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When All of a Sudden the Most Liquid Market Out There Isn't Liquid, It's Worrisome
In this reading this article one will find out what some of the major fixed income managers are doing in anticipation of a rising interest rate environment and their positioning for possible liquidity issues.
Thanks for posting that link Old_Skeet. This article also shows why there has been solid interest in unconstrained bond funds and other alternative fixed income vehicles in recent times.
It kinda goes along with my review of my portfolio I did over this past weekend where I found and that a good number of the hybrid funds contained in the growth and income area of my portfolio have been reducing the amount of bonds held along with moving to shorter durations and in some cases raising their allocation to cash and/or to equities.
This is in part one of the reasons my portfolio's overall allocation to bonds have dropped and another one is that I have recently raised my allocation to equities to take advantage of the fall stock market rally that began back in the middle of October and with the upper movement in stock valuations has now left me short in my bond allocation.
I am now left to ponder what I will do. The most easy fix is to buy more fixed income (bonds) to rebalance. But, wait ... interest rates are expected to soon rise? And, according to the article ... Well, things just don't look the best for fixed income.
This is new territory for us. I am guessing when the first rate hike is announced or enacted there will be an emotional type of response. Who really knows?
The fact that your funds are making changes in advance of this event is positive. I have noticed this as well and in addition have bought short duration funds instead of long duration. Those holding long term govt funds for example will be affected greatly. If you have a fund that was around during the last rising rate environment (the Carter Depression as I call it), you can chart what happened then. That was a severe time and I don't know if this period upcoming will be like that. I don't think they (the Fed) will allow it to get that far.
Are the equity managers of the groups mentioned in the ariticle also attempting to conclude what they will do if and when their equity holdings also encounter a "liquidity" event? If high yield bonds and bank loans become illiquid to the point of "folks being scared"; will this not affect the equity sectors, too?
I remain with questions about the October 15, 10 year Treasury yield taking the big plunge. The below link is for your reading pleasure, including the comments section.
Note: You should be able to read this WSJ link with your first linkage. After that (a second read), not unless a subscriber or clear all browser history.
Seems, to me, when investors become faint at heart and rush for the exits in an attempt to build their cash positions asset valuations drop. This is one of the reasons Old_Skeet holds ample amount of cash to take advantage of these buying opportunities that usually take place several times a year.
I usually, build my cash position by selling equities into stock market strength. And, I may do this again and lean towards carrying a high level of cash. Currently, I am about neural in cash at about 15%, a little light in fixed income area and heavy in equity area. Come January, I am thinking of starting a sell down process in my equities if the market continues to advance and raise my cash by about 5% above neutral, buy a little fixed income to square the bond allocation to about the 25% range and then bubble equities a little on the light side through the sell down process as we move through the first and second quarters of 2015. I'd like to enter summer being a little light in the equity area by about five percent, or so.
In this way, come fall I can then begin to load equities and reduce cash by starting the "special investment spiff" process all over again to take advantage of the traditional fall and winter stock market strengths. Usually, stocks are the strongest in the fall and winter months and fixed income is strongest during the summer months with a transition period happening in between. However, the central banks have a lot to say about this tradition.
Anyway, this is Old_Skeet's thoughts as we move into December and start to close the year out as I am collecting all mutual fund capital gain distributions in cash. Come January, I’ll revisit this and most likely govern by my late father's old investment playbook.
Just wondering with no opinion because my choice during the summer was to eliminate bonds from my portfolio, but wouldn't there be an option to allocate some of the fixed income portion of a portfolio to dividend focused funds or etfs? I read in JP Morgan's Q4 Guide to the Markets that there's a positive correlation between stock prices and 10 Yr Treasury interest rates up to 5%. I've linked the guide and the page I'm referring to is page 12.
I think the current yield on the 10 Year is about 2.3%, which, in general terms of course, would suggest to me that we should have a decent opportunity in stocks for a while after rates start to rise.
If managers are reducing bond holdings and moving to shorter durations, my assumption would be the yields are also going down. I think, based on M*'s X-ray of my portfolio and reverse calculating, that the dividend yield on the S&P 500 is around 1.7%, which isn't great, but presumably a case could be made that the total return on a dividend focused strategy could match or beat the total return on shorter duration fixed income up to a 5% 10 Year yield if fixed income is losing on the price side.
