Government Bonds Around the World

September 9, 2021

 

There is absolutely no question that, from a historical standpoint, yields on U.S. government bonds are terrible.  10-year Treasuries that were issued at 1.25% a year are now yielding 1.297%, which is not terrific when the inflation rate is somewhere between 6% and 7%.  If you go shorter term, 5-year Treasuries are trading at a yield of 0.788% a year, and 2-year Treasuries are offering a somewhat less-than-generous yield of 0.215%.

Those yields look stingy from a historical standpoint; just a couple of years ago, the 10-year Treasury rate was over 3%, and before the Great Recession you could have locked in 5% rates.  But if you compare U.S. rates to what the citizens of other countries are getting, the American bond market looks positively generous.

Consider, for instance, investors in German bonds, whose 2-year, 5-year and 10-year bonds were issued at 0% rates; the government promised nothing more than that it would give you your money back at the end of the term.  The 2-year bonds are trading at prices equivalent to an annual yield of roughly negative 0.738%, which is better than the negative 0.724% for 5-year bonds.  Buy 10-year German government bonds on the open market and you can expect to lose only 0.464% a year. 

European bonds in general are less-than-generous for their investors these days.  Two-year Spanish government bonds, which were actually issued at positive yields, are now trading to yield negative 0.684%; the 5-year bonds are yielding -0.419% and you can eke out a +0.219% annual return if you go out ten years.  Dutch, Belgian, and French bonds are similarly yielding negative returns across all maturities up to 10 years, while investors in Italian, Swedish and Portuguese bonds would have to go out ten years in order to get a positive return on their investments.  Of the major developed nations, only Australia is offering yields comparably ‘generous’ to what the U.S. is offering.

If you’re shopping for higher yields, maybe you could consider Venezuelan 10-year government bonds, which are posting an unusually high 46% annual yield—which barely beats the 45% yield offered on Argentinian 10-year government bonds.  Of course, then you would have to contend with Venezuela’s 9,986% annual inflation rate (down from 14,291% last year), which means the Venezuelan Bolivar is collapsing in real time, and your bond investment would be worthless in roughly a year.  (At today’s exchange rate, you can buy just under 403 billion bolivars with a dollar.  Five dollars will get you more than 2 trillion.)  Argentina’s currency is devaluing at a comparably more modest rate of ‘just’ 47% a year, which might eat away at the returns offered by the country’s bond investments.

We can complain that our government bond investments are losing money to inflation today, and the complaint certainly feels justified.  But investors in other countries actually have more to complain about than we do.

We hope that you and your family are safe and well!

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Sources:

https://www.wsj.com/market-data/bonds/governmentbonds

https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart

http://www.worldgovernmentbonds.com/

https://worldpopulationreview.com/country-rankings/inflation-rate-by-country

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

 

 

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Tax Proposal Consequences

September 1, 2021

 

Despite the alarmist articles you might be reading in the press, most people won’t be affected very much, if at all, from the tax proposals that are percolating through Congress.  If the bills pass in their current form, then individuals who make less than $400,000 a year won’t see any increase in their ordinary income or capital gains rates, and husband and wife taxpayers with less than $7 million—or maybe $10 million—in net worth still won’t have to worry about paying federal estate taxes.

But the proposals are creating some challengers for certain taxpayers, which would have to be planned for.  Individuals who are earning more than $452,700 a year, and joint filers reporting more than $509,300, are looking at a top marginal tax rate of 39.6% on income above that amount—up from today’s 37%.  For them, it makes sense to shift income, if they can, from 2022 into the 2021 tax year. 

People who are selling a business, or selling a home or investment real estate with a lot of appreciation, could be facing an even bigger challenge.  For taxpayers who report $1 million in adjusted gross income in any given year, the Biden proposal would raise the tax rate on capital gains—that is, on appreciation at sale above the purchase price—from today’s 20% to the ordinary income rate, which would be 39.6% plus a net investment income surtax of 3.8%. 

