Stocks have kept investors on edge during the past week as the Dow swings from boom to bust. For consumers, it's a good time to step away from the market mayhem to survey the damage and potential threats to their finances.
One area that is getting short shrift — but shouldn't — is the impact the Standard & Poor's debt downgrade may have on credit card rates.
First, some background. The downgrade on U.S. Treasury bonds that was issued by ratings agency Standard & Poor's — from AAA to AA+ — was widely viewed as a wake-up call to the U.S government and its "drunken sailor" approach to spending (though that might actually be an insult to drunken sailors).
While the Fed says it will keep rates near zero, many economists expect major consumer interest rate categories to eventually rise because of the downgrade, including things like mortgage, auto and student rate loans.
It's no big secret why. Any consumer with a low credit rating knows that he or she is a bigger credit risk to lenders, and thus must pay higher interest rates for creditors to accept that risk and loan the consumer money.
It's the same thing with Standard & Poor's and the U.S. government. A lower credit rating means that global creditors face a higher risk of default when lending money to Uncle Sam. To borrow money — usually through the sale of U.S. Treasuries in the bond market — the U.S. government will have to offer higher rates of return to investors.
But here's an interesting point. Even if Treasury yields do recover and grow again, your credit card's interest rates may not follow the script. Why? Let's look at three reasons:
Credit card rates aren't tied to Treasury rates. Instead, credit card interest rates are tied to the Federal Reserve's prime interest rate, which still remains historically low, and should continue along that path. Federal Reserve chairman Ben Bernanke has made it clear the Fed's rate policy is to keep those rates down, despite what S&P says. That should help keep card rates manageable for consumers.
The CARD Act has a built-in safety net. Government can do something right once in a while. Take the credit card legislation passed in 2009: Inside the CARD Act is a provision that limits how much card issuers can raise rates. The reforms are limited to "current account balances," meaning card companies can still raise rates on new charges, so be careful of new spending going into the last four-and-a-half months of 2011. But any charges you've already made are tied to current rates, which still remain relatively stable. A quick glance at BankingMyWay's credit card rate search tool shows card interest rates stable between 11% and 20%, with the average credit card rate around 14%.
Standard & Poor's doesn't speak for everyone. Right now, S&P is out on its own with its debt downgrade. The other major U.S. credit agencies — Moody's and Fitch ratings — didn't go along. And until, or even if they ever do, don't expect your credit card interest rates to rise significantly.
So call it a cloud with a silver lining. Yes, the stock market is taking a huge hit, but at least your credit card rate isn't.
Source: Yahoo
Thursday, 11 August 2011
What Rock-Bottom Interest Rates Mean for Consumers
n an unprecedented move on Tuesday, the Federal Reserve said definitively that historically-low rates are here to stay until at least mid-2013, essentially eliminating the possibility of a hike in interest rates for the next two years.
While stocks reacted favorably to the news — the Dow soared 429 points — determining the impact of extraordinarily low interest rates for the next two years from a personal finance perspective is a bit more ambiguous.
On the one hand, the Federal Open Market Committee's decision to keep rates low for more than just an "extended period" — as it has previously stated — is an indicator the Fed expects the economy to remain sluggish. That could mean we will see continued high unemployment, low consumer confidence and slow economic growth, all factors that do not give one much impetus to borrow and spend money.
On the other hand, it has never been cheaper to borrow money; if you can qualify for a loan, now (or sometime before mid-2013) is the time to get one. But personal finance experts caution against making any purchasing decisions based on interest rates, warning consumers it's important to keep the bigger picture in perspective.
"I certainly wouldn't be basing my decision to buy a car, a house, or take out a loan because interest rates are going to stay low for a couple of years," said Erik Carter, a certified financial planner with Financial Finesse, a Los Angeles-based financial education firm. "Really, it's about focusing on your goals, focusing on the fundamentals and not being distracted by what the Fed is saying today."
Carter said if it makes sense for you to buy a car, consolidate student-loan debt, or refinance your mortgage, now is as good a time as any with these historic rates, but major spending decisions should be made based upon your current financial picture, not the federal funds rate.
The fact that we know rates will be low for the near future is a positive thing for consumers who are looking to buy a home or refinance, according to Paul Bishop, vice president of research for the National Association of Realtors. He continued to explain that fear of rising mortgage rates is not really the primary concern weighing on borrowers. For most consumers, it's high lending standards, not interest rates, that are holding them back.
"It's really the availability of mortgages at this point that is a problem for consumers," Bishop said. "Underwriting standards are fairly strict and are likely to remain that way for some time."
