. In addition, as hone in on the changing trends in the general bonds of such countries begin to reflect marketplace for all assets. improving inflation and creditworthiness, the Bonds are good barometers of a country’s countries’ currencies will also tend to reflect condition because creditors are the most cau- the improving core economic fundamentals. tious of investors. As creditors become more However, if conditions begin to deteriorate, impressed with the fortunes of debtors, the the foreign exchange markets as well as the interest rates commanded in the market for new bond traders will often quickly react by pun- and existing bonds will fall. But when a hint of ishing the currency and the bonds. concern enters the picture, the first signs of mar- Buying into economic reformations through ket destruction come from the bond pits. the bond market can be accomplished through www.neilsbonddesk.com Page 3
  4. 4. Learning How to Get Paid local currency bonds and often in US dollars. stantial reserves. In addition, Korea had main- Historically, there are many great examples of tained trade and financial surpluses with the windfalls from using both strategies. In the rest of the world and had only two outstand- 1990s, many countries in Europe and Asia ing bonds that they could easily have made began to awaken to the benefits of reformation. good on. Many bond traders were able to step The results of their efforts rewarded farsighted inland and buy US dollar-denominated bonds investors with huge returns. for pennies on the dollar, which are now trad- One of the more memorable occurrences ing back above par and even at premium was in the New Zealand bond market. In the prices. We’ll look further at these currency ’80s, the country had fallen into a period of opportunities in The Yield Letter. poor fiscal and monetary management that resulted in an outflow of capital, and even Mortgage Mavens people, at an alarming rate. For the country to Another way investors use the bond market fund its spending needs, the markets com- without even realizing it is through their home manded yields in the high double digits. In mortgages. Mortgages are the chief means of addition, with horrible economic conditions, providing money for individuals to purchase foreign exchange traders sent the New homes in the US and around the world. Zealand dollar to the depths of 40 cents. In the US, families go to mortgage lenders, Faced with a crisis, the country restructured which can be finance companies or banks. its government in numerous ways, including After the loan is made to purchase or re- making each minister responsible by contract finance a home, it’s pooled together with for specific objectives. The Governor of the other home mortgages and then the collection Bank of New Zealand, for example, had to of pooled loans is sold to the market in the keep inflation under 2 percent or face a breach form of a bond. We’ll look further at mort- of contract. As a result, the country is now a gage companies and mortgage bonds that are model of responsibility. worth capitalizing on in The Yield Letter. Eventually, the markets noticed and drove These are only a few examples of various the New Zealand dollar higher and higher in debt markets that present themselves each and the ensuing years. Bond traders also saw the every year. Through this service, we’ll delve monetary discipline driving inflation lower as into the markets that are already in motion and well as the fiscal discipline resulting in improv- explore the ones that are about to take off. ing credit conditions. Ultimately, yields were driven down and prices soared. Ins and Outs Even more recently, during the Asian eco- First, I’d like to welcome you to The Yield nomic crisis, another country was under the gun Letter. I’m happy you’ve subscribed and will resulting in a windfall in the making. Korea, one soon be unlocking untold profits through my of the wealthiest nations in Asia, was pressured bond advice. Twice a month, you’ll receive to reform as many of its regional neighbors— articles that focus on current happenings in including Thailand, Indonesia and Malaysia— the bond market or aspects that are impor- were facing economic reckonings. tant to you and your portfolio. Articles will In 1998, the world was holding its breath as be published at www.yieldletter.com.com. I’ll several countries in Asia and Europe were also keep you informed via regular Market heading into crisis, making the bond market in Updates throughout the month. Korea a tough place. Then, when Russia As part of your subscription, you’ll have defaulted on its bonds, traders dumped access to two portfolio tables, the Taxable Korean bonds in sympathy, which drove yields Portfolio and the Tax-Free Portfolio. Each into the high double digits. will include specific recommendations. I’ll All this happened despite the country’s sub- also cover popular debt securities in the www.neilsbonddesk.com Page 4
  5. 5. Learning How to Get Paid bond world that you may be holding. I’ll great deal of experience with US dollar, update the portfolios on a regular basis with non-US dollar and non-US government, actionable advice and details that are critical agency and corporate bonds. Contact Chris for you to lock in big profits. at 800-926-4922 for help with your global Make sure to check in regularly at bond needs. www.yieldletter.com for Market Updates, Another former colleague of mine from through which I’ll update you on bond mar- Mark Twain Bank is Mark Elmore, principle at ket news and information regarding our Tahoe Fixed Income. Mark specializes in US holdings. I’ll also use the Market Update bond with a focus on agencies, pass-throughs section to alert you to breaking news regard- and collateralized mortgage obligations ing portfolio holdings, and you’ll be notified (CMOs). Contact Mark at 775-852-3994. via e-mail when such alerts are posted. My former mentor and bond rabbi at Mark Together we’ll dive head first into the Twain Bank—Bill Stern—is a great source for bond market, explore the various securities helping you with your bond broker needs. available and reap the high potential He’s a principle at Stern Brothers and special- rewards together. izes in mortgages, passthroughs, CMOs, municipal bonds and corporate bonds with a Bond Broker Directory concentration in the US markets. Contact Bill Now that you’ve subscribed and will be at 314-727-5519. receiving my bond advice and recommenda- Another broker who can execute your plays tions, you need a broker who will execute in the housing market is Mark Verbeist. Mark your trades. As part of your subscription to is a former colleague and trader of mine. He’s The Yield Letter, I’m providing you access to a veteran trader in the industry, with expertise some of my closest and long-time friends in on handling mortgage bonds, pass throughs the bond broker industry. and GNMAs. He’s currently a bond trader at First is Martin Truax, from Morgan Keegan. National Alliance Securities. You can reach Martin and I have been long-time friends, and Mark at 877-680-6588. I worked with him at Mark Twain Bank. He’s Furthermore, Fidelity Investments a 30 year-plus veteran to the broker industry (www.fidelity.com) and Charles Schwab and has been in the financial newsletter indus- (www.schwab.com) offer you bond trade ser- try since it started. Contact Martin at 866- vices. Fidelity specializes in government, muni, 813-9911 for your bond brokerage needs. corporate, agency and some foreign bond Next is Chris Gaffney. Chris was my part- issues. Schwab offers on- and offline trading in ner at Mark Twain Bank. He’s now the vice the domestic and international bond markets. president of Evertrade Direct Brokerage. Schwab clients can reach the dedicated trading He’s a veteran to this industry and has a team at 888-621-4355. Disclaimer: The information contained in this premium is current as of 08/10/07. For the most up-to-date advice and pricing, go to www.yieldletter.com or check your latest issue of The Yield Letter.

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