Who would report $1 million in adjusted gross income?  Small business owners who are planning to sell their firms might experience a one-time event where they pop up over that threshold—and find themselves paying more than double the amount they expected to Uncle Sam on the transaction.  Similarly, anyone who has a highly-appreciated real estate investment might breach that threshold, and some homeowners, if they combine the sale of an expensive house with the rest of their income, could find themselves with an unpleasantly unexpected tax bill.

There are ways to plan for this.  The easiest is, if the sale is imminent, to have it take place this year, under today’s 20% capital gains rates.  If that isn’t feasible, the business owner or real estate investor could negotiate an installment sale, where only a part of the money is received each year, over a period of years, keeping the total income below the $1 million threshold.  But these things have to be planned for now, before the new law takes place—and, of course, the complicating factor is that until the law is passed, nobody knows exactly what it will contain.

A proposal which is not in the Biden tax plan, but has been put forth by Bernie Sanders and others, is a reduction in the estate tax exemption—that is, the amount that people can leave to their heirs at death, or by gifting, without having to pay federal estate taxes. Today, the exemption (and the gift tax exemption and generation-skipping tax exemption) is a whopping $11.7 million per individual—$23.4 million for a couple, which is obviously well above most peoples’ net worth.  The Sanders tax plan would reduce that amount to $3.5 million per individual; others are proposing a reduction to $5 million.  Even if no bill is passed, the current estate and gift tax exemption will “sunset” in 2026, resulting in a reduced exemption of between $6 million and $7 million.

Most couples have less than $7 million or $10 million to pass on to their heirs.  But for an individual who has, say, $10 million in various investment accounts, planning for the federal estate tax suddenly becomes a bit complicated.  Suppose that person wants to take advantage of today’s high gift tax exemption.  Should he give away $8 million, and keep $2 million for living expenses in retirement?  If/when the estate tax exemption drops, that would expose the remaining $2 million to a 40-45% estate tax, since that taxpayer would have used up the new (reduced) exemption amount.  The only way to avoid estate taxes altogether would be to give away all of it to heirs, meaning that the retiree would have to depend, for living expenses, on the kindness of the children receiving those assets.

Or take the case of a couple which has $15 million in assets.  Suppose they decide to each gift $5 million to their kids, and live on the remainder.  If they do that, and the exemption goes down to $5 million, they have each used up their exemption and exposed the remaining $5 million to estate taxes at some point down the road. 

Is there a better way?  Either the husband or the wife could gift the whole $10 million (still comfortably under today’s $11.7 million gift tax exemption), and the couple would preserve the other person’s (reduced) $5 million exemption to be used to avoid estate taxes at the second person’s death.  What if the person NOT making the gift is the first to die?  The reduced exemption amount would still be ‘portable,’ meaning that the other spouse would “inherit” it and use it to avoid estate taxes upon death.

Once again, there are techniques to address these issues for people who are troubled by a reduced estate tax exemption.  One is a spousal lifetime access trust—a SLAT in the estate planning vernacular.  One spouse would gift assets to an irrevocable trust that would provide income to the other spouse for life, with the remaining assets, at the spouse’s death, going to the heirs—outside the estate.  Each spouse could gift substantial assets to the other under SLAT arrangements and potentially eliminate the estate tax problem altogether, but this can be tricky; the gifts and trusts cannot be reciprocal, or the estate planning advantages would be challenged by the IRS.

Once again, it is important to remember that most people will sail through these tax law changes, whatever they may be, whenever they are passed, without feeling much if any effect.  But for some, the new tax laws will pose some vexing challenges—what financial planners call ‘planning opportunities.’

We hope that you and your family are safe and well!

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

 

Sources:

https://www.investopedia.com/explaining-biden-s-tax-plan-5080766

https://taxfoundation.org/joe-biden-tax-plan-2020/

https://presidentialwm.com/blog-2020/an-ugly-sunset-what-will-happen-if-the-tax-cuts-and-jobs-act-expires/

https://www.kiplinger.com/retirement/estate-planning/601544/federal-estate-tax-exemption-is-set-to-expire-are-you-prepared

https://www.cnbc.com/2021/06/01/bidens-proposed-39point6percent-top-tax-rate-would-apply-at-these-income-levels.html

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

 

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The Eternal Olympic Boondoggle

July 30, 2021

 

What’s more eternal than the famous Olympic Eternal Flame?  Eternal cost overruns by Olympic sponsoring nations.

