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The Inverted Yield Curve and Why It Matters

For those invested in securities, the last few years have offered thrilling milestones, as the closing bell on so many trading days has ended with one record-shattering day after another.* If those market indexes were all we considered when predicting the future, we could be forgiven if we saw nothing but clear sailing ahead.

But there's another trend, this one sending tremors of worry through the bond markets, that demands attention because it suggests another downturn may be on the horizon. 

In the bond market, it's called an "inverted yield curve," and this wonky-sounding event has presaged every recession for the last 60 years. Only the timing of the downturn is in question, with recessions showing up somewhere between 6 to 24 months after the inverted begins.
Before we explain what the inverted yield curve is and why it's worrisome, let's set the stage with some basics about bond markets.

Bonds are instruments of debt issued by corporations, cities, and governments, such as our federal government, whenever they need to raise money. When investors buy bonds, they expect to be repaid in full at a later date with interest based on the risk associated with the bond. 

Sometimes the risk is considerable. Remember the junk bond crisis of the late 1980s, early '90s? Back then, lots of businesses on shaky footing tried to borrow themselves into profitability by issuing "junk" bonds that paid bond holders a high rate of return commensurate with the risky nature of the investment. Unfortunately, lots of those junk bonds weren't worth the paper they were written on, and the financial services industry was indelibly transformed by the fiasco that followed.

But for conservative investors, there can often be nothing more comforting than bonds. Typically one of the safest bets around, these bonds offer investors an assured rate of return on their money for very little risk. US Treasury bonds, or T-Bills, are considered the safest in the world, thanks to their backing by the U.S. government.
There's nothing terribly exciting about how government bonds work: 

 You buy a bond - or coupon in the parlance of the bond market - and essentially park your money for a fixed period of time - or it's "maturity date." In return, the issuer promises to pay you back in full at the end of that period plus a pre-determined rate of interest - called the "yield." 

In theory, the shorter the duration of the coupon, the lower the yield, while longer term coupons offer higher yields. That's because there's a greater risk that unforeseen events such as rising inflation or economic downturns will erode your yield over those longer periods than shorter ones. So, the higher yields on long-term bonds - those with terms of ten years or more - are meant to compensate you for the added risk. If you plotted these yields in a chart, you'd see a rising curve with yields ascending over time.

That is, until now.
For the last few months, long-term T-Bills have actually offered lower yields than short-term ones. As of July 26, for example, a 4-week T-Bill offered a yield of 2.13 percent, while a 52-week T-Bill's yield was just 2.00 percent. And it isn't just U.S. Treasury bills and other U.S. entities which have begun paying less for longer term bonds: it's a trend taking place throughout the world as nations as diverse as Japan, Germany, Sweden, the UK, and dozens of others are all lowering their bond yields over the long-term.
The Big Question: Why?

When pricing yields, economists have to take into consideration lots of factors. But few are as critical to pricing as interest rates, both current rates and the best forecasts for the future.  As you might imagine, fluctuating interest rates pose a big problem for bonds. When interest rates are expected to rise in the future, bond-issuers have to offer higher yields on long-term bonds to entice buyers away from other investments. That makes bonds more expensive for the issuer, while making bonds more attractive to investors.

On the other hand, when interest rates are expected to fall in the future, issuers don't want to be caught overpaying for their bonds, so they lower rates. That might make borrowing money cheaper for the issuer, but it also makes the bonds less attractive to buyers. 

Why Interest Rates Rise and Fall
So far, we've been talking about fluctuating interest rates as if they were only a supporting player in this scenario, when in fact, they are actually the lead actor. The reason that the inverted yield curve is alarming to so many observers is that it points to expectations for falling interest rates in the future. And that is often a harbinger of economic troubles.

Here are just some of the factors on the horizon that point to the potential for an economic downturn and the reason for this inverted yield curve:

* The Fed has signaled lower interest rates later this year, despite earlier statements that it would be raising interest rates throughout 2019. This new course of action is widely being interpreted as a sign of a cooling economy.
Second quarter GDP was a sluggish 2.1 percent, another possible indicator of an anemic economy.
* The economic "cold war" that seems to be gaining steam between the U.S. and China holds the potential for all kinds of negative financial impacts.
* Brexit and other economic indicators in Europe are signaling possible downturns in the economies of many of our trading partners.
* Growing trouble in the Middle East, especially the straights of Hormuz where Iran has become especially aggressive in attacking the oil tankers of other nations, could flare up into a serious international conflict that impacts the flow of trade, most particularly, oil.

Now What?
Usually, what's bad for bonds is good for stocks, and we've certainly seen investors shun bonds in favor of equities lately. But an ebbing tide can ground all boats, so in a full out recession, even stocks may be affected. That's why your money manager should always keep a vigilant eye on economic trends and remains ready to respond accordingly as market conditions require.

*Remember that past performance is no guarantee of future performance. Just because the markets have had some great closing days in the past doesn't mean the markets will continue to go up in the future.




We're enjoying our independence with our new Broker/Dealer, and we hope you are too! But we're also excited to continue to offer you a wide range of insurance products as well. So, we hope you'll continue to turn to us whenever you have any questions or concerns about your current goals and your plans for the future. 

In the meantime, if the topics covered in this newsletter raises issues or concerns you may have about your own financial strategies, we'd love to hear from you!

