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Archive for the ‘Government Bonds’ Category

Who requires businesses to have bonds?

90% of businesses that need surety bonds are to satisfy a government regulation. In many cases bonds are needed to obtain a license or to perform a service for the government.

Why are bonds needed?

Bonds can be required for a variety of reasons. If the principal is performing services for the government the bond protects the tax payer’s investment. This extra step also helps the consumer by eliminating fly by night companies and provides an easier means of financial recourse.

Not all bonds just protect the obligee there are bonds that can protect the bonded business too. Fidelity bonds protect the employer from left by the employee.

What is the difference between surety bonds and insurance?

Insurance policies protect the business that is insured from slip and falls to fires. Insurance policies have a deductible bonds do not. With Surety bonds you cannot pick and choose the coverage you want with insurance you can.

Bonds are more of a reverse insurance policy. Surety bonds protect the obligee, not the business. The obligee can be the state, federal government or it can be a private obligee such as a bank or another business. If a bond claim arises the damaged party evolved can obtain financial compensation up to the stated bond amount unless specified in the bond form.

Without Surety bonds required by the government fraud would be more prevalent and the consumer would be out millions of more dollars every year.

Stimulus funds and surety bonds

The government has set aside a vast amount of stimulus funds for infrastructure projects. In order to be awarded stimulus funds a contractor must first bid on the project if there are the lowest bidder the contractor will be awarded the project.

Before the construction company can start the project the contractor will have to carrier a performance bond. A performance bond is different than a simple license and permit bond. These bonds are required to protect the tax payer’s money that is funding the project. Without the performance bond if the contractor defaulted on the project the tax payer would lose their investment.

In essence, the investor of a US savings bond is loaning the US government his money since it is a treasury security. In keeping with the times, savings bonds are issued both in paper and as electronic bonds.

Pros and Cons

An advantage of savings bonds is that the interest accrued on them need not be reported to the federal government for taxation purposes unless and until they are cashed.

One often hears about the bond markets being the basis of interest rates going up or down, but few really understand what that means. In this article, we take a look at the basic processes involved.

When we talk about bonds, we are not talking about a certain British spy with a licensed to kill. Sadly, they aren’t even remotely as exciting. Instead, a bond is a certificate of debt issued by a government to raise money. In issuing the bond, the government promises to pay back the indicated amount on a certain date at a certain interest rate. It should be noted that corporations can also issue bonds, but we’ll stick with government offerings for the purpose of this article.

The term of a bond can range wildly. There are short term bonds that mature [are paid by the government] in a few months and long term bonds that don’t pay off for as long as 30 years. You can hold these bonds or you can actually trade them in bond markets that work on an auction basis somewhat similar to the stock market.

Buying bonds can be a bit confusing. Most short term government bonds are bought at a discount to the face value at the maturity date. What does this mean in practical terms? It means that you pay less money now for a bigger payoff later. Let’s say you want to buy a $1,000 bond that has a maturity date in one year. You would buy it for a discount set by the market, say $975. The government would then pay you $1,000 in one year.

Longer term bonds are set based by an auction. You can see how this works given the financial strife in Europe. Greece has a lot of debt that many bond investors feel impact its ability to pay its obligations. The only way investors will buy the bonds is if they get a better rate of return. Given this, Greece must pay a higher interest rate on its bonds to facilitate its debt.

Why would someone invest in government bonds? Notwithstanding the problems in Greece, bonds of this type are generally considered very safe. While a company like General Motors might fail, the going belief is a government is very unlikely to have such a problem. This notion is now under attack somewhat given the massive debt levels of countries like Greece, Italy, Spain, United Kingdom, Portugal and, yes, the United States.

The savings bonds issued by the federal government are probably the safest investments ever. After all, you will earn interest and recoup your principal investment no matter the state of the economy. Any US citizen with a social security number and Puerto Rican residents can invest in these bonds.

Definition

But first, a definition is in order. As previously said, savings bonds are debt securities issued by the US Department of the Treasury with the purpose of funding the federal government’s borrowing needs. Savings bonds come in several types:

* Series EE bonds will increase in value as long as the interest accrues on them for 30 years. When these securities become due and demandable, you will be paid the accrued interest plus the original investment.

* Series HH bonds are bought at their face value ranging from $500 to $10,000 in denominations with no limit on the amount of purchase. However, these securities do not increase in value and are limited to just 20 years.

* Series I bonds are also purchased at face value. It can increase in value depending on the inflation rate for the next 30 years. The limit on purchase is set at $5,000 per calendar year.

