Investors in long-term bonds face rising risks
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.