Still, knowing we will see two more years of low interest rates is not a bad thing for prospective home buyers, who can work to improve their credit without feeling they might miss out on an historic deal. For those with good credit, Bishop reiterates that it is tough to beat flat housing prices and rock-bottom interest rates, if you are considering the purchase a home.
From a retirement perspective, a protracted period of depressed rates means socking money away into the standard high-yield savings account is not going to cut it. Mark Singer, a certified financial planner and author of "The Changing Landscape of Retirement," said most conventional investment strategies can not satisfy most investors' goals anymore.
"Eighty percent of the money invested in 401(k)s is in equities — they're getting crushed, and are moving from one headline to the next," Singer said. "You can't use the traditional stocks, bonds, cash and mutual funds formula anymore, you have to use alternative investment classes." He continued to cite managed futures, long/short funds and market-neutral strategies as better alternatives.
Singer explained that for people nearing retirement that have hit their target retirement "number," or the amount of money they can live comfortably on in retirement, they need to take low-risk strategies to maintain that number against inflation. For those who have not yet reached their retirement goals, Singer advocates carefully evaluating how much risk you need to take in order to reach the target, but warns against putting a lot of money in the market and investing everything in bonds, regardless of where interest rates stand.
The idea of the Fed giving us a more transparent outlook as to how interest rates will look for the next two years may be atypical, but there is nothing stopping the committee from changing its strategy in a few months if the economy were to suddenly stabilize. In light of that, Carter reiterated consumers should not alter their fiscal picture much from what they were already planning on the spending or saving front.
"You have to keep it in perspective — the fundamentals are the same," Carter said. "You're always trying to earn as much interest as possible and pay as little interest as possible."
In other words, act in your own best interest, regardless of interest rate levels.
Source: Yahoo
| More from FoxBusiness.com: • For Interest Rates, S&P Downgrade No Big Deal -- Yet • Six Tips to Jump Start Your Rainy Day Fund • Five Retirement Mistakes Boomers Should Avoid |
On the one hand, the Federal Open Market Committee's decision to keep rates low for more than just an "extended period" — as it has previously stated — is an indicator the Fed expects the economy to remain sluggish. That could mean we will see continued high unemployment, low consumer confidence and slow economic growth, all factors that do not give one much impetus to borrow and spend money.
On the other hand, it has never been cheaper to borrow money; if you can qualify for a loan, now (or sometime before mid-2013) is the time to get one. But personal finance experts caution against making any purchasing decisions based on interest rates, warning consumers it's important to keep the bigger picture in perspective.
"I certainly wouldn't be basing my decision to buy a car, a house, or take out a loan because interest rates are going to stay low for a couple of years," said Erik Carter, a certified financial planner with Financial Finesse, a Los Angeles-based financial education firm. "Really, it's about focusing on your goals, focusing on the fundamentals and not being distracted by what the Fed is saying today."
Carter said if it makes sense for you to buy a car, consolidate student-loan debt, or refinance your mortgage, now is as good a time as any with these historic rates, but major spending decisions should be made based upon your current financial picture, not the federal funds rate.
The fact that we know rates will be low for the near future is a positive thing for consumers who are looking to buy a home or refinance, according to Paul Bishop, vice president of research for the National Association of Realtors. He continued to explain that fear of rising mortgage rates is not really the primary concern weighing on borrowers. For most consumers, it's high lending standards, not interest rates, that are holding them back.
"It's really the availability of mortgages at this point that is a problem for consumers," Bishop said. "Underwriting standards are fairly strict and are likely to remain that way for some time."
Still, knowing we will see two more years of low interest rates is not a bad thing for prospective home buyers, who can work to improve their credit without feeling they might miss out on an historic deal. For those with good credit, Bishop reiterates that it is tough to beat flat housing prices and rock-bottom interest rates, if you are considering the purchase a home.
From a retirement perspective, a protracted period of depressed rates means socking money away into the standard high-yield savings account is not going to cut it. Mark Singer, a certified financial planner and author of "The Changing Landscape of Retirement," said most conventional investment strategies can not satisfy most investors' goals anymore.
"Eighty percent of the money invested in 401(k)s is in equities — they're getting crushed, and are moving from one headline to the next," Singer said. "You can't use the traditional stocks, bonds, cash and mutual funds formula anymore, you have to use alternative investment classes." He continued to cite managed futures, long/short funds and market-neutral strategies as better alternatives.
Singer explained that for people nearing retirement that have hit their target retirement "number," or the amount of money they can live comfortably on in retirement, they need to take low-risk strategies to maintain that number against inflation. For those who have not yet reached their retirement goals, Singer advocates carefully evaluating how much risk you need to take in order to reach the target, but warns against putting a lot of money in the market and investing everything in bonds, regardless of where interest rates stand.
