Are Stock Market Investors Being Set Up For Another Fall?
By: Sy Harding
Jul 30, 2010
In the early 1930’s, after the 1929 crash, Wall Street could not get nervous investors interested in stocks again. However, with interest rates dropped to extreme lows in the Great Depression, those who still had money were eager to invest in something that would provide more income than they could receive on savings accounts. As a result Wall Street had no trouble selling them bonds.
It was later said to have been a slower disaster than the stock market crash, but almost as devastating. Bonds decline in price when interest rates and yields rise. Over the next two decades interest rates began to rise from their extreme lows, and the price of bonds declined. Investors new to bonds discovered it was not a safe haven to be receiving 4% annual interest on bonds if the bonds were dropping 10% in price annually due to rising interest rates.
I bring that up because of reports this week that the major U.S. banks are on a tear to raise huge amounts of low cost capital by issuing bonds while rates are at record lows, and while investor demand for higher returns is on the rise as an alternative to stocks. Some of the low cost capital being raised is being used to pay off the higher cost bonds and debt on their books. Moody’s estimates that U.S. banks have already refinanced $200 billion of the $372 billion in debt that is coming due in 2010.