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.

At what race distance could the women’s world record be faster than the men’s?

Women and men were created differently. Men hold faster world records than women for every running distance (as tracked by wikipedia).

I wondered, as the distance gets longer, does the margin decline between men and women?

Methodology: I looked at world records from wikipedia to find the difference between men and women at different distances. I used a logarithmic chart below, which is a little more intuitive given the exponentially increasing distance. Note the regression will not look like a straight line due to the logarithmic horizontal axis (linear scale chart is included at the end of the post).

Men vs women world records by race distance 2

Findings:

  • From the 100 meter dash to a marathon, men appear to progressively get faster than women. This is not what I was expecting. I thought men would be much faster than women at shorter distances due to sheer muscle mass, but as the length got longer, women would be closer.
  • This didn’t start to occur until after the marathon. For the double marathon (second dot from the right), men are only 10% faster. And for the 100K Ultramarathon, women are much more competitive, coming in within 5% of the men’s time.

At what distance could a women’s world record be faster than the men’s?

Methodology: I used the linear regression equation in the chart above to extrapolate what would happen at longer distances. The model was a pretty good fit, having an R-squared of 0.67.

Findings: Women could beat the men’s world record @ 200k. The model suggests the tipping point is 199k. Anything above that, and women should be on an equal playing field.

A 200k is about 124 miles, which, if running 7 minute miles, would be 14 hours of continuous running. I couldn’t find an example of a continuous 200k race on the Internet, but who knows, it could exist. If there is one, I wouldn’t be surprised if a women took home top prize.

Men vs women world records by race distance - linear scale

The Mike Krzyzewski coaching tree is in need of pruning

Duke basketball coach Mike Krzyzewski is a tremendous coach. His resume of wins and titles speaks for itself (his 11,000+ word biography on Duke.com is a different matter).

I wondered, what does his coaching tree look like? Has his success propagated to his former assistants?

Coach K’s coaching tree has a couple solid branches, but it’s in need of pruning.

I would argue 4 coaches have achieved pretty successful coaching careers after being Duke Assistants (or in Jeff Capel’s case, players).

  • Mike Brey – Brey went on to coach at Delaware, and then onto Notre Dame. Under Brey, Notre Dame has been a constant contender for the NCAA Tournament
  • Johnny Dawkins – Stanford has a proud basketball tradition, and while Dawkins hasn’t wow-ed anyone yet, just sticking around in Men’s College Basketball is an accomplishment
  • Tommy Amaker – While Michigan showed him the boot, Amaker found success at Seton Hall and again at Harvard, where he has built the team into a perennial Ivy League powerhouse and an upset-favorite come tournament time
  • Jeff Capel – On the downside, former Duke player Capel has come full circle, and is back under Krzyzewski, now as assistant coach. On the upside, he had several successful seasons at VCU, and moved on to Oklahoma. He’s a recruiting powerhouse, bringing in players like Blake Griffin and Eric Maynor.

However, all the other branches are dead. Other coaches that studied under Krzyzewski (and downstream) did not have long tenures, including at Missouri, Delaware, Toledo, Rutgers, and UNC-Greensboro.

How does this compare to the top coach in College Football?

While football is a bit of a different animal, I wondered how Krzyzewski’s tree stacked up to the likes of Nick Saban.

Surprisingly, it looks pretty similar. There are many branches coming off the Nick Saban coaching tree, and many have been successful. Will Muschamp, Jimbo Fisher, Jason Garret, and Mike McCarthy are huge names. But similar to Coach K, there are many dead branches. Pat Shumer, Mike Mularky, and Derek Dooley were all fired this year.

Why are there so many dead branches coming off of successful coaches?

Athletic Directors are more willing to take a chance on an assistant studying under a successful coach. For example, when you’re VCU and looking for a marquis coach, you pick the Jeff Capel or Anthony Grant (Billy Donovan’s assistant), hoping you picked the right guy. But for every Mike Brey there’s a Quin Snyder.

For bigger-name schools, I believe a superior strategy is to pick a successful head coach in a lower division/league. Ohio State has found great success with that approach for both football and basketball, recently with Jim Tressel (Youngstown State) and Thad Matta (Xavier).

Don’t blame Coach K for his wilted coaching tree. Blame the hiring athletic directors.

Michael Jackson’s albums: Thriller was the outlier

Don’t judge me: I caught bits and pieces of Dancing With The Stars while my wife was watching, and they dedicated the show to Michael Jackson’s album, Bad. Honestly, I was surprised – I didn’t think that was a very good album (except for Smooth Criminal). I wondered, was Bad really a good album, and I just remembered it incorrectly?

No, Bad wasn’t THAT good

To sell 8 M copies of an album is great. But it’s not that great if you’re Michael Jackson. Which albums sold more copies than Bad? The list is numerous – over 100, and includes such winners as Nelly’s Country Grammar, Will Smith’s Big Willie Style, MC Hammer, Jewel, N’Sync, and the list goes on and on. Bad actually sold 70% fewer copies than Thriller. And the trajectory after Thriller was steeply downward.

Betting on the Super Bowl 2014

For those prepared to take the risk of a futures bet on the 2014 Super Bowl at such an early stage in the NFL season, there is plenty of information about which teams are favourites available at bookmakers. The Broncos have been installed by sports betting pages as the hot favourites in the early season, at 9/2, but there are several other teams not far below them in the odds standings. The Seahawks (11/2), the 49ers (8/1) and the Patriots (11/1) are all reasonably safe bets for the Super Bowl, at this stage of the season, but you may not fancy a safe bet.

After all, for some NFL gambling fans it is all about taking a punt on a team a bit outside the favourites, but not out of contention. A lot of people have identified the Cincinnati Bengals as a good sleeper bet at 20/1, although they do not have a good play-off record. What is surprising is that more punters are not considering the Ravens at 39/1, as they won the Super Bowl last year, have retained the core of the side that did so, and have actually strengthened in the key defensive positions. They represent a good sleeper pick for this season, but another tip would be to let the season progress, see how the teams perform, and play online casino slot games like $5 Million Touchdown.

This particular NFL slot machine has impressed a great many fans of the sport, and of casino – and it would be fair to say that the $5 million cash jackpot has a lot to do with. However for NFL fans the graphics in the bonus game, involving trying to score a winning touchdown in a match, will be just as significant to the appeal – as they really do make you feel like you are out there on the pitch in a key match. Find the best online casinos in New Zealand at CasinoOnline.co.nz. Both NFL and casino fans will enjoy the fact that the game gives you a strong shot at a payout, offering both wild and scatter icons amongst the NFL-related images filling the five reels. So $5 Million Touchdown is truly a game for everyone.

Twitter Weekly Updates for 2012-10-14

  • Twitter Weekly Updates for 2012-10-07: Ohio State. 6-0. Bowl eligible. Oh wait. # East Coast Bias in one Tim Teb… http://t.co/ANIH4DxK #

Twitter Weekly Updates for 2012-10-07

  • Ohio State. 6-0. Bowl eligible. Oh wait. #
  • East Coast Bias in one Tim Tebow T-Shirt: http://t.co/pxTxQXHq #
  • Twitter Weekly Updates for 2012-09-30: Gus Johnson makes college football better. # Ohio State's offense is look… http://t.co/iQOlQBCh #

East Coast Bias in one Tim Tebow T-Shirt

Twitter Weekly Updates for 2012-09-30

Twitter Weekly Updates for 2012-09-23

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