Can you feel the impending doom of the government shutdown?
Every night, it seems that the media cannot wait to tell us how bad it will be when it happens – and whose fault it will be. One talking head tells us the sky is falling followed by a response from another talking head telling us that it is not likely that we will let the sky fall all the way – because no one in their right mind really wants to see that happen.
So, rather than spread the doom and gloom, the Annuity Guys® look to answer the questions that really matter to people who are getting ready to retire and those considering annuities for a portion of their retirement.
Watch as Dick and Eric discuss:
- What is going to happen to your retirement if the political wrangling in Washington continues?
- How would a federal government default affect bonds and annuities?
**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
Obama Says Real Boss in Default Showdown Means Bonds Call Shots
By David J. Lynch and Cordell Eddings | Bloomberg
President Barack Obama knows who is the boss: the bond market.
“Ultimately, what matters is: What do the people who are buying Treasury bills think?” the president told reporters this week, when discussing measures he could take to end the threat of a historic default on the nation’s debt.
Even with the U.S. budget deficit down by more than half since 2009 as a percentage of the economy, the Congressional Budget Office says the government this fiscal year will need to borrow an average of almost $11 billion each week. That’s why Obama is so sensitive to what investors will tolerate.
“The market is the final arbiter of any policy, the ultimate barometer and enforcement mechanism,” says Russ Certo, a managing director at Brean Capital LLC in New York. “The market holds risk-takers and policy makers accountable.”
After weeks of confidently expecting a resolution of the standoff in Washington over the government shutdown and the debt ceiling, bond investors this week began to betray nervousness in their approach to short-term government borrowing.
The yield they demanded at the Oct. 8 auction of four-week Treasury securities almost tripled from a week earlier, Treasury Secretary Jack Lew highlighted in testimony before the Senate Finance Committee yesterday. The government was forced to pay 0.35 percent for four-week borrowings, up from 0.12 percent.
Endorsing Deal
The White House yesterday endorsed a short debt-limit increase with no policy conditions attached, signaling potential support for a Republican plan that would push off the lapse in U.S. borrowing authority through Nov. 22 rather than Oct. 17. Rates for all Treasury bills maturing through Nov. 14 fell in response, while those with due dates between then and Jan. 2rose. At a meeting with Republican leaders later in the day, Obama neither accepted nor rejected the party’s plan. The two sides will continue discussions.
Obama’s deference to bond investors is reminiscent of the last Democratic president, Bill Clinton, whose economic agenda in 1993 was eclipsed by demands for deficit reduction. The belt-tightening was followed by four straight budget surpluses later in the decade, prompting Alan Greenspan, the then-Federal Reserve Board chairman, to predict the end of the Treasury market. Bond buyers’ clout ebbed.
More than a decade later, surpluses are a fading memory and the bond market has regained its swagger. Yet unlike in the Clinton era when the danger of rising yields kept government spending in check, the market now is exercising discipline only after several years of record federal outlays and borrowing.
‘2008 Event’
“The one market that is behaving more as if a 2008 event is around the corner is the T-bill market — one must wonder if this is the proverbial canary in the coal mine,” David Rosenberg, chief economist at Gluskin Sheff in Toronto, wrote to clients this week.
Investors’ sudden awareness of the danger in Washington also can be seen in the difference between what banks pay to borrow from each other and the yield on one-month U.S.government debt. This so-called TED spread turned negative this week for the first time since Bloomberg began collecting such data in 2001, meaning investors regard banks as a better credit risk than the U.S. government.
Jack McIntyre, who oversees $44.5 billion at Brandywine Global Investment Management LLC in Philadelphia, said slow economic growth, low inflation, and accommodating central banks explain why 10-year Treasury yields are little changed from Obama’s first month in office, even as federal borrowing has soared. […Read More at Bloomberg]
Transcription:
Eric: Hi, I’m Eric.
Dick: And I’m Dick. We’re the annuity guys. And Eric, big government shutdown.
Eric: Government shutdown. We’re talking about right now obviously the United States is kind of imperil I guess where the people is like threat… the looming…
Dick: We’re on the threshold… we’re on the brink of disaster…
Eric: That’s right. Here comes the default, we’re all going to the heck of a hand basket. You know, we’ve already seen what happened in Greece and all of Europe over the last couple of years…
Dick: Which is very real and stronger markets into total mess and we’re feeling a little of it.
