Category Archive: Economy

Why are bond yields so low?

I was reading an article about the plunge in interest rates on junk bonds and wondered, are bond rates low, and if so, why?

I looked at AAA-rated Corporate Bonds (the highest-quality) and BAA-rated Corporate Bonds (medium-grade) as rated by Moody’s Investors Service, as that data was most readily available, to see if bond rates are down. Definitions:

  • AAA: Bonds rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as “gilt edged.” Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
  • BAA: Bonds rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present, but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.

Bond rates are low

Indeed, they are at historic lows – it’s cheaper for a corporation to borrow money now than at any point since 1956.

Bond Yields Historic

Interestingly, it’s cheaper for a BAA rated company to borrow money today than it was for a AAA rated company to borrow money back in 2011. Think about that. Companies that are up against the wall today (e.g. Best Buy and Dell who are both BAA rated companies and examining buy-outs) can borrow money cheaper than the top companies in the world could in 2011 (think Exxon and Johnson & Johnson – two of the largest and most stable companies out there).

Bond Yields Historic recent

If you think of countries instead of companies, the distinction is much clearer. AAA countries include Switzerland and Germany. BAA countries include many of the “PIIGS” – Spain, Italy, and Ireland. To think that the equivalent of Italy today can borrow at the same rate as Germany could in 2011 is absurd, but true.

Why are yields so low?

This is not an easy question to answer, and there’s a lot going on.

First, 4 rounds of quantitative easing by the federal reserve is having a big impact on bond prices. The bond market is just like any market – it’s driven by supply and demand. And when the Federal Reserve prints $85 billion each month to buy bonds, suddenly there’s more demand than supply. Bond yields decrease to the market-clearing rate.

There’s more going on though. Because bond rates are down, investors have to take on more risk to get the same return. In the competitive market of asset management, there’s belief that similar to before the housing bust, managers are taking bigger risks by buying lower-rated bonds, juicing their portfolio for the short term, but adding risk.

Additionally, there is still a “flight to security” going on. While a BAA bond is only medium grade, it is a lot better than the prospects of some sovereign debt and equity like in Greece. Suddenly, in a tough market, lower-rated bonds become more appealing.

How low will interest rates go?

I don’t know (hypothetically I calculated 30-year morgage rates could reach 2.75%), but there’s not much room below. I wouldn’t buy any bonds at the moment.

Received my invite for Simple

It’s been over two years since I signed up, but I finally received my invite for Simple (formerly BankSimple). Two years ago, I was fresh out of banking and excited by the prospect of an online-only competitor that would simplify the mess that banking has turned into.

Simple (formerly Bank Simple)

Simple (formerly Bank Simple)

The idea is “simple.” An online bank that allows you to budget like Mint, but with only 1 account. You don’t need multiple debit/credit cards, savings/checking accounts, etc. Everything is online/on your phone, so there are no branches, just take a picture of your check, or transfer money to a friend via the app. Love it.

  • Notate your expenses while spending – for example, you can indicate where you made good choices and bad choices.
  • Simple way to create separate folders or accounts to save for upcoming expenses like vacations or gadgets (or a new roof), for example. Breaks expenses down into daily savings goals to reach your total
  • Transfer money to friends, real-time, for free
  • Everything available online/over the phone. No more waiting in line at the bank branch.

However, after reading through the FAQ, I decided not to sign up. There were some big problems in the fine print.

  • No interest paid. 0% – zero, zilch, nada. For a site that claims to “replace your bank,” they sure forgot about an important aspect – interest.
  • MUST have an iPhone to sign up. I don’t have an iPhone, and I’m not getting one. The service should be enabled for phones, but it should not be a prerequisite.
  • No Rewards. Simple pockets all the interchange and gives you nothing.
  • No services other than debit/savings. Again, for a site that claims to replace your bank, they fall short of fully replacing everything a bank offers (or even the majority of what a bank offers). No Credit Cards/loans, brokerage accounts, CDs, mortgages, etc.

If you’re interested in a very, very “simple” bank that is tech savvy and can help you budget, you can sign up for it here. But, if you have any financial literacy, you’re best bet is to keep looking.

Invite I received for Simple

Invite I received for Simple

How low can 30-year fixed mortgage interest rates go?

When I bought my house last year, I thought I was getting a screaming deal @ 4.875% for a 30-year fixed mortgage. Then rates kept dropping. I re-financed @ 4.0% in Febrary, again thinking I had beaten the market. Now rates are at 3.75% (data from I wondered, how much lower can they go?

30-year mortgage rates are tied to 10-year treasuries

First, I tested the hypothesis that 30-year mortgages are tied to 10-year treasury yields. I looked at the correlation of 10-year treasuries and 30-year treasuries over the past few years. Indeed, 30-year fixed mortgages are more closely correlated to 10-year treasuries (R-squared of .74) than 30-year treasuries (R-squared of .45).

But there’s an interesting split in both graphs. For data points prior to the crash, there appears to be a different trend than after the crash. I looked at data since 2010 and found that the 10-year treasury and 30-year fixed is even more closely linked (R-squared of .94):

So how low can rates go?

Using the data since 2010 and assuming 10-year treasuries can’t go below 0% interest rate, using linear regression, one can assume the lowest 30-year fixed can be is 2.75%.

Ben Bernanke’s Pizza Order

Was Zynga’s IPO really a “flop?”

Zynga’s IPO hit the market on December 16th, 2011, and the stock price sank from the $10 IPO price to $9.50 at the closing bell.

Was the stock a “flop,” as so many commentators stated?

In my opinion, not at all! Zynga was the real winner in this.