I haven't gone through all the details enough to convince myself one way or the other (clearly its influenced by the particular stocks chosen) but thought its at least worth throwing it out there as an idea.
Thanks for the link to J P Morgan’s 4th Quarter 2014 Guide to the Markets. Indeed good and useful information is to be found here. I plan to save the link.
I like your idea and it seems very sound to me. As a matter of fact my late father favored dividend paying stocks over traditional fixed income investments. He did carry some bonds for diversification purposes but felt a good dividend stock the better choice as it would over the years, most often, grow its dividend over time plus, in most cases, provide capital appreciation. And, I have not moved away form this concept either as my spiff is paying me a good dividend while I carry it and more so than a short term bond fund would but not what a high yield bond fund would pay.
One of his favorite strategies was taking advantage of the traditional fall and winter stock market rally which I now have now put in play, during the recent October swoon, and have named this special investment position “spiff.”
Putting this spiff into play has tilted my asset allocation somewhat along with the fact that many of my hybrid funds found in the growth & income area of my portfolio are also a little light in bonds and combined has made me light in bonds within my overall portfolio’s asset allocation ranges that I generally follow. My neutral allocation to bonds is about 30% and with me currently managing bonds at the 25% range has already put me at about 5% light. Now, I am at about 22% to 23% in bonds and wanting to work back towards the 25% allocation which I’ll do over the next few months, or so.
According to my quick review of the “Guide” it seems equities are the place to be.
I think Ted normally posts the Guide each quarter as that's how I became aware of it. I thought about posting it early October but didn't want to step on any toes and then I forgot about it and maybe he did too.
I think your spiff was great and while I shared your opinion at the time and made additional investments as well, the idea I liked most was using the cash from year-end distributions to invest opportunistically. Thank you for sharing that approach as I'm sure I'll benefit from that learning for a long time.
What does uncle Jeffrey say about this? DLFNX is holding 16.53% in cash. DBLTX holds 13.56% cash. (If we can trust that number from Morningstar.) I do think JG knows what he's doing. I remember an interview on Bloomberg tv a few years back. He simply said that he was "exploiting inefficiencies in the Market..... I wish I could teach it." With that latter phrase, he sounds like me, but I don't claim to know the Markets the way he does, though! I'm what you might call a RANK AMATEUR.
Sorry, not possible. Our resident intellectual analyst has proven that, over and over, with unchallengeable references to acres of formidable economic formulae and uncounted Monte Carlo simulations.
Comments
It kinda goes along with my review of my portfolio I did over this past weekend where I found and that a good number of the hybrid funds contained in the growth and income area of my portfolio have been reducing the amount of bonds held along with moving to shorter durations and in some cases raising their allocation to cash and/or to equities.
This is in part one of the reasons my portfolio's overall allocation to bonds have dropped and another one is that I have recently raised my allocation to equities to take advantage of the fall stock market rally that began back in the middle of October and with the upper movement in stock valuations has now left me short in my bond allocation.
I am now left to ponder what I will do. The most easy fix is to buy more fixed income (bonds) to rebalance. But, wait ... interest rates are expected to soon rise? And, according to the article ... Well, things just don't look the best for fixed income.
Old_Skeet
The fact that your funds are making changes in advance of this event is positive. I have noticed this as well and in addition have bought short duration funds instead of long duration. Those holding long term govt funds for example will be affected greatly. If you have a fund that was around during the last rising rate environment (the Carter Depression as I call it), you can chart what happened then. That was a severe time and I don't know if this period upcoming will be like that. I don't think they (the Fed) will allow it to get that far.
Are the equity managers of the groups mentioned in the ariticle also attempting to conclude what they will do if and when their equity holdings also encounter a "liquidity" event?
If high yield bonds and bank loans become illiquid to the point of "folks being scared"; will this not affect the equity sectors, too?
I remain with questions about the October 15, 10 year Treasury yield taking the big plunge. The below link is for your reading pleasure, including the comments section.
Note: You should be able to read this WSJ link with your first linkage. After that (a second read), not unless a subscriber or clear all browser history.
Hey, why did the 10 year T yield drop like a rock on October 15? Dunno, eh?