Eric: Yes. So, the threat of default a lot of times we go through this political pressure in the economic market and what we see is how they react and they keep on trying to anticipate what they think the government is going to do…. and I think we finally saw the first the market is kind of blink just here recently and it’s like they said “I don’t know if I want to own your death?
Dick: And political will tends to waiver very quickly and we were reading an article on that this morning; but political will is very quickly dictated to by the markets and politicians think that somehow they’re going to dictate a policy just based in a vacuum of what they want and they realize real quickly that they can’t do that.
Eric: Well, and I guess we should get a little bit history when we start talking about annuities and how annuities are impacted by bonds, it’s kind of a mixed bag really because you would toy to think when bond rates go up so do the rates on annuities which is generally because you have insurance companies are buying bonds to basically pay off their annuity holder.
Dick: Yes.
Eric: but when you have annuities that are ricocheting up and down and you have instability in the market, that’s really what makes a lot of people nervous.
Dick: Right. Well and the annuities, generally speaking Eric, what they do so well is they insulate against the volatility of the market and the risk in that is in most portfolios, and as you well know when you go back to the just the standard portfolios that we’ve all been recommended is generally everywhere all over the internet… you need a mix of bonds, you need a mix some stock, and just talked about it regularly.
Eric: Yes, just a rule of thumb – it’s all based of your age, you take your age and subtract if from a hundred and there’s your mix of bonds and equities. I’ll be honest. I’ve been having conversations with people telling them that they may want to consider eliminating some of their bond possessions – maybe all of them – and replacing them with annuities for the very reasons you’re just mentioning. That when you look at you know, you can eliminate the market declines in this kind of pingpong effect… you don’t have to worry about default risk because you own the annuity, you’re not worried about the bond defaulting or the federal government not paying its debt… and they got couple bonuses like for life…
Dick: Oh yes, that will be nice, why not?
Eric: And how about not having initially pay a management fee to somebody that’s managing a bond portfolio.
Dick: Well case in point Eric, go back to when the market took the big nose dive or 2008 the Great Recession, well, what do we think? We thought that based on conventional wisdom if we have at this stock bond mix, then sure the stocks are going down but the bonds are going hold us up!
Eric: Right.
Dick: What happen? It all went down. So now, here we are in probably the most vulnerable position potentially in all of history but at least in recent years – the last century, where the bond markets are facing this inverse relationship to interest rates were interest rates have nowhere to go… but straight up and what’s going to happen to the bottom market, to the yield?
Eric: Who wants to own a one percent bond when all of the sudden they’re going start to pay two percent or 3 percent? Nobody’s going to be able to get rid of those bonds!
Dick: Yes, it’s a hot potato. And why not let, you brought it up… why not let the annuity companies manage that risk because that’s what insurance companies do best. They manage risk and they basically hire the cadre de army of managers that’s needed to manage bond risk.
Eric: Right. They’ve done this for hundreds of years.
Dick: And they do it long-term, they’re not in it for the short-term treasury.
Eric: It’s just not for your lifetime which sounds a little funny but they have managed it for multiple lifetime. So, they look much bigger much larger…
Dick: Some of these companies, one in particular I’m thinking of, survived over the last three hundred years and it’s a rated A company today…
Eric: Couple World War and…
Dick: France take over… Napoleon Bonaparte… and the list just go on and on… So, the truth of the matter is that government shutdowns; rather they’re perceived, they’re real; the austerity measures we’ve seen in Europe, they have a dramatic effect on interest rates and interest rates have a dramatic effect on annuities; and interest rates have a dramatic effect on volatility in the market.
Eric: So, let’s put this in summary, I guess. Is it a good thing to hold an annuity or being an owner of annuity when there’s a government shutdown?
Dick: I think that that would be where I would want my portfolio to be; a portion of it anyway in annuities – a foundational portion – so that when these kind of things happen, which they’re going to or something new that we’re always blind sided with something new…
Eric: That’s something that’s never happened before…
Dick: We think we’ve got it all figured out, we’ve got all the stress tests then low and behold the next crisis comes along that blind side us… that’s why it make sense to have a portion of the annuity – a foundational portion, so that when these things happen you can weather the storms without stress… sleep well at night…
Eric: Some safety, some security, some annuities.
Dick: Agree.