The idea of the Fed giving us a more transparent outlook as to how interest rates will look for the next two years may be atypical, but there is nothing stopping the committee from changing its strategy in a few months if the economy were to suddenly stabilize. In light of that, Carter reiterated consumers should not alter their fiscal picture much from what they were already planning on the spending or saving front.
"You have to keep it in perspective — the fundamentals are the same," Carter said. "You're always trying to earn as much interest as possible and pay as little interest as possible."
In other words, act in your own best interest, regardless of interest rate levels.
Source: Yahoo
Entrepreneurship: Nothing to Lose and Everything to Gain
by Dan Schawbel, contributor
I recently caught up with Ryan Blair, who is a serial entrepreneur and author of the new book "Nothing to Lose, Everything to Gain." Ryan established his first company, 24-7 Tech when he was only twenty-one years old. Since then, he has created and actively invested in multiple start-ups and has become a self-made multimillionaire. After he sold his company ViSalus Sciences to Blyth in early 2008, the global recession took the company to the brink of failure resulting in a complete write off of the stock and near bankruptcy. Ryan as CEO went "all in" betting his last million dollars on its potential and turned the company around from the edge of failure to more than $150,000,000 a year in revenue in only 16 months winning the coveted DSN Global Turn Around Award in 2010. In this interview, Ryan talks about how he re-branded himself after being in a gang, the issues with the education system, and more.
How did you shake your criminal record and re-brand yourself?
I remember when I was working my way up in the first company that employed me, I used to have nightmares that one day they'd find out about that I had been in a gang, call me into the office, and fire me. In the beginning I didn't talk much about what I'd been through. But eventually when I got to a point where I had established myself as a professional entrepreneur, I embraced my past, used it as part of my branding, and crossed over.
In this day and age people want authenticity. Now that the world is social, people know all about you. Assuming you decided to join humanity, that is. It turned out that as I started showing my true identity, so did the rest of the world. One of the reasons my company ViSalus is one of the fastest growing companies in the industry today is because we share our good, bad, and ugly. Like sharing a video of me playing a practical joke on one of my employees, for instance. As a result of embracing authenticity, I turned the company around from near bankruptcy to over $15 million a month today. Unlike our competitors, our distributors and customers know exactly who we are, and I'd say that corporate America has a lot of catching up to do.
What's your take on the educational system? Will a college degree help or hurt your chances at starting a successful business?
As a product of Los Angeles's public school system, in a state with the highest dropout rate in the nation (about 20 percent), I can tell you from personal experience that some of our brightest minds are being misidentified because of a one-size-fits-all learning environment. Because I had ADD and dyslexia I never got past the 9th grade.
I recall sitting with a career counselor in continuation high school, being told that I didn't have the intellect or aptitude to become a doctor or a lawyer. They suggested a trade school, construction, something where I'd be working with my hands.
The irony is that today I employ plenty of doctors and lawyers. Would you rather be a doctor or a lawyer, or a guy who writes a check to doctors and lawyers?
If President Obama phoned me today and told me he was appointing me Educational Czar, I'd turn education into a business, a capitalistic, revenue driven system, creating a competitive environment where each school is trying to attract customers, based on quality of customer experience.
As an entrepreneur, having a college degree or getting classroom training won't hurt your chances for starting a successful business, but it's ultimately not necessary. In Malcolm Gladwell's book "Outliers," he makes a point that it takes approximately 10,000 hours to master a skill set at a professional level. That means experience, over traditional education.
What three business lessons did you learn from juvenile detention?
I learned a lot about business and life from my time spent incarcerated. I like to call these pieces of wisdom my Philosophies from the Jail Cell to the Boardroom. One of the biggest lessons I learned was that in Juvenile Hall, new guys always get tested. When I went in the first time, I was just a skinny little white kid and I had to learn fast. People will be bumping into you on the basketball court, or asking you for things, testing to see if you're tough.
And everyone knew that if a guy let someone take their milk during lunchtime, they weren't as tough as they looked. Soon you'd be taking their milk everyday, and so would everyone else. It's the same for business, if you give people the impression that you can be taken, you will be.
Also, adaptation is the key to survival. In jail the guy who rises to power isn't always the strongest or the smartest. As prisoners come and go, he's the one that adapts to the changing environment, while influencing the right people. You can use this in business, staying abreast of market trends, changing your game plan as technology shifts, and adapting our strategy around your company's strongest competitive advantages. Darwin was absolutely right — survival is a matter of how you respond to change.
The last lesson I got from jail is that you have to learn how to read people. You don't know who to trust. It's the same for business because a lot of people come into my office with a front. I have to figure out quickly who is the real deal and who isn't. Based on that fact, I developed an HR system that I use when interviewing potential new hires that I call the Connect Four Technique. Yep, you guessed it. I make my future employees — and I have hundreds of them — play me in Connect Four.
