Personal Finance Blog By MoneyRates - February 2008
February 29, 2008
Government bond funds are a favorite of investors due to the safety of the underlying holdings which are primarily securities issued by the Treasury Department or government-sponsored entities. While normal bond fund managers can buy riskier lower-rated bonds to boost yields, the government bond fund manager is heavily restricted to the type of holdings in their funds. Interest-rate risk is always a factor with bond funds, but in general the shorter the duration of the holdings in the fund the less volatile the returns of the fund will be. Below are some funds which have been identified by Morningstar as out-performing funds:
Short-term Government Bond Funds
Funds that primarily invest in U.S. government securities which may include Treasury bills, notes, bonds, mortgage-backed securities issued by government lending agencies and other Treasury securities with maturies less than five years.
JP Morgan Treasury and Agency Select (OMBAX) - yield 4.51%, YTD return 2.34%, 2007 return 6.56%, expense ratio 0.65%, minimum investment $10,000
Vanguard Short Term Treasury (VFISX) - yield 4.11%, YTD return 2.63%, 2007 return 7.62%, expense ratio 0.26%, minimum investment $3,000
Vanguard Short Term Treasury (VSGBX) - yield 4.34%, YTD return 2.11%, expense ratio 0.20%, minimum investment $3,000
Fidelity Spartan Short (FSBIX) - yield 4.17%, holds 97% securities rated AAA primarily US Treasuries, average maturity of holdings 2.40 years, 2007 return 7.71%, minimum investment $10,000
Intermediate-term Government Bond Funds
Funds that primarily invest in U.S. government securities which may include Treasury bills, notes, bonds, mortgage-backed securities issued by government lending agencies and other Treasury securities with maturities typically between five and ten years.
Morgan Stanley U.S. Government (USGAX) - yield 4.48%, holds 100% securities rated AAA primarily U.S. Treasuries and government mortgages securities, average maturity of holdings 6.30 years, 2007 return 6.50%, minimum investment $1,000
Vanguard GNMA (VFIIX) - yield 5.09%, YTD return 1.50%, expense ratio 0.21%, minimum investment $3,000
Fidelity Government Income (FGOVX) - yield 4.34%, YTD return 2.11%, expense ratio 0.20%, minimum investment $3,000
Long-term Government Bond Funds
Funds that primarily invest in U.S. government securities which may include Treasury bills, notes, bonds, mortgage-backed securities issued by government lending agencies and other Treasury securities with maturities typically ten years and longer.
Vanguard Long-Term US Treasury (VUSTX) - yield 4.50%, YTD return 1.58%, expense ratio 0.26%, minimum investment $3,000
T Rowe Price US Treasury Long Term (PRULX) - yield 4.28%, YTD return 1.85%, expense ratio 0.55%, minimum investment $2,500
Another type of fund which has performed well in the last year are inflation-protected funds. These funds are heavily invested in Treasury Department securities and are designed to match the rate of inflation in the US economy.
Fund which specifically target offering a return that exceeds or matches inflation are available for investors who might need inflation protection in their portfolio.
Franklin Real Return A (FRRAX) - yield 3.81%, 2007 return 9.83%, $1,000 minimum investment
DWS Inflation Protected Plus (TIPIX) - yield 4.71%, 2007 return 11.57%, $1,000,000 minimum investment
State Farm Interim (SFITX) - yield 4.39%, 2007 return 7.41%, $250 minimum investment
Hartford Inflation Plus A (HIPAX) - yield 3.83%, 2007 return 11.58%, $1,000 minimum investment
Schwab Inflation Protected Select (SWRSX) - yield 4.26%, YTD return 6.90%, $50,000 minimum investment
February 28, 2008
Fed Chairman Ben Bernanke, a long-time proponent of inflation-targeting, has set a specific inflation target of 1.5% to 2% over three years in a semi-annual FOMC report to Congress. Bernanke and the Fed were thought to have set a target as low as 1% to 2% so the "new" target range gives the Fed a little more leeway on the side of interest rate cuts in the risk of inflation vs the risk of growth debate. The subtle announcement by the Fed of a specific inflation target has been overshadowed by the release of 4th quarter GDP which shows the US economy growing at a 0.6% pace. Overall the economy grew at a pace of 2.2% in 2007 vs the 2.6% rate in 2006. The language of recent statements by Fed officials indicates that the 50-point rate cuts expected at the March meeting of the FOMC can still be expected, although Fed watchers are now predicting and trading on Fed Funds futures contracts at the Chicago Board of Trade is now indicating an expected floor of 2.00% on the Fed Funds rate (currently at 3.00%) before the Fed reverses its trend of lowering interest rates.
Investors looking to park their cash during this cycle of economic slowdown and low interest rates can expect to find more diminishing rates on bond funds, money markets, money funds, CDs, savings accounts, and other fixed-income investments. For the savings-oriented investor, there are many bank deals posted at money-rates.com where investors who open an online bank account can still find 4.00%, 5.00%, and even 6.00% rates and the rates offered on US Savings Bonds have become more attractive when compared to US Treasury yields.
Posted in: The economy, the Fed, and interest rates
February 24, 2008
A big jump in mortgage rates last week occured after more fears of inflation in the economy persist. The national average on the 30-year Fixed Mortgage rose over 40 points and the national average on the 15-year Fixed Mortgage increased over 20 points. Any sustained increase in inflation could lead to higher US Treasury yields and increases by the Federal Reserve of benchmark interest rates, although at this point economists are forecasting inflation as more of a concern in the third quarter or fourth quarter of 2008. So while we are expecting inflation down the road the US economy is still in a no-growth or negative-growth environment. The chart below provided by HSH Associates shows the historic relationship between the Fed Funds rate and mortgage rates.
The interesting aspect of the chart is the relatively narrow range of 30-year fixed rate mortgage rates when compared to the Fed Funds rate. Market watchers are still convinced that the Fed will lowering rates another 25 or 50 basis points in March, but as we see in the chart even within a upward or downward trend in interest rates - mortgage rates can drift in the opposite direction. This seems to be the consensus of economists who are warning of a steepening yield curve with lower short-term rates and higher long-term rates. Mortages consequently would be expected to drift higher or stay level despite the Fed's intervention.
Posted in: Miscellaneous
February 20, 2008
MoneyExchange is an online money transfer service that allows members to transfer funds among themselves via e-mail. The account balances are held in a FDIC-insured bank, First Bank and Trust in Brookings, South Dakota, that can be linked to other banks accounts. Of course this service is a direct competitor to PayPal, and MoneyExchange even allows users to sell items off their website to other MoneyExchange members similar to the E-Bay/PayPal model.
(1) $25 bonus for signing up
(2) 2-minute sign-up process
(3) free to send money, request money, or receive money
(4) account balances are FDIC-insured
(5) tools to accept MoneyExchange payments off your commerce website
(1) You can only transfer money to other members
(2) $2.50 check withdrawal fee
(3) $35.00 overdraft fee
(4) No immediate withdrawals of funds via wire transfer, both deposits and withdrawals are subject to a delay of a few days
(5) No interest on funds on deposit
(6) Difficulty tracking funds for tax-reporting purposes
MoneyExchange has set-up a great alternative to PayPal with an easier interface and additional features, the question is can you convince your family, friends, or customers to sign-up with you and make this a viable way to transfer funds.