Why Are Bond Yields So Low - Part 2

Why are Bond Yields So Low – Part 2

For those that read last week's post on bonds regarding why bond yields are at current low levels, this week's post should provide you with the answer. The background was that 10 year Treasury Notes are currently yielding around 2.3%, down from 5% pre GFC, and some think that there's still a possibility of re-testing lows at 1.67%. The bond yield is made up of two main components, the default risk of the bond issuer and future risk free rate expectations, and these broken down below.
 

Why are Bond Yields Low? - Part 1

Bond Yields

Before considering whether bond yields are high are low, it is important to understand what the bond yield reflects. A brief overview can be found in this previous post , but in summary they reflect the annual return that you should expect to receive (assuming the issuer default) from now until they mature. This is comprised of coupon payment made to the buyer of the bond (often semi annual), and any capital gain/loss that may occur as the bond moves towards its maturity value (e.g. $1000, 100,1000). A bond can therefore have the same yield by either paying a small coupon, and currently trading well below its maturity value (large capital gain from now until maturity) or by having a high coupon payment, and a small capital gain component.

Trading Bonds

How to trade bonds

One of the keys to trading and investing profitably is the ability to trade bonds when stocks aren’t performing well, and vice versa. Trading bonds is no different from trading stocks – the same rules of technical analysis still apply, and the same catalysts move bond prices as well. When the government reduces interest rates over a period of time, stocks often rise (as they are cheaper to buy, though the reason interest rates are being reduced may have a negative impact on their prices), the local currency falls in value and the price of local bonds rises. The important part is to understand what exactly you are trading, and how it is affected by the economic news around you. 

Stockpicking Part 2 - Bottom Up

Stock Market - Bottom Up Analysis

When it comes to stockpicking – choosing which stocks to invest in and trade – there are many different techniques which have proved successful in the stock market. The most important thing is to consider as many as possible, and find the ones which work best for you. Last week’s post about top down analysis described a top down approach; finding a broad area of the economy you think will perform well and then finding the best stock in that sector. This is useful for those with big picture views that are often unsure how to create a trading strategy or trading model based on them, but it doesn’t work for everyone.

Stockpicking Part 1 - Top Down

Starting Stockpicking

Choosing your first stocks to trade or invest in can be a daunting task. Why should your stock be the best one? What about the thousands of people out there who will inevitably disagree with you? Generally speaking, 50% of investors will make money, and 50% will lose money. There is always a small portion of the market that invests on a whim, without reliable information and without an exit plan, and usually fall within that losing 50%. Your aim is to not fall into their habits and claw your way into the successful 50%, and the surest way to do that is through hard work and thorough analysis.

Free Broker Research

Broker Research

Free broker research can be immensely useful for both trading beginners and those who are more experienced in the markets but are looking for different strategies in order to improve their returns. The stock research can often be obtained through brokers who own the research, for example Comsec in Australia, and since it costs nothing, there are only rewards to be reaped for you. The stock research often contains details the company, what the future catalysts for price movements are, what their target price is and whether they recommend buying or selling the company in the short, medium or long term. Whilst this is great, there are a few significant drawbacks that you should be wary of.

Trading Online Simplified - Part 3

Trading at its Simplest

This is the last of the three part series seeking to clarify and simplify some language used in trading and investing that can leave beginners confused. All good trading blogs should seek to enhance the reader’s learning, and hopefully this one is no different. If you have any questions about the topics, or any topics for that matter, do leave a comment and I’ll get back to you when I can.