Can everyone be an entrepreneur? Can it be learned or do you have to be born with a special gene?
No. Not everyone can be an entrepreneur. There are two types of people in the world, domesticated and undomesticated. Some people are so domesticated through their social programming and belief system, so employee minded, that they could never be entrepreneurs. And they shouldn't even bother trying. The irony is that this is coming from a guy who teaches millions of people how to become entrepreneurs. I'm literally selling a book about becoming an entrepreneur, telling you that not everyone should read it.
To be an entrepreneur, you have to have fighting instincts. Are instincts genetic? I don't think so, but you 'inherit' them from your upbringing. Now, if you're smart you can reprogram your beliefs. But there are still some people that would rather watch other people be entrepreneurs, like the people in the Forbes "richest celebrity list" than take the time to reprogram themselves, and live their lives like rock stars, too.
Is there a need for business plans these days?
When you've really got the entrepreneurial bug, the last thing you want to do is sit down and write a business plan. It's the equivalent of writing a book about playing the guitar before actually knowing how to play the guitar. You don't know what your new business is going to be like. And just like a guitar, a business will have to be tweaked and tuned multiple times, and you'll need long practice sessions and repetition, before you can get even one successful song out of it.
In my book "Nothing to Lose, Everything to Gain," I actually included a chapter called "I Hate Business Plans" where I talk about this. Most business plans that get sent to me, I close within seconds of opening them up because they are full of fluff and hype. A business plan should be simple, something you could scribble on a scratch pad. No more than three pages of your business objectives, expected results, and the strategy to get there. But the best business plan is one built from a business that is already up and running and that matches the business's actual results.
The point is that you should be so obsessed with your business that you can't sleep at night because that's all you can think about. And that's your ultimate "business plan."
Dan Schawbel is the Managing Partner of Millennial Branding, LLC, a full-service personal branding agency, and author of "Me 2.0: 4 Steps to Building Your Future."
More from Forbes.com:
Source: Yahoo
I recently caught up with Ryan Blair, who is a serial entrepreneur and author of the new book "Nothing to Lose, Everything to Gain." Ryan established his first company, 24-7 Tech when he was only twenty-one years old. Since then, he has created and actively invested in multiple start-ups and has become a self-made multimillionaire. After he sold his company ViSalus Sciences to Blyth in early 2008, the global recession took the company to the brink of failure resulting in a complete write off of the stock and near bankruptcy. Ryan as CEO went "all in" betting his last million dollars on its potential and turned the company around from the edge of failure to more than $150,000,000 a year in revenue in only 16 months winning the coveted DSN Global Turn Around Award in 2010. In this interview, Ryan talks about how he re-branded himself after being in a gang, the issues with the education system, and more.
How did you shake your criminal record and re-brand yourself?
I remember when I was working my way up in the first company that employed me, I used to have nightmares that one day they'd find out about that I had been in a gang, call me into the office, and fire me. In the beginning I didn't talk much about what I'd been through. But eventually when I got to a point where I had established myself as a professional entrepreneur, I embraced my past, used it as part of my branding, and crossed over.
Ryan Blair
What's your take on the educational system? Will a college degree help or hurt your chances at starting a successful business?
As a product of Los Angeles's public school system, in a state with the highest dropout rate in the nation (about 20 percent), I can tell you from personal experience that some of our brightest minds are being misidentified because of a one-size-fits-all learning environment. Because I had ADD and dyslexia I never got past the 9th grade.
I recall sitting with a career counselor in continuation high school, being told that I didn't have the intellect or aptitude to become a doctor or a lawyer. They suggested a trade school, construction, something where I'd be working with my hands.
The irony is that today I employ plenty of doctors and lawyers. Would you rather be a doctor or a lawyer, or a guy who writes a check to doctors and lawyers?
If President Obama phoned me today and told me he was appointing me Educational Czar, I'd turn education into a business, a capitalistic, revenue driven system, creating a competitive environment where each school is trying to attract customers, based on quality of customer experience.
As an entrepreneur, having a college degree or getting classroom training won't hurt your chances for starting a successful business, but it's ultimately not necessary. In Malcolm Gladwell's book "Outliers," he makes a point that it takes approximately 10,000 hours to master a skill set at a professional level. That means experience, over traditional education.
What three business lessons did you learn from juvenile detention?