Hal Schwartz
DMG Financial Advisors Group
Chief Investment Officer
Managing Partner


TOLL FREE     800.983.4448
Denver Metro 303.470.5664
Tampa Bay.    813.996.6100

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Medicare May Be in the News These Days, But Some Older Americans wondering if they need

These days, reaching age 65 no longer means automatically retiring. Today, according to AARP, 20 percent of those over age 65 are still either working or looking for work. That's twice the number of working seniors as in 1985. And that's a trend expected to not only continue, but increase in the future. The Bureau of Labor Statistics expects that 13 million Americans over age 65 will be in the workforce in 2024.
There are lots of reasons why seniors continue to work when they could retire. Some do so for economic necessity. But many also work for the other benefits that employment brings, such as career satisfaction, social contact, and employer benefits, such as health insurance.

When Seniors Don't Need Medicare
At age 65, most Americans are expected to enroll in Medicare, the government-run health insurance program for seniors. Fail to enroll when you become eligible, and you may be penalized by a lifetime late-enrollment penalty of up to 10 percent for each year (twelve consecutive months, not calendar year) that you put off enrollment.
But there are some important exceptions to this rule that deserve greater discussion. But first, let's look at bit more closely at Medicare and why anyone might not want to enroll in the first place.

A Quick Overview of Medicare
There's lots to recommend Medicare, especially for those who would otherwise go without health care insurance or have to shoulder the burden for care out of their own pockets. But Medicare also has disadvantages, such as: 

The Cost of Medicare
Medicare isn't free. Participants must pay for Medicare Part B and Part D monthly premiums, as well as Medigap plans that help cover the gaps in what Medicare covers. Then there are copays, deductibles and coinsurance. A Medicare Advantage plan or a Medigap plan may cover part or all of these additional expenses, but the greater the coverage, the higher your premium. Also, the older you get, the more your Medicare premiums will cost you.

Limits on Treatment
  • Under Medicare, you must seek treatment from a participating provider or Medicare won't cover your costs, with some exceptions for emergencies. 
  • Routine Medicare does not provide vision care, dental or hearing benefits. 
  • If you switch Medigap or Medicare Advantage plans, you may have to change doctors.
  •  You may need to wait for treatment until Medicare approves it. You may not have access to certain treatments or providers if they aren't approved by Medicare.
For these reasons and more, some people are anxious to delay their Medicare enrollment in favor of their current coverage.

When You Can Delay Medicare Enrollment
With so many Americans working past age 65, more and more enter their Medicare enrollment period still covered by an employer's health care plan either as worker or spouse. 
For those employees with enviable health care coverage through their workplace, the government's Medicare plan may seem a poor substitute. Fortunately, these individuals can forestall Medicare enrollment and keep their employer coverage, with a few conditions:
  • If your employer has fewer than 20 employees, you should enroll in Medicare Part A and Part B when you become eligible, even if you are covered either as an employee or spouse. Medicare will pay for your care first as the primary payer for your health coverage, with your employer's insurance paying any remaining benefits due you.
  • If your employer has more than 20 employees, you may delay enrollment until you are no longer covered by the employer's plan.
  • Once you are no longer under an employer's plan, you must enroll in Medicare. 
  • If you are eligible for premium-free Medicare Part A, which covers hospitalization, then you may still want to enroll in benefit. 
Postponing Medicare enrollment while you are covered by an employer's health insurance coverage requires some careful thought.  For example, you'll want to look more fully into how much your employer's plan costs you - in premiums, copays, deductibles, and coinsurance, for example - versus how much Medicare - and any Medigap or Medicare Advantage plans you buy - will set you back.  With that information in hand, you'll be better prepared to decide when to keep an employer's plan and when to go with Medicare.
More Help
Click here for a great government site with more information.


When Bond Yields Go Up, Bond Prices Fall

It's not just bond yields that are impacted by lower interest rates. It's the price of the bonds themselves.

No, we're not talking about that initial investment, when a buyer plunks down the face amount of the bond and keeps it until it matures. The fact is that most bonds aren't owned by individuals but rather  by institutional investors.

These bond funds are like baskets that contain a lot of bonds from many different issuers with different yields and maturity dates. The bond fund managers are always buying and selling these bundles of funds based on market activity, performance and a host of other factors.

As institutional investors buy and sell bond funds, the value of these funds is heavily influenced by interest rates. Why? Because when interest rates are going up, investors know that they can get a better return on their investment by buying brand new bonds reflecting these new higher rates than by buying existing bonds at a lower rate of return. So anyone wanting to sell a bond fund has to settle for a lower price when interest rates are rising. Conversely, when interest rates fall, existing bonds become more valuable and can command a higher price.

The Inverted Yield Curve of Four Nations

It's not just the U.S. experiencing an inverted curve. Several nations, including the five below, are now offering lower bond yields for longer-term bonds


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Copyright 2019. DMG Advisor Group LLC. Main office:  7114 West Jefferson Ave., Suite 305, Lakewood, Colorado  80235 800-983-4448, 303-470-5664.  Securities and advisory services offered through Stephen A. Kohn & Associates, Ltd., (SAKL) member FINRA/SIPC/MSRB. SAKL is separately owned and other entities and/or marketing names, products or services referenced here are independent of SAKL.  Neither SAKL, nor its representatives, offer tax or legal advice. Visit us online at

Federal income tax laws are complex and subject to change. The information in this newsletter is based on current interpretations of the law and is not guaranteed. Neither the company nor its representatives give legal or tax advice. Please consult your attorney or tax advisor for answers to specific questions. To best serve you, we need to be kept current on your personal situation.  Please let us know if you have any changes in your financial status including employment changes, raises, promotions, change of objectives, or in your personal status such as marriage, divorce, birth of a dependent, or change of address.