Date: Wed, 11 Aug 2004 21:38:22 CST
From: Tad Borek 
Newsgroups: misc.invest.financial-plan
Subject: Re: Newbie questions on bonds
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Tom wrote:
  > 2.  Regarding your question on long-term zeros when rates are low...
> looking at his back-tested restuls (to 1972), the 30 yr zeros did
> amazingly well in 1982, 1985, and 1995 (156% ,107%,and 85%) as well as
> doing pretty well in other years.  For the 1982 and 1985 results, I'm
> not sure if macro-economically speaking, this is somehow related to
> recession-ish stuff?  He doesn't give much analysis regarding why
> stuff did well.

Tom-
The quick answer: go here after reading the next paragraph, it's a graph 
of historical rates on 30-year bonds...
http://research.stlouisfed.org/fred2/series/WGS30YR/115/Max

Every time the blue line went up, STRIPS dropped a lot in value. Every 
time the blue line went down, STRIPS gained a lot in value. The higher 
up the line was, the more of a chance you had to make a killing in 
STRIPS. So you can see that the early 1980s was a unique time because 
the blue line went as high as it's ever been. And the dates you mention 
are times that the line went down very quickly (in part because it had a 
long way to drop).

STRIPS represent a very aggressive bet on long-term interest rates. You 
buy them if you think rates are dropping, because they'll go up a lot in 
value. You avoid them if you think rates are rising, because small 
changes in long-term interest rates produce large changes in the value 
of a STRIP. Maybe that's what you want to do, but be aware of how 
they're valued.

Let me know if you want the long answer.

> under the Barrons
> Market Lab - Economic Indicators section, there is a subsection
> entitled "Adjustable Mortgage Base Rates" and there is a list that
> includes a few t-bills and t-notes with some "rate" listed.  Under,
> there is some small type saying, "fed annualized yields adjusted for
> constant maturity"  Any idea what this refers to?

Some mortgage rates (ARMs, adjustable rate mortgages) are based on 
interest rates reported by the Federal Reserve Bank. The things you 
mention are some of the things that mortgage rates are pegged to. These 
are set by market demand and reflect "today's" interest rates. The 
One-year Constant Maturity Treasury rate is the current yield for a 
Treasury bond that matures in one year. The Five-year is that day's rate 
for a five-year bond. When you graph all of these rates you end up with 
a chart called the "yield curve". If you google all these terms or look 
around on the Federal Reserve sites you'll find a lot of info describing 
exactly what they all mean and how they're calculated and reported. 
Though if you do all that you can't go calling yourself a newbie anymore!

-Tad