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Project description
Read the attached article;’ In the end,there’s no such things as free lunch’
Question: Comment on the statement by the author of the article that;
‘….it’s actually the interest rate on 10years US government bonds that holds the biggest sway in financial markets’.
INVESTORS are between a
rock and a hard place. Those with fortunes tied to the Big Four banks would no doubt be
feeling a little worse for wear if they care about share prices.
It appears the share market
is readjusting to the expecta- tions interest rates are likely to have stopped falling and will at
some point start rising – led by
As a result many stock mar- ket darlings – not to mention
bond prices – have been sold off sharply. Investors have been left
feeling more unsettled than usual, even in these times of heightened uncertainty. Since April I, a $200,000 portfolio invested evenly
among the Big Four would be $22,000 worse off. In the space
of a few weeks, more than 10
per cent of your investment value has been wiped out. With many self-funded retirees holding the Big Four directly or indirectly (via man- aged funds and other prod- ucts), it’s hard to avoid the nightmare streak of the banks. The rapid-fire sell-off of banks is the symptom of a rise
in long-term interest rates in
the US, mirrored locally. It’s like the US has caught a cold
and Australian investors have
sneezed, repeatedly. While we often focus on the
cash rate set by the RBA be- cause it affects our mortgage repayments and term deposit savings, it’s actually the inter- est rate on 10-year US govern- ment bonds that holds the
biggest sway in financial mar- kets. For the boffins who tell us
what the financial markets are
expected to do, this a bell- wether. When it moves, it tells
you whether economists and market analysts are expecting the economy to strengthen or weaken.
It influences the market’s
expectation for future short- term rates – and therefore
what you pay on your mort- gage. And if the 10-year bond rate moves sharply, you can be
sure that share prices – and other bonds – will move too.
For bonds, higher interest
rates mean lower prices, and vice versa. High-yielding shares, such as the banks and
property trusts, behave in a similar fashion when interest
rates rise – higher rates mean share price declines.These types of shares are extremely sensitive to what happens to long-term interest rates, meaning more uneasy times could lie ahead.
Shares are generally consid- ered more risky than cash and bonds, so investors tend to de- mand a much higher return. When share prices move lower, it means the return you receive considers all of the
risks that you are exposed to, including higher interest rates. Changing interest rates is
part of the normal business cycle and affects asset classes differently at any one point in time. But the problem self- funded retirees now face lies in
the fact they have always pre- ferred investments that pro- vide healthy dividends. (COUNTINUES.. COULDNT TYPE HERE)
Added on 01.05.2016 18:51
It means there is a vast
number of shares they avoid,
and they all cluster around the
same high dividend-paying shares, without balancing out their investments with other
less interest rate-sensitive in- vestments.
They”re after an easy in- come. But, as they say, there”s
no such thing as a free lunch.
Instruction files

present1_intheendnofreelunch.pdf(739,19 KiB)

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