 

By all accounts, the Tokyo Olympics are extremely unpopular among Japanese citizens, and the reasons have nothing to do with the resurgence of COVID in that country.  The events are taking place with no live spectators allowed in the seats while medals are handed out and world records are broken, which is surely annoying.  But the real irritation is cost.

 

Hosting such a major gathering, and constructing the athlete village, arenas and other venues for 67 different types of sporting events, from baseball fields and bicycling tracks to equestrian arenas and synthetic kayaking rivers, is extraordinarily, indeed monumentally, expensive.  The prize for most money ever spent to host an Olympic event goes to Russia’s Sochi winter Olympics, which reportedly cost just under $22 billion.  London’s summer Olympics cost an estimated $15 billion of taxpayer dollars; Brazil spent an estimated $13.7 billion on the 2016 Rio Olympics, and every Olympic host from 1992 to the present has spent at least $2 billion of public money—often much more.

 

The 2020 Tokyo summer Olympics, delayed to 2021, has broken all records, costing the Japanese government (and, by extension, its citizens) an estimated $28 billion.  Part of the cost was the inevitable one-year delay, which added roughly $2.8 billion to the final tally.  But like virtually every other Olympic bid, the Tokyo event was estimated to cost far less than it eventually did; the Japanese bidding committee proposed to spend just $7.3 billion when they were awarded the event back in 2013. 

 

There are several lessons here.  One is that if your local officials are thinking about contending for the privilege of hosting an Olympic spectacle, you should think about drafting an opposing petition.  Another is that, if your local officials succeed, don’t believe any of their cost estimates.  The citizens of Montreal learned that lesson the hard way, when their 1976 construction costs came in 720 percent over budget.  Barcelona, in 1992, reported 266% cost overruns, while Russia’s Sochi Olympic construction costs ran 289% over the initial estimates.

 

But of course, the host city still has those newly-constructed venues, which are surely worth some decent fraction of the cost of building them.  Right?  As it turns out, the fancy ‘bird’s nest’ stadium built in Beijing, and similarly extravagant venues in Sarajevo, Athens and Rio, are now crumbling and largely forgotten—or, at least, the government hopes they are fading from their citizens’ memories.  The same fate may or may not happen to the city of Tokyo, but given the enormous cost of hosting games that will proceed without spectators, one might forgive the citizens of Japan for deeply resenting their part of the “bargain.”

 

We hope that you are enjoying your summer and staying safe.

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

Source:

https://www.statista.com/chart/5424/the-massive-costs-behind-the-olympic-games/

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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Inflation and Social Security Benefits

July 22, 2021

 

Every year since 1975, the Social Security Administration has automatically adjusted its benefit payments upward to account for inflation; the goal is for the payments to keep pace with the cost of living that recipients are experiencing.  For the past decade, these inflation adjustments have been pretty modest, as you can see in the chart.  In 2009, 2010 and 2015, there was no increase, and many of the other raises were 2% or less. 

 

That could change in the coming year, as a result of higher inflation.  In June, the Consumer Price Index rose 5.4% from a year earlier—the largest gain since 2008.  Extrapolating from the first six months of inflation data, the Senior Citizens League has estimated that the Social Security cost-of-living adjustment for 2022 would be at or about 6.1%—which would be the largest one-year increase since the bad old high-inflation days of 1983.

 

Social Security increases are tied to the CPI-W, the Consumer Price Index for Urban Wage Earners and Clerical Workers.  Some economists believe that the CPI-W tends to undercount the cost of living increases that many people experience, and that is especially true for seniors, whose budget is more closely tied to housing and health care costs, and less to food, apparel, transportation and recreation. 

