10 June 2011
So here I am today, June 2, finishing up this month’s edition of The Entrusted Steward. I locked in my interest rate on May 23rd, at 3.75%, to refinance my home loan. Now I can get a rate of 3.625%, with the same company, but it is too late. I have to go with the 3.75%. Oh well, I am thankful to lower my interest rate from 5% to 3.75%. And interst rates are probably the biggest story of the year.
At the end of 2010, all of the inflationary income earners and pundits were writing up letters about how this was the start of the great bond crash - that interest rates were going to go sky high in 2011 and beyond. On January 25th, I purchased the 20 year government long bond thinking that interest rates would go down. I also lengthened out the duration on my fixed income investing clients, that same day. I remember, several of my clients thought I was crazy.
On February 28th I took on a new client. I bought him the 20 year Treasury on March 1st, for a better price than I had purchased for my other clients back on January 25th. [By March 1st, my clients’ position in the long bond had gone down. In other words, interest rates had gone up from Jan. 25th to March 1st.] Anyway, my new client (as of Feb. 28th) called me the next day on March 2nd and asked me why I had purchased the 20 year Treasury bond. He asked, “Don’t you know that interest rates are going up? I have no confidence in the US government. The US government bond is going to vanish into thin air. Haven’t you been reading ___________? Do you know of any water stocks I can buy?”
I put a blank above because I forgot who this particular client was reading. It was one of the inflationary gurus. I just can’t remember which one. I calmly talked with him and told him that I was just trying to make him money and that it did not mean that I loved what the US government was doing. I only thought that interest rates would go down in the short term. I said that I was happy to sell the position if it bothered him that much. He said, “No, you come highly recommended and I trust your judgment.”
Then interest rates continued to creep up the next week and on March 8th, he couldn’t take it anymore. He called me and said he wanted all of this money back because he and I had different beliefs about where the economy is going and our country’s infrastructure in general. He didn’t have a problem with any of the other positions I had purchased for him, but the fact that I thought interest rates were going to go down, in the short term, really upset him. On March 9th I was forced to sell his 20 year US Government long bond at a loss of 1.41%.
March 8th ended up being the recent bottom for bonds! Since March 9th my clients have seen their 20 year Treasury bond position go up 5.93%. Not only that, but they have also received two (4/7, 5/7) very nice interest payments, since March 9th, in addition to the increase in bond prices.
To start the year, you could have asked just about any average investor in America and they would have told you that interest rates had to go up in 2011. Yet, the 30 Treasury bond’s yield has gone from 4.36% to 4.21%, or a decrease of 3.56%, so far in 2011.
Inflation Update
So far in 2011, we have seen commodities go up 2.7%, which is about average for the last 50 years. Interest rates have gone down and so have home prices. Home prices are a better inflation gauge, in my opinion, than interest rate movements.
The average home price in America is down 33.1% from its peak in July of 2006. The average home, in the USA, cost the same price as it did in April of 2003. So over the past 8 years the average home, in the United States, has appreciated 0%!
Parting Shot
It will be interesting to see if commodities actually finish 2011 up. The movement in commodity prices, in general, is my #1 inflation gauge.
