In­vestors in long-term bonds face ris­ing risks

Austin American-Statesman - - BUSINESS - By Floyd Nor­ris

The Fed­eral Re­serve Board’s Open Mar­ket Com­mit­tee last week gave the first hint of what would cause it to al­low in­ter­est rates to rise. It promised to main­tain low rates un­til the un­em­ploy­ment rate — at 7.7 per­cent last month — fell to 6.5 per­cent, so long as in­fla­tion also re­mained quiet.

Fed of­fi­cials say they do not think that will hap­pen un­til late 2015, but they could be overly pes­simistic. A year ago, they thought that the rate would not get as low as it is now un­til 2014.

The pro­longed low level of in­ter­est rates — both short­term rates that are ad­min­is­tered by the Fed and longert­erm rates that are more sub­ject to mar­ket forces — has caused many in­vestors to search for yield by pur­chas­ing longer-term bonds. That has pro­vided a bo­nanza for U.S. com­pa­nies and in many emerg­ing mar­kets, where the amounts of newly is­sued bonds have risen rapidly.

“Al­most any kind of cor­po­rate ac­tiv­ity is ac­cept­able to the bond mar­ket,” said Michael Shaoul, the chief ex­ec­u­tive of Mar­ket­field As­set Man­age­ment. “That is really a sign the bond mar­ket is be­com­ing in­dis­crim­i­nate.”

For a bond in­vestor, there are two things that can go wrong. The first is credit qual­ity, when bonds ei­ther de­fault or at least fall in mar­ket value be­cause a de­fault seems more likely.

The sec­ond is in­ter­est rate risk — the risk that mar­ket in­ter­est rates will rise sig­nif­i­cantly. Shaoul said he thought in­vestors in emerg­ing mar­ket bonds were more likely to run into credit prob­lems, while U.S. bond buy­ers were more likely to face in­ter­est rate prob­lems as the U.S. econ­omy im­proves.

“Five years down the road,” he said, “you are likely to have sig­nif­i­cantly higher in­ter­est rates.”

For a bond mar­ket in­vestor now, the choice is to stick to shorter-term bonds, and get very low yields, or to move to longer-term ones that pay higher in­ter­est rates but that could lose mar­ket value if the in­ter­est rate of­fered on new bonds rose.

Much of the re­cent is­suance in bonds has been be­cause of re­fi­nanc­ing, in which com­pa­nies re­pay ex­ist­ing bonds with money bor­rowed on bet­ter terms. For hold­ers, it can seem the worst of both worlds: If rates rise, they have old bonds that have lost value. If rates fall, their old bonds are re­deemed by the com­pany, de­priv­ing them of the yield they ex­pected.

Cor­po­rate bond is­suance in the United States has risen to record lev­els this year, and the av­er­age in­ter­est rate on high­yield bonds, also known as junk bonds be­cause they are rated be­low in­vest­ment grade, has fallen even more rapidly than have rates on high­erqual­ity bonds.

By Hil­lel Italie

The story of 2012 in pub­lish­ing was the story of “Fifty Shades of Grey,” in more ways than one.

E L James’ erotic tril­ogy was eas­ily the year’s big­gest hit, sell­ing more than 35 mil­lion copies in the U.S. alone and top­ping best­seller lists for months. Ri­val pub­lish­ers hur­ried to sign up sim­i­lar books and de­bates started over who should star in the planned film ver­sion.

But the success of James’ nov­els also cap­tured the dual state of the book mar­ket — the ad­vance of e-books and the re­silience of pa­per. In a year when print was la­beled as en­dan­gered and es­tab­lished pub­lish­ers re­ferred to as “legacy” com­pa­nies, de­fined and be­holden to the past, the al­lure re­mained for buy­ing and read­ing bound books.

James al­ready was an un­der- ground hit be­fore sign­ing in early 2012 with Vin­tage Books, a pa­per­back im­print of Random House Inc., a house where legacy is in­sep­a­ra­ble from the brand. She could have self-pub­lished her work through Ama­zon.com, or re­leased her books from her own web­site, and re­ceived a far higher per­cent­age of roy­al­ties.

“We had a very clear con­ver­sa­tion back in Jan­uary about the need for a very spe­cific pub­lish­ing strat­egy,” says Vin­tage pub­lisher Anne Mes­sitte. “We talked about distri­bu­tion, a phys­i­cal for­mat, pub- lic­ity. And she was ba­si­cally clear that she needed what we did as pub­lish­ers to make that hap­pen.”

“Fifty Shades” be­gan as an e-phe­nom­e­non, un­der­stand­able since dig­i­tal erot­ica means you can read it in pub­lic with­out fear of dis­cov­ery. But ac­cord­ing to Mes­sitte, sales for the pa­per­backs quickly caught up to those for e-books and have sur­passed them for the last sev­eral months.

Pub­lish­ers from sev­eral ma­jor houses agreed that ebooks com­prise 25-30 per­cent of over­all sales, ex­po­nen- tially higher than a few years ago, but not nearly enough to erase the power of pa­per. And the rate of growth is lev­el­ing off, in­evitable as a new for­mat ma­tures. Simon & Schus­ter CEO Carolyn Reidy said e-sales were up around 30 per­cent this year, less than half what she had ex­pected.

“We saw all th­ese huge sales for tablets and huge sales for other machines coming out and as­sumed there would be a lot of new e-book read­ers,” Reidy says. “But in ret­ro­spect there were a lot of cur­rent e-book read­ers who were up­grad­ing their machines.”

The rise of e-books has not bro­ken the way books are pub­lished and sold. Mem­ber­ship in the in­de­pen­dent stores’ trade group, the Amer­i­can Book­sell­ers As­so­ci­a­tion, has in­creased three years in a row af­ter decades of de­cline. Ama­zon is a draw for many self-pub­lished au­thors, but its ef­forts at ac­quir­ing and edit­ing books — “legacy” pub­lish­ing — have been mixed.

Ri­val sellers have re­fused to stock Ama­zon’s books, lim­it­ing their sales po­ten­tial.

Au­thor E L James could have self-pub­lished her books through Ama­zon.com but pre­ferred the ex­per­tise of a tra­di­tional pub­lisher.

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