 

A new bill in Congress, the Fair COLA for Seniors Act of 2021, proposes to change Social Security’s measure of inflation from CPI-W to CPI-E, the Consumer Price Index for the Elderly, which the Bureau of Labor Statistics has been calculating since 1985.  This shift, endorsed by the Biden Administration, would have resulted in a 1.4% upward adjustment last year (vs. the 1.3% figure used by the Social Security Administration), a 1.9% increase in 2020 (vs. 1.6%), 2.8% in 2019 (vs. 2.6%), 2.1% in 2018 (vs. 2.0%), and a much bigger increase in 2017, from 0.3% up to 1.5%.  Comparing the two measures of inflation over time, economists estimate that over 25 years, the CPI-E cost adjustments would push benefits 5% higher than the existing CPI-W index increase calculation that we use today.

 

The Social Security Administration has published a lengthy analysis of the differences in the various inflation measures, and its analysis suggests that, even though healthcare costs are weighted more heavily in the elderly CPI statistics, the prices actually paid by the elderly for health care, medications and hospital costs may be different from the general population calculations of inflation that are embedded in CPI-E.  Also, as the homes owned by the elderly increase in value, their out-of-pocket payments for property taxes and insurance premiums may be more volatile than they are for their younger peers.  Beyond all that, every one of us is different, with different lifestyles, so our individual CPI—whatever index is used—is likely to be different from whatever number is published month to month, year to year. 

 

We hope that you are enjoying your summer and staying safe.

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Sources:

https://www.ssa.gov/oact/cola/colaseries.html

https://www.cnbc.com/2021/07/14/social-security-cost-of-living-increase-for-2022-may-be-largest-in-decades.html

https://www.ssa.gov/policy/docs/ssb/v67n3/v67n3p73.html

 

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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New Tax Proposal Summary

 

May 21, 2021

 
Our colleagues at Blue Bell Private Wealth Management have put together a summary on Biden’s Infrastructure Plan. With their permission, we are sharing it here. Keep in mind these numbers may change. 
 
The recent tax proposal from the Biden Administration has made headlines as a way to help pay for the near $2.3 Trillion dollar infrastructure plan. While this is still just a proposal and many of the details remain fuzzy, we wanted to provide you with a summary of some of the changes that have been reported.
 
  • The top individual federal income tax rate would increase from 37% to 39.6%.
xxxxxxxxx - The income threshold is currently around $525,000 for individuals and
xxxxxxxxxx $628,000 for joint filers.
 
  • Increase the corporate tax rate from 21% to 28%. A 15% minimum tax would apply to corporate book income. 
 
  • Long-term capital gains and qualified dividends would be taxed at the ordinary income tax rate of 39.6% on income above $1 million and eliminates step-up in basis for capital gains taxation.
xxxxxxxxx - This is believed to be $1 million for joint filers.
 
  • Imposes additional social security taxes on wages or self-employment income over $400,000.
xxxxxxxxx - The current wage cap of $137,700 would remain in place but those
xxxxxxxxxx making more than $400,000 would pay additional tax into Social
xxxxxxxxxx Security.
 
  • The Biden proposal could expand the estate and gift tax by reducing the exemption amount to $3.5 million (per individual) and increasing the top rate for the estate tax to 45%. Biden would consider eliminating step-up in basis for inherited property.
xxxxxxxxx - The current exemption is $11.7 million per individual or $23.4 per couple.
 
  • Retain the current like-kind exchange rules for taxpayers earning less than $400,000. Taxpayers with income greater than $400,000 will be ineligible for capital gains deferral.
xxxxxxxxx - This would eliminate the current 1031 exchange for those making over
xxxxxxxxxx $400,000.
 
Keep in mind that this is still all a proposal with the final details still not worked out. We will continue to keep you updated as more details are released and discuss planning opportunities should they arise. 
 
Remember: Please note that our firm will continue to hold virtual client meetings only in order to prioritize and protect the health of our clients. 
 

Sincerely,

 Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Sources:

https://taxfoundation.org/joe-biden-tax-plan-2020/

https://rsmus.com/what-we-do/services/tax/federal-tax/president-bidens-tax-plan.html

 

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Kohlhepp Investment Advisors, Ltd.
3655 Route 202, Suite 100
Doylestown, PA 18902
Phone: 215-340-5777
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