Zynga raised $1 Billion by selling 100 million shares at $10 each. At the end of its first day as a publicly traded company, the market determined the shares were really worth $9.50 each.

Zynga sold shares worth $950 M for $1 B, profiting a cool $50 M in one day. Zynga was the real winner and all the IPO investors were losers.

But that’s not what the market commentators would have you believe

The news after the IPO all said that Zynga “flopped.” They stated that the fact that the stock did not go up on the first day was a bad sign for Zynga.

This was a phenomenon that is also taught at business school. At Wharton, it was drilled into us that stocks should go up when they IPO. This was especially important in the tech bubble, which occurred when I was a student there.

I never subscribed to that ideology. It seemed like a bad deal for the company. Back in the tech bubble, some IPOs would climb over 50% in one day. What a huge opportunity cost to the company. They could have sold their shares for 50% more on the open market but chose not to. Where is the wisdom in that?

Commentators would have you believe that a stock that spikes on the first day creates “momentum” and “mojo.” Hogwash. Do you remember how much Wal-Mart went up or down on it’s first day of trading? What about Microsoft or McDonalds? No one remembers because it is completely irrelevant – no more important than how much the stock went up or down on any other day during the year.

It’s time to stop gauging a stock by it’s IPO performance

Any analyst would tell you, measuring any stock by it’s performance on one day would be ludicrous. So why do we put so much emphasis on IPO price? It’s time to stop.

The only thing we should gauge by the IPO performance is the capabilities of the management. If the price ends up at or below the IPO price on day 1 of trading, it was a success. And for Zynga, I give Mark Pincus, the CEO, two thumbs up. He successfully sold a $9.50 stock for $10, profiting $50 M in the process. He got exactly what he wanted, and the investors were the suckers, not him.

Top posts of 2011

Pacific Northwest-Coast Bias had a great year. But what articles did readers enjoy the most?

5.  Redmond is the most expensive Washington city to live in – Were you like me and thought Bellevue was the most expensive city in Washington?

4. US Debt-to-GDP Ratio– Deservedly, the US got downgraded from AAA debt in 2011. Not surprisingly, Switzerland and Germany are on the list of AAA, but I was quite surprised that the UK was still among the top-rated countries, along with Hong Kong and Norway. Interestingly, the US is one of the few countries with a Debt-to-GDP ratio below 100%. I was quite surprised by The Netherlands and Norway above 400%. It’s clear that the path to solvency is getting the US budget back on track. With the current leadership on both sides, my confidence of this happening is very low.

3. NBA Arena in Bellevue – I don’t know precisely where the NBA might build an arena in Bellevue, but I have a couple ideas.

2. NFL Concussions – My magnum opus of 2011 was inspired by a head injury that I suffered myself, and realized that others were undergoing the same injury with no idea of the long-term implications. Although I wasn’t playing football, I hit my head and blacked out, going into seizures and needing to be revived by medical staff. I was woozy for days. At that time, much less was known about the diagnosis and treatment of concussions, so my recovery consisted of lying on the couch. Like NFL players, the only thing I can do is hope I won’t suffer any long-term impacts.

1. Who has the toughest college football schedule in 2011 – The top post in 2011 wasn’t without controversy. The SEC had the weakest schedule among top conferences, yet the got both spots in the Championship. Do I think they deserved it? No Way. Oklahoma State or Stanford definitely deserved that spot over Alabama. But I’ll be watching the game, and rooting for a playoff in future years.

Lufthansa sells used aircraft seats!

From the Lufthansa in-flight magazine.

eTrade spends $1.76 / year to tell me I have $0.07 invested with them

  • When I rolled over my 401k two years ago, eTrade would not let me transfer the cents, thus I was stuck with $0.07 in my account
  • I tried to cancel my account, but they would not let me, stating there was still value in the account ($0.07).
  • Every quarter they pay the postage and printing necessary to send me a statement telling me I still have $0.07 invested with them.

I’m going to let them keep sending me these statements until they figure out how to run their business better.

Does Seattle really have more coffee shops than other cities

Seattleites sure do love their caffeinated beverages. But I wondered, does Seattle really have more coffee shops than other cities?

To test this question, I used online maps to determine how many coffee shops were located downtown (1k feet per inch resolution). Seattle is the 23rd largest city in America according to Wikipedia, so to test its coffee shops, I compared it to #22, Boston, and #24, Washington DC. I wish I could have used Bing Maps, but they just don’t show the view I was looking for.


Seattle has a TON of coffee shops. We’re not just talking Starbucks either. With the sale of the Seattle Supersonics to Oklahoma City by Howard Schultz, many Seattleites won’t step foot inside a Starbucks anymore. Tully’s, Pete’s, Fuel, and independent coffee shops, among others, take first place in Seattle resident’s hearts for best coffee shop. But how many shops are needed to serve its residents?

Answer: 131. For a coffee search in downtown Seattle, 131 shops show up, even with half the map taken up by Puget Sound


Boston is more known for (Dunkin) Donuts than coffee, but when I visited Boston earlier this year, there were still Starbucks across the street from each other. How many coffee shops are in the same footprint within Boston?

My count is 60. Less than half of Seattle’s.

Washington DC

Washington DC isn’t know for their coffee, but they do have 83 coffee shops in their downtown area. Not bad, but still about two-thirds of Seattle.

Overall, no surprise, Seattle really does have more coffee shops than other cities of similar size.


Free Pre-Paid Cremation

No, I’m not interested in a Free Pre-Paid Cremation. This company needs to work on their segmentation algorithm. They just wasted about $0.50 on the stamp/envelope/paper/printing.

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