Benefits

Of course, the primary benefit of savings bonds is that these securities are truly secure in every sense of the word, finance-wise. Your original investment along with interest accrued will be paid, recession or no recession.

Another benefit is that the interest accrued on these bonds need not be reported to the Internal Revenue Service for taxation purposes until such time that these are cashed by the holder. However, take note that when you use the savings bonds for your education as well as the education of your spouse and child, you have to report it to the federal government.

Overall, savings bonds are great investments especially when you want to diversify your portfolio.

Calculate Worth

At some point, you will want to know the value of your savings bond especially when you want to cash it in. You have two choices in the matter – the manual way and the automated method.

If you choose to go the route of the manual method – because you are a math pro in that way – you start by jotting down the face value of the these bonds and the interest rate affixed to them. Then, you will determine the specific period of time when you want to redeem the bonds.

Now, multiply the interest rate with the face value with the time for encashment as the only consideration to arrive at the accrued interest. Add the accrued interest to the face value of the bonds and deduct the penalties and voila! You have the value of your stocks.

If you choose the automated method – because you are lazy but very precise that way – you can always access any of the numerous of the online savings bond calculators. Better yet, log on to the Savings Bonds Calculator of the Treasury Department to secure the accurate amount you will be receiving. No hassles, no pen and paper, and no mistakes.

Municipal bonds are the informal debt instruments issued by county, state and city governments, to raise money for the community projects such as hospital, new school or a highway. The main feature of municipal bonds as a form of investment is that, the interest paid to the municipal bond owner is federal tax exempted. In addition, investors are exempted from state taxes in case they reside in the same state of issuance of municipal bonds.

Usually, there are two forms of investment in these. The first is termed as general obligation. This depends on the issuer’s ability to tax and issued for payment of projects such as sewer systems and schools. Majority of investors feel that general obligation bonds are much safer as compared to their counterparts in the revenue section. However, this is a misconception.

On the other hand, the local government sanctioned entities or special state government entities issue the revenue municipal bonds.

With the revenue generated from business backing the obligation, investors stand to gain from the interest. In case of water firms, bondholders get cash payment from the amount generated by the customers who pay their water bills.

Taxable Municipal Bonds V/s Tax – Free Municipal Bonds:

Investors having an average interest in bonds may have a difficult time in deciding between tax-free municipal bonds and taxable corporate bonds. With the help of a formula known as taxable yield, investors can decide on the type of fixed income investment that may provide them with greatest after-tax return.

Below mentioned are the two major thumb rules beneficial for amateur municipal bond investors:-

- Non-profitable organizations are always at an advantage in investing in the corporate bonds largely because of their tax-free status.

- Investors, who come under the high income tax brackets, are always better in investing in tax-free municipal bonds.

Safety of Municipal Bonds:

In relation to the individual municipal bonds, very little information is available. This forces the investors to depend heavily on credit ratings that credit agencies assign.

In order to ensure the safety of their investments, bondholders need to find out the following:-

- The responsible authorities for servicing of interest payments on bonds.

- Check for the financial status of the issuer.

Investors need to ask themselves, as to whether the place where they are investing is a promising community with a high net worth having growing citizen base, or a degenerating metropolis having low-income demographics.

In the security analysis of 1942, Benjamin Graham mentioned the below listed characteristics of municipal bonds:-

- Has a population of at least 10,000 or greater.

- Diverse economy and,

- It bears a good record of punctual payments on the previous obligations.

As compared to the high-risk private bonds, investment in government bonds is the best risk free option. There is no wonder that conservative people still opt for them as a risk free form of investment.

Investment in municipal bonds yields double benefit to the investor. The first one is that, the investor gets to invest in public development projects and the second benefit is that, it comes with a small smart gain for the investor.

When all else fails and the markets are in a pickle, you can always count on your uncle to be there for you and your portfolio.

Your Uncle Sam, that is.

Except right now. Uncle Sam has troubles of his own. In fact, thanks to the largess of the West Wing and the leadership in Congress, Uncle Sam is running into a bit of a cash squeeze.

With not just billions of dollars – but trillions of dollars being showered on nearly everybody with a hand out and a lobbyist over the past several months – the deficit spending of the federal government is beginning to take a toll on the market for what’s nearly always been considered the super safe place to put cash in tough times: US government bonds.

The first major telltale sign came from the US Treasury as it reported the cashflow statement for the government’s coffers for the first quarter of the year. Traditionally, this is the one time of the year whereby taxpayers like you and I send in the remainder of our taxes for the prior year’s bills from Uncle Sam.

