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Premium Bonds Offer A Compelling Story
Premium bonds ---- bonds that sell for more than their face value, or par ---- are often overlooked by investors because of the higher price tag.
But these defensive bonds seem particularly compelling today, as interest rates remain relatively low and both managing volatility and maximizing income are top of mind to many investors.
A Little Bond Math
It's true that investors pay a higher dollar price for a premium bond than they'd pay for a par or discount bond.
And over the full life of the bond, premiums and discounts should pay the investor the same total return (all else held equal). As the table below shows, with a hypothetical $1,000,000 investment in a premium municipal bond, an investor gets less face value than he or she would with a par bond.
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Hypothetical analysis provided for illustrative purposes only. As of May 31, 2017. Source: AB Global
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As a bonus, however, a premium bond's higher coupon may help investors get their money back faster than if they owned a par bond. This factor can be especially helpful when interest rates rise, because the increased cash flow from premium bonds can be reinvested at higher rates.
Interest Rate Sensitivity
Additionally, due to their higher current income stream, premium bonds have historically been less sensitive to interest-rate changes, and have even outperformed par bonds when interest rates rose. In contrast, par bonds tend to be more volatile, which we saw during the Taper Tantrum in 2013, when the market sold off and yields rose (see the chart below).
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Data through December 31, 2016. Source: AB Global
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More current income, the ability to reinvest sooner at higher rates, combined with lower price volatility might be especially compelling today, with the Fed poised to hike rates further and with volatility concerns not going away anytime soon.
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Despite last week's weaker than expected jobs data, stocks rallied again with the Dow Jones, S&P 500 and Nasdaq composite all reaching new highs. Investors appear to believe that because the unemployment rate (now at 4.3%) is below the Federal Reserve's measure of full employment, job growth should actually be slowing, and one monthly report is no cause for alarm (see Economic News below for additional detail).
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> Jobs: The Employment Situation report from the Bureau of Labor Statistics came out on Friday, June 2, and the data was weaker than expected. Nonfarm payrolls rose 138,000 in May
---- nearly 50,000 below expectations. In addition, average hourly earnings were not favorable, up only 0.2%. Wage inflation experienced a year-over-year rate of just 2.5%. The unemployment rate is still a very low 4.3%, but this contrast of employment growth with a lack of wage pressure will no doubt be a key topic of debate at the June Federal Reserve meeting.
> Manufacturing: The ISM manufacturing index is constructed so that any level at 50 or above signifies growth in the manufacturing sector. Last Thursday's report showed manufacturing at a healthy 54.9%. Production is strong, import orders continue to rise, and deliveries are slowing which are all signs of strength.
> Crude Oil: Crude oil prices fell more than 1% following President Trump's decision to pull out of the Paris Climate Accord. That concluded a second straight week of losses as investors worried that abandoning the climate pact could spark more crude drilling in the United States, worsening a global glut.
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In conjunction with the Scripps National Spelling Bee last week, Google compiled a
list of America's Most Misspelled words.
The Google team combed through the top "how to spell" searches that occurred in every state and then presented the data in the form of a US map.
The list is color coded by word length, and the vast majority of states (40 of the 50) struggled with words that were six to 10 letters long.
Among the more interesting findings:
- Five states (California, New York, Minnesota, Kentucky and Ohio) have trouble spelling "beautiful."
- Anyone in Alabama, Maine, Michigan or Washington who has "pneumonia" apparently has trouble Googling symptoms, since they can't correctly spell the name of the disease.
- People in Arizona and Colorado can't spell "tomorrow."
- Six states struggle with one-to-five-letter words: Oregon ("sense"), Idaho ("quote"), Mississippi ("nanny"), Georgia ("gray"), Tennessee ("chaos") and North Carolina ("angel").
- Disturbingly, people in Wisconsin don't know how to spell their own state's name.
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New Market Wealth Management offers modern investment solutions backed by extensive research and experience serving the needs of wealthy families. Through our strategic partnership with
Cliffwater LLC
, we provide institutional-quality research, investment due diligence and asset allocation tools. We believe this level of experience and unique access to in-depth, sophisticated research are essential for success in today's complex world markets.
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