UPDATE

🌤️ Happy Tuesday

Good morning. It’s officially October, meaning that you’re probably seeing Halloween decorations pop up around your neighborhood. If you do, now begins the holiday decoration season which will likely last until January! 🎃

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Read time: 4 minutes

WEEK IN REVIEW

📈 Market Performance

S&P 500 (5-day), via Google Finance

If you were to take a look at the S&P at the time of this issue’s release, you might think that the approximately 4,240-point value is a really bad sign. Relative to the performance of the index during this summer, this past September hasn’t kept up, but that isn’t a reason to jump ship.

This past week showed that the index has a for amount of strength and value to work with going forward. The week started with the S&P hovering around 4,240 but on Friday the index pushed up to the 4,320 price level. This may be a sign that the decreases over the last few weeks are a seasonal adjustment as the S&P finds itself a new fair value (i.e. not overvalued or undervalued).

🏦 BofA Big Losses

Bank of America branch by Tony Webster, via Flickr

One of the more shocking stock performances from this week came from Bank of America (BAC) stock. For some context, BAC stock had been on a major bull run in the years during COVID lockdowns. From mid-2020 to early 2022, the stock saw nearly a 130% increase in its value.

• This isn’t just a one-off performance by the way, as many so-called “super-investors” hold significant positions in Bank of America due to its value. Legendary Berkshire Hathaway investor Warren Buffet has BAC as his second-largest holding.

So what’s changed? The stock had been slowly declining from its COVID-time highs and was hovering around $30 for the last 6 months. In September, however, the stock shockingly dropped from around $29.20 to $26.22. That may not sound like much, but that’s a nearly 10% decline in value.

One of the main reasons this trend could be happening is because of interest rate fears. Inflation is still not at the desired level, and if interest rates rise even more, people will want to borrow less from banks. Last week's issue also mentioned how buying treasuries is becoming increasingly popular for long-term investors, who want to park money in safer, high-yielding assets.

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MARK IT. EXPLAINED

💵 Tackling T-Bonds (Updated)

Secretary Janet Yellen by International Monetary Fund, via Flickr

As we talked about last week in our issue, Is the S&P Still Safe?, the purchase of U.S. Treasury securities is rising. What are US Treasury Bonds, and why are they so important? Let’s break this down:

• Treasury bonds, or T-bonds, are simply debt agreements made by the U.S. government to American citizens.

• The government leverages this debt, along with tax revenues, to fund day-to-day operations and key initiatives, such as defense spending.

🏦 Purchasing Bonds (and What You Should Know)

Investors can either purchase T-bonds directly through a Treasury auction or via a secondary resale market and then receive semi-annual interest payments until maturity. T-bond pricing is primarily dictated by interest rate changes and market demand, as the events over the last year have demonstrated.

• As interest rates rise, the prices of existing bonds decrease as their fixed interest payments become inferior compared to recently issued bonds with higher coupon rates. The same is true conversely. The coupon rate, not to be confused with yield, is the interest rate return bondholders receive on the bond’s face value (usually $1000).

If an investor purchases a bond at face value, the coupon rate will equal the yield. However, if an investor purchased a bond at a discount (below face value) their yield would be higher because they pay less upfront but still receive the fixed coupon payment. If they purchased at a premium, above face value, their yield would be lower for the inverse reason.

📈 T-Bonds as an Investment

Why are T-bonds more popular than other bonds such as corporate or municipal bonds? The answer is, they are virtually risk-free. 

• These bonds are backed by the “full faith and credit of the U.S. government,” an institution that has never defaulted on debt and whose currency is the global reserve.

• While stocks and commodities typically carry higher expected returns, their lack of price stability is not ideal for use as collateral. Therefore, T-bonds are commonly used as collateral across international markets, whether through loans, margin accounts, or other forms of financial transactions.

They are the benchmark for most debt securities and collateral, so if a U.S. default were to occur (as was nearly the case in early June), it could have far-reaching consequences across financial markets and the broader economy. (Source: TheStreet)

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Nothing MARK IT. publishes constitutes professional and/or financial advice, nor does any information published by MARK IT. constitute a comprehensive or complete statement of the matters discussed.