I learned a lot about business and life from my time spent incarcerated. I like to call these pieces of wisdom my Philosophies from the Jail Cell to the Boardroom. One of the biggest lessons I learned was that in Juvenile Hall, new guys always get tested. When I went in the first time, I was just a skinny little white kid and I had to learn fast. People will be bumping into you on the basketball court, or asking you for things, testing to see if you're tough.
And everyone knew that if a guy let someone take their milk during lunchtime, they weren't as tough as they looked. Soon you'd be taking their milk everyday, and so would everyone else. It's the same for business, if you give people the impression that you can be taken, you will be.
Also, adaptation is the key to survival. In jail the guy who rises to power isn't always the strongest or the smartest. As prisoners come and go, he's the one that adapts to the changing environment, while influencing the right people. You can use this in business, staying abreast of market trends, changing your game plan as technology shifts, and adapting our strategy around your company's strongest competitive advantages. Darwin was absolutely right — survival is a matter of how you respond to change.
The last lesson I got from jail is that you have to learn how to read people. You don't know who to trust. It's the same for business because a lot of people come into my office with a front. I have to figure out quickly who is the real deal and who isn't. Based on that fact, I developed an HR system that I use when interviewing potential new hires that I call the Connect Four Technique. Yep, you guessed it. I make my future employees — and I have hundreds of them — play me in Connect Four.
Can everyone be an entrepreneur? Can it be learned or do you have to be born with a special gene?
No. Not everyone can be an entrepreneur. There are two types of people in the world, domesticated and undomesticated. Some people are so domesticated through their social programming and belief system, so employee minded, that they could never be entrepreneurs. And they shouldn't even bother trying. The irony is that this is coming from a guy who teaches millions of people how to become entrepreneurs. I'm literally selling a book about becoming an entrepreneur, telling you that not everyone should read it.
To be an entrepreneur, you have to have fighting instincts. Are instincts genetic? I don't think so, but you 'inherit' them from your upbringing. Now, if you're smart you can reprogram your beliefs. But there are still some people that would rather watch other people be entrepreneurs, like the people in the Forbes "richest celebrity list" than take the time to reprogram themselves, and live their lives like rock stars, too.
Is there a need for business plans these days?
When you've really got the entrepreneurial bug, the last thing you want to do is sit down and write a business plan. It's the equivalent of writing a book about playing the guitar before actually knowing how to play the guitar. You don't know what your new business is going to be like. And just like a guitar, a business will have to be tweaked and tuned multiple times, and you'll need long practice sessions and repetition, before you can get even one successful song out of it.
In my book "Nothing to Lose, Everything to Gain," I actually included a chapter called "I Hate Business Plans" where I talk about this. Most business plans that get sent to me, I close within seconds of opening them up because they are full of fluff and hype. A business plan should be simple, something you could scribble on a scratch pad. No more than three pages of your business objectives, expected results, and the strategy to get there. But the best business plan is one built from a business that is already up and running and that matches the business's actual results.
The point is that you should be so obsessed with your business that you can't sleep at night because that's all you can think about. And that's your ultimate "business plan."
Dan Schawbel is the Managing Partner of Millennial Branding, LLC, a full-service personal branding agency, and author of "Me 2.0: 4 Steps to Building Your Future."
More from Forbes.com:
Source: Yahoo
What the Downgrade Means for U.S. Treasurys
In market turmoil like we've seen in the past weeks, investors frequently adhere to a simply playbook: sell risky assets and buy investments deemed to be safer. Typically that leads investors to dump stocks and put money into safe havens like cash, gold or government bonds. After all, stocks can fluctuate wildly, and individual stocks can ultimately go to zero. (Lehman Brothers stockholders were wiped out entirely when the crisis hit in the fall of 2008.) Bonds, by contrast, offer regular, fixed interest payments and a guarantee to return the principal. U.S. government bonds had always been the ultimate safe haven, as they come with the backing of the full faith and credit of the world's largest and most powerful economy.
But Standard & Poors' decision to downgrade America's debt rating last Friday from AAA to AA+ may cause investors to think twice. So it's worth considering what the downgrade and the recent, somewhat counterintuitive action in the bond market mean for investors seeking safety.
What do Treasury bonds pay now? Very little. To see what different government bonds yield, check out the data at the Treasury Department's website. As of yesterday, government bonds maturing in one month pay an annual interest rate of .02 percent; five-year bonds pay an annual interest rate of .93 percent, while 10-year bonds pay 2.17 percent. These are extraordinarily low returns. But they still pay a smidgen more than a typical bank savings account. Bank certificates of deposit that are federally insured (check out Bankrate.com for rates) of similar duration generally pay slightly lower interest rates than government bonds. But in this climate, it may be possible to find some that pay a bit more. In general, it's best to remember the basic rule on all fixed-income instruments: greater safety and a shorter term generally translate into lower interest rates.
