Friday, September 6, 2013

Market update - Substantial rise in treasury yields

Update of Treasury yields in the US

2yr Treasury Yields - 0.51%
10yr Treasury Yields - 2.98%
30yr Treasury Yields - 3.88%

What do these numbers means? A rise in yields implies a fall in bond prices. If you have investment in bonds,  most likely you'll see a drop in your portfolio value. Short term yields have already more than doubled from 0.24 to. 0.51.

This also means that interest rates are rising. Those with floating rate loan packages will feel the effect of higher interest rates. If you have substantial loans like housing and car loans, do take note of the impact.
The good news is a rise in interest rates usually signify a economic recovery. Money is flowing out of bonds(which is considered a safer asset) into equities and other more risky assets.

Dry bulk shippers have bottomed out from its low and have risen substantially the past one month. Baltic dry index (BDI) is also rising indicating an increase in shipping freight rates. Will Singapore shipping stocks start to recover as well? This will need to be monitored further.

Reits and property stocks will be negatively impacted by the rise in interest rates. Reits generally have high debt to service ratios which means they borrow a substantial amount of money.  Higher interest rates will impact a reit's profit.

There may be an adverse effect as some Singaporeans are overleveraged on debt. Some with debts of more than 60% of their income. Will there be more loan defaulters and bankruptcy? That we'll not be sure and need to see how the situation develops.

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  1. Good point on debt service. People keep making the mistake of comparing current yields of REITs and utilities and assuming 4% or 5% is still pretty attractive compared to bonds. But it is not just about comparing yields. Companies with heavy debt burdens will see negative pressure on future earnings with debt costs rising.

  2. Hi S. B.

    Bond yields will definitely continue to rise. Right now the FED haven't even start tapering down QE. Indeed those companies with high debts will see negative pressures on future earnings. REITS are one of them. Thanks for your points too :)