Most years at this time the inflow actually outpaces the outflow and the result is that the federal government runs a surplus – if only for a brief time.

This year, given the work of lobbyists and their targets in the West Wing and Congress, the cash coming in couldn’t meet what was going out, meaning that the government is already running a deficit.

The result is that the US Treasury has to peddle more and more bonds out to the market to borrow money to make up for the deficit even earlier in the year. This surge in supply is now moving the market for US Treasuries into the red.

So far, if we look at the US Treasury market – every part of the market from the short end to the long-term is losing money for investors who just wanted to put cash in a safe haven for a while until the recession or worse begins to ease and better opportunities genuinely develop.

If we look at the 1 to 2 year maturities – the impact is minimal – but still a loss so far this year amounting to some 0.03 percent. Then moving to the 3 to 5 year maturities – the loss rate starts to climb more steeply by some 2.3 percent. The core intermediate 7 to 10 year maturities are delivering a loss of 7.8 percent while the longer term maturities of 10 years out to 30 have really taken some hits resulting in red on investor’s investment statements of nearly 16 percent.

And it’s going to get worse.

Usually in a recession – especially one that should be expected to last and linger longer – US Treasuries are the place to be. Slower growth tends to support less inflation pressure and with less opportunities in other typically riskier assets like stocks – Treasuries fare well – at least earning their coupon rates of yield.

But with so much new borrowing from Uncle Sam – the supply is just overwhelming demand.

This week, the US Treasury auctioned off a new batch of bonds with 7 year maturities. And by some measures it was successful. The number of bids outnumbered the amount offered by a ratio of 2.26 – which was better than the last three auctions of similar bond maturities over the past three months’ average of 2.3. This is being taken as a positive sign that perhaps the fear of debt trouble of Uncle Sam might be overdone.

And sure, there is plenty of chatter about how the US government might lose its vaunted Aaa/AAA credit ratings – especially as rating agencies such as Standard and Poors have cut the outlook for a peer – Britain’s debt – to negative. But while such talk makes for great pitches from the fear mongers of the markets – the reality is that Uncle Sam can indeed keep issuing bonds for a while before the government is in similar trouble as the UK.

Right now our debt to GDP is bad – at nearly 80 percent representing some 11.2 trillion in gross debt. But in the UK, it’s over 100 percent and climbing.

But the real trouble isn’t about default risk by the US government. Rather, it’s about pricing of new bonds and the impact on the existing trillions of dollars’ worth of bonds in the market.

So far this year, the West Wing has driven the amount of traded debt of Uncle Sam to a record of some 6.4 trillion dollars. The deficit for this year is set to be close to 2 trillion, meaning that in percentage terms it will soar – roughly triple last year’s number – to over 13 percent of GDP.

The total amount of Treasury bonds that need to be sold through the government’s fiscal year end in September should be over 3.2 trillion.

Again, while this reads like the stuff of doomsday – if the US government was a corporation, the debt to assets would be a paltry rate as Uncle Sam has multiples of the debt in varied assets ranging from land and other resources to financial and other assets around the nation and the globe.

The real issue is that Treasury prices are likely to suffer as the supply keeps being pushed out.



So, what action do you need to do to keep your portfolio from being further stressed?

First, look at your own direct holdings. Do you have any US government bond funds in your brokerage or trust accounts? If you do – it’s time to take that cash out of them and head elsewhere for a while.

And more likely than not – if you were to look at your current asset mix of your retirement accounts – such as your 401k or 403b or other qualified plans – you probably have a US government bond fund that is a big chunk of your retirement assets. Again – time to sell.

Putting it into cash might sound pretty unappealing with yields so low, but it might well be better than giving up gains over the past 12 months in these funds and then some.

And at the same time that this otherwise traditional port-in-a-storm segment of the market faces its own hurricane – the risky side of the bond market is what you need to buy and continue to own through the next many months.

Yes, emerging market government bonds. These are the bonds that you’ve been told are the risky part of the market. But at the same time – these are the bonds of countries that have lots of cash on hand and stockpiles of reserves on hand. Nations such as the leaders in Asia and Latin America.

These are exactly what’s inside my five core bond funds that are the bedrock of the stocks that pay you to own them.

So, while you dump your supposedly safe US Treasuries – buy the AllianceBernstein Global High Yield (NYSE: AWF). Buy the Templeton Emerging Markets (NYSE: TEI). Buy the Western Assets Emerging Markets (NYSE: EFL). Collectively these three alone are generating yields right now of nearly 9 percent while continuing to perform with a year to date average return of 31 percent which is an annual rate of return of nearly 100 percent.