Does the S&P downgrade mean that it is now riskier to buy U.S. government bonds, or bonds of states and cities? In theory, yes. Or at least that's what S&P was implying. Ratings are supposed to be indicators on the relative confidence the agency has that investors will be paid back. But there's a wrinkle here. The two other main credit rating agencies, Moody's and Fitch, have maintained their high U.S. government rating. In addition, the federal government differs from, say, a company whose debt S&P might rate. It has the power to print money and to raise taxes, and has plenty of revenues and resources it can use to make good on its interest payments. Even after the downgrade, nobody really believes the U.S. is less likely to keep current on its debt than it was a few weeks ago.
What's more, the market generally seems to have shrugged off S&P's warning. In the past several days, rather than rising —- as one would expect interest rates of a downgraded entity to do —- the interest on U.S. government bonds has fallen rapidly. In other words, investors seem to have responded to the downgrade by expressing more confidence in the asset. It's as if a restaurant received a negative rating on its cleanliness, and the next day people lined up around the corner.
So if buy government bonds today, I'll be getting a lower rate than before the downgrade? Yes. And that's one of the ironies of this situation. This shows that ratings are only one of many factors that impact prices and interest rates. Given S&P's less-than-stellar reputation, and the unique role that the U.S. government occupies in the credit markets, a simple rating change alone wouldn't be expected to have a huge impact. We have to consider the other factors that have been influencing bond prices in recent weeks.
There's a global flight to safety. Even downgraded, the U.S. remains a comparative bastion of stability in an uncertain world. Government bond markets are huge, and highly liquid, meaning it is easy to get in and out of them quickly. The U.S. government has always paid its debt. The dollar, while generally weak, is not the sort of currency that crashes 10 percent overnight. And so whenever something bad happens in the world —- an earthquake in Japan, instability in London, problems with European debt, uprisings in Arab countries —- investors around the world rush to buy U.S. government bonds. That pushes prices up and interest rates down. That's what has been happening in the past couple of weeks.
But it's not just about what is happening in the rest of the world. Aren't bond prices influenced by trends in the U.S. economy? Yes. Inflation —- and the fear of inflation —- tend to push interest rates up, while concerns about growth tend to push them down. These factors have been helping to keep interest rates on government debt low in the aftermath of the downgrade. The brinksmanship and uncertainty sown by the debt ceiling debacle, the promise of large budget cuts to come, and general concerns about economic malaise have pushed economists and investors to ratchet down their expectations for growth in the U.S. in recent weeks. What's more, with the continuing fall in energy prices —- a function of concern about a global growth slowdown —- inflation fears have ebbed. These three forces are powerful factors that help push U.S. government interest rates down.
How will interest rates be affected by the Federal Reserve's plan to keep interest rates low? The nation's central bank is yet another wild card influencing rates. In recent years, the Federal Reserve has been enormously influential in helping to dictate the prices of bonds. It controls short-term interest rates by buying and selling very short-term securities. At other times, it can do the same with longer-term debt. As part of its first round of quantitative easing, for example, the Fed bought $1 trillion in long-dated mortgage-backed securities. In June, it finished its second round of quantitative easing, conjuring up money to buy $600 billion in U.S. government bonds, focusing on those that mature in five to seven years. The transparent point of this was to push interest rates down. So the Fed can be a very influential player in certain parts of the bond market. The Fed announced on Tuesday that it is planning to keep very short-term interest rates at their current low level through mid 2013. But it did not signal that it plans to embark upon other efforts to buy large quantities of longer-dated debt.
What's the best way to buy bonds? This is ultimately a matter of preference. The U.S. has created a vast amount of debt in recent years, which means investors have plenty of instruments to choose from, ranging from one-month out to 30 years. The Treasury Departments afford individuals the opportunity to buy bonds directly from the government through its Treasury Direct site. Online brokerage firms permit individuals to buy and trade bonds, just as they do with stocks. For customers not interested in simply buying and holding onto bonds until they mature, mutual fund companies like Pimco offer actively managed bonds funds. Investment companies have also rolled out a host of U.S. bond exchange traded funds.
Daniel Gross is economics editor at Yahoo! Finance.
Email him at grossdaniel11@yahoo.com; follow him on Twitter @grossdm.
Source: Yahoo
But Standard & Poors' decision to downgrade America's debt rating last Friday from AAA to AA+ may cause investors to think twice. So it's worth considering what the downgrade and the recent, somewhat counterintuitive action in the bond market mean for investors seeking safety.
