My Photo
Note: Jeff does not accept guest blog posts on A Dash of Insight.

For inquiries regarding advertising and republication, contact main@newarc.com

Follow Jeff on Twitter!

Enter your email address:

Delivered by FeedBurner

Certifications

  • Seeking Alpha
    Seeking Alpha Certified
  • AllTopSites
    Alltop, all the top stories
  • iStockAnalyst
Talk Markets
Forexpros Contributor
Disclaimer
Copyright 2005-2014
All Rights Reserved

« Weighing the Week Ahead: Expecting too Much from Central Bankers? | Main | July Employment Report Preview »

July 30, 2012

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d83451ddb269e2016768f0e6fc970b

Listed below are links to weblogs that reference Four Actionable Investment Themes:

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

oldprof

Sheldan -- To determine the risk you need to decide whether the data from all of the other countries is actually relevant for the current US situation. This step is usually skipped by pundits citing the R&R book.

As to taking an aggressive position, I am not short bonds nor are my clients. I bring this up to suggest that you should consider replacing your bond funds with individual bonds. That is the conservative position.

Thanks for bringing this up.

Jeff

oldprof

David -- As we know, if interest rates go higher, the price of a bond moves lower. This is necessary for the coupon payment to match the market yield.

If you own individual bonds as part of your portfolio, and you do not plan to sell the bonds, unless the company defaults you will collect your full principal and interest -- no absolute losses. The portfolio is lower on a mark-to-market basis, but you do not care.

Now let us suppose that you and I form a partnership to invest in bonds (a simple bond fund). Now try the same scenario. Interest rates move higher and the price of our bonds moves lower. We still collect the expected coupon and can plan to get our principal back at maturity.

But I change my mind -- either due to preferences or other personal reasons. I want half the money in the partnership, which is forced to sell the assets at current prices. Your losses are now locked in, since you could not hold to maturity.

I go into a little more detail here: http://oldprof.typepad.com/a_dash_of_insight/2012/06/the-quest-for-yield-part-7-what-about-bonds.html

Fixed income investors should consider buying their own bonds.

Jeff

David

In reference to Doug Kass's investment in TBT, you cautioned us to be "... wary about absolute losses in your bond fund." Would you please expand on this. Thanks! David, a faithful follower

Sheldan

Hello: There is a recent and compelling argument against shorting bonds at this time by Lacy Hunt and Van Hoisington (following work by Reinhardt and Rogoff).

http://www.mauldineconomics.com/outsidethebox/hoisington-quarterly-review-and-outlook2

They claim that throughout history, when a government's debt ratio gets extremely high, long-term bond yields remain quite low for extended periods - like a decade or two. That's mainly because inflationary pressures in low-growth times, such as the present, are nil.

They, as well as Gary Shilling, predict LT Treasuries might get to 2.0 percent or below, and that future investors will view today's 2.5% yield with envy.

Even so, at age 68, I'm a bit wary of taking an aggressive position on either side.

Thanks for your very insightful commentaries.

Steve

Since I've retired from Cat I have a huge Bias
However like Cummings, Deere, Monsanto
It's not going away anytime soon
It's a ride both ways
If you are on the wrong side just wait. Sometimes for a while but you can wait.

Good call but I'm biased.

oldprof

Optradero -- Doug was a little early on this call, as were many others. He has been more aggressive in recent days, so I thought it was worth noting.

While I have also expected rates to rise for some time, it has not been a major theme (warning to investors) for me until recently.

Summary: You are correct, and thanks!

Jeff

Optrader0

Good post!

One note: Hasn't Kass called long bonds the "short of the decade" since 2010. I know he was buying TBT or calls on TBT back in August 2010.

The comments to this entry are closed.