LIVINGSTON: Home loan blues and bonds

Published: Thursday, August 15, 2013 at 16:52 PM.

South Walton being a notable exception, nationwide home sales fell slightly during June due to rising borrowing costs. Perhaps we don’t need GSEs in the home mortgage game but their absence shifts the paradigm. 

What you don’t know about bonds

In the midst of the great July 4th deluge, no one caught the huge bond market decline. On July 5, the 30-year bond lost more than 4 percent or in Dow Jones Industrial Average terms over 600 points. Pundits blame Ben Bernanke but the Federal Reserve directly controls only short term rates. Quantitative Easing, the Federal Reserve’s policy of buying long term bonds, influences but does not directly control longer term rates. Long term rates are set by market forces-buyers and sellers. 

Media outlets publicize the S&P 500 and Dow Jones Industrial Average prices.  Bond market prices conversely gather little press despite the bond market dwarfing the stock market. Stock markets consist solely of corporate stock versus the bond market which includes corporate and government debt.

Conventional wisdom has the interest rates soaring to the stratosphere when the Fed stops Quantitative Easing and increases short term rates. Raising short term rates in 1995 and 2000 led to a decline in long term rates. Don’t abandon fixed income. The worst five-year period for large U.S. stocks saw a negative 17 percent return. The worst five-year period of five-year bonds was positive 1 percent. For short term needs, consider bonds or bond funds. 

Buz Livingston, CFP, has the only investment management and financial planning firm in the entire world headquartered in Blue Mountain Beach. Contact him at 850-267-1068 or www.livingstonfinancial.net.

 



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