What do Treasury bonds pay now? Very little. To see what different government bonds yield, check out the data at the Treasury Department's website. As of yesterday, government bonds maturing in one month pay an annual interest rate of .02 percent; five-year bonds pay an annual interest rate of .93 percent, while 10-year bonds pay 2.17 percent. These are extraordinarily low returns. But they still pay a smidgen more than a typical bank savings account. Bank certificates of deposit that are federally insured (check out Bankrate.com for rates) of similar duration generally pay slightly lower interest rates than government bonds. But in this climate, it may be possible to find some that pay a bit more. In general, it's best to remember the basic rule on all fixed-income instruments: greater safety and a shorter term generally translate into lower interest rates.
Does the S&P downgrade mean that it is now riskier to buy U.S. government bonds, or bonds of states and cities? In theory, yes. Or at least that's what S&P was implying. Ratings are supposed to be indicators on the relative confidence the agency has that investors will be paid back. But there's a wrinkle here. The two other main credit rating agencies, Moody's and Fitch, have maintained their high U.S. government rating. In addition, the federal government differs from, say, a company whose debt S&P might rate. It has the power to print money and to raise taxes, and has plenty of revenues and resources it can use to make good on its interest payments. Even after the downgrade, nobody really believes the U.S. is less likely to keep current on its debt than it was a few weeks ago.
What's more, the market generally seems to have shrugged off S&P's warning. In the past several days, rather than rising —- as one would expect interest rates of a downgraded entity to do —- the interest on U.S. government bonds has fallen rapidly. In other words, investors seem to have responded to the downgrade by expressing more confidence in the asset. It's as if a restaurant received a negative rating on its cleanliness, and the next day people lined up around the corner.
So if buy government bonds today, I'll be getting a lower rate than before the downgrade? Yes. And that's one of the ironies of this situation. This shows that ratings are only one of many factors that impact prices and interest rates. Given S&P's less-than-stellar reputation, and the unique role that the U.S. government occupies in the credit markets, a simple rating change alone wouldn't be expected to have a huge impact. We have to consider the other factors that have been influencing bond prices in recent weeks.
There's a global flight to safety. Even downgraded, the U.S. remains a comparative bastion of stability in an uncertain world. Government bond markets are huge, and highly liquid, meaning it is easy to get in and out of them quickly. The U.S. government has always paid its debt. The dollar, while generally weak, is not the sort of currency that crashes 10 percent overnight. And so whenever something bad happens in the world —- an earthquake in Japan, instability in London, problems with European debt, uprisings in Arab countries —- investors around the world rush to buy U.S. government bonds. That pushes prices up and interest rates down. That's what has been happening in the past couple of weeks.
But it's not just about what is happening in the rest of the world. Aren't bond prices influenced by trends in the U.S. economy? Yes. Inflation —- and the fear of inflation —- tend to push interest rates up, while concerns about growth tend to push them down. These factors have been helping to keep interest rates on government debt low in the aftermath of the downgrade. The brinksmanship and uncertainty sown by the debt ceiling debacle, the promise of large budget cuts to come, and general concerns about economic malaise have pushed economists and investors to ratchet down their expectations for growth in the U.S. in recent weeks. What's more, with the continuing fall in energy prices —- a function of concern about a global growth slowdown —- inflation fears have ebbed. These three forces are powerful factors that help push U.S. government interest rates down.
How will interest rates be affected by the Federal Reserve's plan to keep interest rates low? The nation's central bank is yet another wild card influencing rates. In recent years, the Federal Reserve has been enormously influential in helping to dictate the prices of bonds. It controls short-term interest rates by buying and selling very short-term securities. At other times, it can do the same with longer-term debt. As part of its first round of quantitative easing, for example, the Fed bought $1 trillion in long-dated mortgage-backed securities. In June, it finished its second round of quantitative easing, conjuring up money to buy $600 billion in U.S. government bonds, focusing on those that mature in five to seven years. The transparent point of this was to push interest rates down. So the Fed can be a very influential player in certain parts of the bond market. The Fed announced on Tuesday that it is planning to keep very short-term interest rates at their current low level through mid 2013. But it did not signal that it plans to embark upon other efforts to buy large quantities of longer-dated debt.
What's the best way to buy bonds? This is ultimately a matter of preference. The U.S. has created a vast amount of debt in recent years, which means investors have plenty of instruments to choose from, ranging from one-month out to 30 years. The Treasury Departments afford individuals the opportunity to buy bonds directly from the government through its Treasury Direct site. Online brokerage firms permit individuals to buy and trade bonds, just as they do with stocks. For customers not interested in simply buying and holding onto bonds until they mature, mutual fund companies like Pimco offer actively managed bonds funds. Investment companies have also rolled out a host of U.S. bond exchange traded funds.
Daniel Gross is economics editor at Yahoo! Finance.
