3 Ways 2012 Changed the Investing World Forever

investing lessons2012 has been a very interesting year for the bond market, with many lessons for investors.  Here are the top 3 ways we think the year changed the investing world forever:
  To see a list of high yielding CDs go here.  

1) Guaranteed Positive Returns Disappeared: Retirees and Near Retirees Are Going To Have to Radically Rethink Investing

Real returns measure investment returns after deducting for inflation. Typically, treasuries have provided a real yield of between 1% and 3%. Until 2012 investors could lock in a positive real yield (or at least not a negative one) by buying buying Treasury Inflation Protected Securities (TIPS). TIPS increase in value with inflation, plus have historically provided some positive yield.  Since 2009, the yield on TIPS has been steadily declining.  2012 was the first year that TIPS ( 5 and 10 year maturities) had a negative yield for the entire year.  In the last quarter, the yield was worse than negative half a percent for the 10 year TIPS, and worse than negative one percent for the 5 year. In other words, investors buying TIPS (and implicitly Treasuries) are going to be losing money after inflation.

Conservative investors used to be able to buy treasuries and count on their the nest egg growing. Now investors have to consider riskier options to keep inflation from eating up their savings. Where investors historically could buy “risk-free” treasury bonds, they now have to ask how much risk am I will to take to protect myself from losing money to inflation?

The Exception: The I-Savings Bonds offer no interest, but will keep up in value with inflation. Learn More About I-Bonds


2) Emerging Markets Took Center Stage

On July 11th, Learn Bonds wrote an article on how The PIMCO Total Return ETF (BOND) had made a major investment in Mexican government bonds. In that article, we gave the following reasons for buying Mexican debt:

  • Mexico has a debt to GDP ratio of 45% which is quite low when looked at in comparison to countries like the US (at 100% debt to GDP) and Japan (at 200% debt to GDP).
  • Mexico’s Central Bank is very focused on fighting inflation which is a long-term positive for the currency and its debt. The central bank lending rate has stood at 4.5% for several years.
  • Mexico’s economy continues to show good growth, in the 4 to 5% range.

Following the article, Mexican and emerging market debt in general went into a major rally. The low yields on US government and corporate bonds are driving investors further a field to look for yield. There are number of countries like Brazil and South Korea that have solid economic fundamentals, like Mexico. Having discovered that opportunity, emerging markets are now on everyone’s mind.

The Emerging Market / World Bond Fund We Like: Templeton Global Bond Fund. The following is from LB Ratings review:

Only 40% of the debt the fund holds is denominated in US dollars. However, funds that don’t hold US denominated debt tend to hold Japanese yen or euro debt. Not this fund. Do you want exposure to the Korean won? This fund’s top holding is a Korean issue. How about the Polish zsolty or Hungarian Forint? Got it.

For more on emerging market bonds see our articles 4 Reasons to Buy Emerging Market Bonds and 3 Reasons to Invest in Emerging Markets.


3) The Idea That Treasuries Are The Safest Investment In The World Took A Major Hit

The word safe can have many meanings. In this case, we are talking about being safe from default (non-payment of principal or interest on a timely basis). For generations, it was believed that the US government would always meet its financial obligations. While the United States can meet its debt obligations, there now is a question whether its political situation will prevent it from doing so.  Sharp divides between Republicans and Democrats almost caused a default in 2011. There looks to be a similar situation looming for 2013 when Congress will need to approve raising the country’s debt limit. The market recognized this in 2012 and some AAA rated corporate bonds actually traded at a yield below treasuries because they were considered to have a lower risk of default.

For more read, Are Exxon bonds safer than the US Treasuries?

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