June 16, 2022

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TOGETHER WITH

Good day to you. Do you know what's really driving US gas prices? Turns out, there are 4 main factors that go into the price of gas. The top factor contributing 54% of the price is: A. distribution & marketing costs, B. cost of crude oil, C. refining costs. Follow the wave 🌊 below for the answer.

Today's personal finance topics are:

We're in the worst bond market in 180 years
What should you do with your home equity?
Your home is probably underinsured

INVESTING

We're In The Worst Bond Market In 180 Years

The bond market can be a confusing thing to talk about, but we do in fact need to talk about it. Why? Well, we’re in the midst of the “worst” bond market we’ve seen in 180 years, and ironically enough, that may be pretty good for us.

The basics first

What is it? Government bonds are loans that investors make to the government in exchange for regular interest payments. They're backed by the full faith and credit of the US government, guaranteeing regular interest payments plus repayment of the borrowed money at the time of maturity. The US government issues these bonds across differing maturity dates and yields.
So what about yield? It’s the current rate bonds would pay investors if they bought them today. And the yield directly influences other interest rates, such as those for mortgages. A rule of thumb to remember: a bond’s yield and price are inversely related. When demand is high and bond prices rise, yields fall, and vice versa.
Treasuries and the economy. The 10-year Treasury yield has become somewhat like an economic barometer. Usually, if the 10-year yield falls, mortgage rates fall, which could strengthen the housing market and therefore the economy. If the future becomes uncertain and investors get worried about the economy, they look for safe-haven investments, which causes Treasury prices to rise and rates to decline.
But there’s more. The 10-year Treasury yield also influences a company’s borrowing rate: the higher it is, the more expensive it is for a company, potentially reducing its options to grow. When yields fall, it’s easier for companies to borrow and expand—serving as a boost for equities.
The current state? Bond prices are falling and yields are going up. Long-term Treasury bonds lost 18% of their value through April 30th of this year, which is the most precipitous drop we’ve seen since 17% over a 12-month span ending in 1980. The entire bond market, including all kinds of term lengths, has collectively performed its worst since 1842. And yields on the 10-year Treasury are up over 81%, the 5-year is up 116%, and even the 30-year bond is up over 50%.

The big picture

Simply put, we're in weird times. Typically when equities undergo a rough time, bonds are a classic alternative. Now though, it seems like everything is correlated and going through a rough time. And for what it's worth, following the 5 other times in history when equities and Treasuries both had double-digit real drawdowns, government bonds subsequently went on to soar.

Take this related lesson on this topic and earn Dibs 🪙 while you're at it:

Investing in Bonds

Investing Basics

5 mins

MONEY TIPS

What Should You Do With Your Home Equity?

The most recent market data indicates that almost 65% of Americans are homeowners, and other data shows us that the average sale price for homes in the US has increased about 25% over the last two years alone.

What does this mean? It means a lot of homeowners, newbies and veterans alike, have come into some home equity, whether they know it or not. In fact, US home equity hit its highest level on record of $27.8 trillion, according to the WSJ. For some, it’s just a cool feeling, but for others, it might be burning a hole in their pockets.

So what are some things you can do with your new theoretical money?

Improve: Using a home equity loan to improve the home itself is one of the most prudent ways to use your equity. It comes with numerous benefits, ranging from tax advantages, lower interest, and simply increasing the value of your home. In fact, remodeling projects have been found to return anywhere from 48%-94% depending on the project and where you live.
Buy another: Don’t want to use your savings to buy a vacation home or investment property? Home equity is here to help, maybe. It’s a tantalizing idea to be able to produce a down payment from the walls of the home you already have, and heck, it can be worth it if you consider the downsides too. Remember that home equity loans use your home as collateral, so you risk losing your residence in the worst case.
Invest: Whether taking out your home equity to invest is a prudent decision or not depends a lot on your financial situation. However, it's understandably tempting, in theory, to pull out that money and make a return on it in the markets, and in some specialized cases, that might make sense. If you’re financially stable and able to easily repay the loan, sure, maybe this is an option for you.
Nothing: If you don’t need the money for anything desperately and aren’t going to use it to make improvements to your home, it might be best to just chill. Although no one can foresee where the housing market will go, recent data does indicate that it’s possible that about 65% of homes are now overvalued, and that if a decline does occur, that could mean trouble for that HELOC.

Take this related lesson on this topic and earn Dibs 🪙 while you're at it:

Real Estate Investing Basics

Investing Basics

5 mins

INSURANCE

Your Home Is Probably Underinsured

Giphy—Reese Witherspoon in Little Fires Everywhere

Home prices have been soaring in recent years, and although that might seem like just another perk of being a homeowner right now, it can also be a very troubling thing in the event a disaster strikes your property.

Nationwide estimates that approximately two out of every three homes in the US are underinsured, and that sounds pretty believable considering the average home value has risen more than 25% over the last couple years.

What you should know about your homeowners insurance in this market

Inflation adjustments aren’t enough: Although most policies adjust a little for inflation annually, there’s a solid chance it hasn’t at all taken into account the market value change over the last couple years.
Underinsurement can be costly: The average amount of lag in those who are underinsured is about 22%, but it can be a much larger gap depending on your home. An insurance policy that lags coverage by 22% of the current value on a home that would cost $500,000 to rebuild would leave you footing the bill for $110,000 after insurance. Not many people have that much savings, let alone excess cash, and such an expense could be life-changing.
Taking the time to negotiate is worth it: If you’ve done your due diligence and believe your current policy falls short of truly insuring your property against loss, taking the time to talk with your insurance agent is going to be worth it. You might need to get an independent appraisal, shop around, and reassess your policy entirely.

Home Insurance Basics

Housing

7 mins

🔥 TODAY'S MOVERS & SHAKERS

Opendoor (-14.6%) an online company that buys, sells and swaps residential real estate online is down on fears of a housing bear market.
Roblox (-12.7%) as the online video game platform reported a year-over-year 23% decrease in average bookings per daily active user.
Tesla (-6.6%) on reports it's increased prices on US models by up to $6K due to supply chain issues.
Bitcoin (-26%) to $21,079.70 (5D)
Ethereum (-27%) to $1,114.96 (5D)

This commentary is as of 8:00 am PDT.

🌊 BY THE WAY

⛽ Answer is B. Cost of crude oil as it contributes 54% of US gas prices, followed by gasoline taxes (16%), marketing and distribution (16%) and refining costs (14%) (Visual Capitalist)

📈 ICYMI. Wait, what's a yield curve? (Finny)
🍋 Lemonade is America’s #1 homeowners insurance. Ranked 4.9/5 stars in the App Store, Clearsurance, and more. It’s the insurance people actually love. (Lemonade)
🤔Those who buy stocks the day the S&P 500 enters a bear market have made an average of 22.7% in 12 months (MarketWatch)
Finny lesson of the day. With consumer debt on the rise, put your debt knowledge to the test and pick up some practical tips in this lesson:

Debt IQ

Debt Management

8 mins

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The Gist is Finny's twice-a-week (Tues & Thurs) newsletter covering personal finance & investing insights and money trends. Finny does not offer investment and stock advice or endorsements. The Gist content team: Austin Payne, Chihee Kim.

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