Email him at grossdaniel11@yahoo.com; follow him on Twitter @grossdm.
Source: Yahoo
London riots cast pall over Olympics
The wave of riots and public disorder sweeping the United Kingdom has prompted Olympic organizing chiefs to seek increased security measures ahead of next summer’s London Games.
Following the fatal shooting by police of a man in the North London suburb of Tottenham last Thursday, a surge of criminality has spread to the rest of the capital and other major cities, with shops being looted, cars burned, people beaten and houses ransacked.
The shocking scenes have caused a drastic rethink on Olympic policing, with a source revealing to Yahoo! Sports that officials from Games organizing committee LOCOG will meet with police bosses once the current carnage dies down.
Original plans that would have seen around 9,000 police officers on the streets of London during the Olympics may be scrapped, and figures closer to the 16,000 brought in under this week’s emergency measures are now likely.Olympic planning had previously run smoothly and on budget, yet the spread of violence to the London borough of Hackney, just a brick’s throw from the central hub of the Games, has led to concern and uncertainty less than 12 months from the lighting of the flame.
London has never witnessed anarchic scenes of this kind at any time in its recent history, with the most worrying aspect being the way the discord spread so rapidly and brutally. Just a few months on from the joyous celebrations which marked the Royal Wedding of Prince William and his new bride the Duchess of Cambridge, the historic grace of one of the world’s proudest cities has been shattered in front of the very eyes of its citizens.
Horrific tales that point to a true breakdown in society have been regaled: passers-by ordered to strip naked while having their clothing stolen by muggers, the victim of a beating being robbed by tormentors who he believed were helping him to his feet. After Prime Minister David Cameron returned early from an Italian vacation to order police onto the streets, details emerged which showed that a school worker, a postman and an 11-year-boy were among those arrested for looting.
Normally, sports may be the furthest thing from most minds at times like this. However, it is the way they have been affected in this sports-obsessed nation that has truly brought home the extent of the crisis.
The England soccer team saw its international fixture against the Netherlands at Wembley Stadium on Wednesday canceled as a direct result of the riots, while the squad issued a mass appeal for calm. With the English Premier League season due to commence on Saturday, there is a huge cloud of uncertainty hanging over the opening weekend’s games. Three EPL matches are scheduled for London, with capital-based clubs Tottenham, Fulham and Queens Park Rangers (QPR) all due to play at home.
Talks with police will continue and a decision on most matches is expected on Thursday. “We are in ongoing discussions with our London-based clubs [and] the Metropolitan Police … in regard to the coming weekend’s fixtures,” said a joint statement of the EPL and the Football League, which governs the three divisions below it.
Tottenham’s White Hart Lane stadium is less than a mile from where the initial rioting began on Saturday, two days after local man Mark Duggan was shot and killed, and its box office was damaged in the ensuing fracas. Of all EPL games, it is Tottenham’s clash with Everton which is the most likely to be called off, with even the team’s own players urging a postponement.
“It would be preferable to postpone the match for the sake of fans’ safety,” said Tottenham defender Younes Kaboul.
“The chaos present there is unbelievable,” added midfielder Rafael Van der Vaart.
Following a night of riots, a sign hangs at Wembley Stadium stating the England vs. Netherlands game has been called off.
(Getty Images)
(Getty Images)
“It would send a terrible message to the rest of the world,” said Ecclestone. “You imagine if this happened when the Olympic Games started. It would be terrible.”
Several leading English sports figures have spoken up and urged for normality to be restored. Midfielder Steven Gerrard issued a statement pleading for no violence in his home city of Liverpool, which has fought hard to rise above social problems in recent years.
“What’s all this in aid of?” England soccer captain Rio Ferdinand wrote on Twitter, while suggesting that bringing in the army could be a way of controlling the violence. “Innocent people’s homes and livelihoods have gone up in smoke. Why?”
Trouble also flared up in other major cities, although England’s cricket international against India in Birmingham was allowed to take place.
Greater caution has been necessary in London though, some of it with an inherently Olympic theme. A pre-Games beach volleyball tournament at the iconic Horse Guards Parade was concluded early so that fans could get home more safely. There is also a pre-Olympic cycling race scheduled to take place around the streets of London this weekend, which looks almost certain to be called off.
The IOC has reinforced its faith in the British police authorities but there is no doubt that LOCOG will want to act quickly to give further reassurances.
However, the tricky part might be in striking a balance between the need for a strong security presence while averting overt and obtrusive measures when the world comes to visit. If, indeed, they do come to visit.
As world marathon record holder Paula Radcliffe told the Daily Mail: “In less than a year we welcome the world, and right now they don’t want to come.”
Source: Yahoo
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