Other Google search links related to October 15
The musical chairs of investing remain in place.
More coffee please !!!
Catch
I am working on the coffee this morning too.
Seems, to me, when investors become faint at heart and rush for the exits in an attempt to build their cash positions asset valuations drop. This is one of the reasons Old_Skeet holds ample amount of cash to take advantage of these buying opportunities that usually take place several times a year.
I usually, build my cash position by selling equities into stock market strength. And, I may do this again and lean towards carrying a high level of cash. Currently, I am about neural in cash at about 15%, a little light in fixed income area and heavy in equity area. Come January, I am thinking of starting a sell down process in my equities if the market continues to advance and raise my cash by about 5% above neutral, buy a little fixed income to square the bond allocation to about the 25% range and then bubble equities a little on the light side through the sell down process as we move through the first and second quarters of 2015. I'd like to enter summer being a little light in the equity area by about five percent, or so.
In this way, come fall I can then begin to load equities and reduce cash by starting the "special investment spiff" process all over again to take advantage of the traditional fall and winter stock market strengths. Usually, stocks are the strongest in the fall and winter months and fixed income is strongest during the summer months with a transition period happening in between. However, the central banks have a lot to say about this tradition.
Anyway, this is Old_Skeet's thoughts as we move into December and start to close the year out as I am collecting all mutual fund capital gain distributions in cash. Come January, I’ll revisit this and most likely govern by my late father's old investment playbook.
I wish all … “Good Investing.”
Old_Skeet
https://jpmorganfunds.com/cm/Satellite?UserFriendlyURL=diguidetomarkets&pagename=jpmfVanityWrapper
I think the current yield on the 10 Year is about 2.3%, which, in general terms of course, would suggest to me that we should have a decent opportunity in stocks for a while after rates start to rise.
If managers are reducing bond holdings and moving to shorter durations, my assumption would be the yields are also going down. I think, based on M*'s X-ray of my portfolio and reverse calculating, that the dividend yield on the S&P 500 is around 1.7%, which isn't great, but presumably a case could be made that the total return on a dividend focused strategy could match or beat the total return on shorter duration fixed income up to a 5% 10 Year yield if fixed income is losing on the price side.
I haven't gone through all the details enough to convince myself one way or the other (clearly its influenced by the particular stocks chosen) but thought its at least worth throwing it out there as an idea.
Thanks for the link to J P Morgan’s 4th Quarter 2014 Guide to the Markets. Indeed good and useful information is to be found here. I plan to save the link.
I like your idea and it seems very sound to me. As a matter of fact my late father favored dividend paying stocks over traditional fixed income investments. He did carry some bonds for diversification purposes but felt a good dividend stock the better choice as it would over the years, most often, grow its dividend over time plus, in most cases, provide capital appreciation. And, I have not moved away form this concept either as my spiff is paying me a good dividend while I carry it and more so than a short term bond fund would but not what a high yield bond fund would pay.
One of his favorite strategies was taking advantage of the traditional fall and winter stock market rally which I now have now put in play, during the recent October swoon, and have named this special investment position “spiff.”
Putting this spiff into play has tilted my asset allocation somewhat along with the fact that many of my hybrid funds found in the growth & income area of my portfolio are also a little light in bonds and combined has made me light in bonds within my overall portfolio’s asset allocation ranges that I generally follow. My neutral allocation to bonds is about 30% and with me currently managing bonds at the 25% range has already put me at about 5% light. Now, I am at about 22% to 23% in bonds and wanting to work back towards the 25% allocation which I’ll do over the next few months, or so.
According to my quick review of the “Guide” it seems equities are the place to be.
Old_Skeet
I think Ted normally posts the Guide each quarter as that's how I became aware of it. I thought about posting it early October but didn't want to step on any toes and then I forgot about it and maybe he did too.
I think your spiff was great and while I shared your opinion at the time and made additional investments as well, the idea I liked most was using the cash from year-end distributions to invest opportunistically. Thank you for sharing that approach as I'm sure I'll benefit from that learning for a long time.
Have a great Thanksgiving!!!
LLJB
Sorry, not possible. Our resident intellectual analyst has proven that, over and over, with unchallengeable references to acres of formidable economic formulae and uncounted Monte Carlo simulations.