Ominous, real ominous ramblings about a sooner than expected ending for QE emanating from the Fed minutes today. Ominous price action yesterday and today in 10 and 30 year Treasuries. It could get even more ominous tomorrow if the jobs number are an upside surprise. If necessary, does everyone have an exit plan or at least a partial exit plan for their bond holdings?
Edit: Guess I should mention since I am all into bonds (PONDX) that I have a volatility stop based on a decline equal to the largest percentage decline of the past 12 months (after adjusting for year end distributions)
Comments
In December I had already whittled down our American Fund bond funds significantly.
We're now at cash/43%, bonds/22% and equity/35%. This is both the lowest for bond funds and the highest for equity funds that we have been at for several years now.
(Background info: 70's, retired, no debt, pensions & SS adequate for ongoing expenses, so far.)
http://seekingalpha.com/currents/all
The problem isn't so much the Fed as Mr. Market yelling "Fire!" and everyone running for the doors at the same time. Now that could be nasty.
Away from the ranch and the pc most of today.
The long duration end of bonds were a bit poof today, eh? Below is a quick list of some areas.
EMB -0.09%
TIPZ -0.58%
STPZ -0.02%
LTPZ -1.68%
LQD -0.54%
IEF -0.50%
TLT -1.36%
Generally, the most favorable area today between equity and bonds were the high yield bond sector funds, ranging roughly about +.25% higher.
Our TIPs holdings, which function as our cash holdling area; got whacked about -.50% today. We will watch for further negative action on Friday morning and may indeed sell down some of these holdings again. We do not hold any funds directly related to long duration bonds; aside from whatever may be parked inside of some other bond funds.
Hopefully, a bit more time on Friday for a chat. Six o'clock in the morning will be here too soon; sign off I must.
Regards,
Catch
Most high yield funds are not particularly rate sensitive. The valuations of high-yield bonds and some mortgage-backed securities depend largely on the ability of the borrower to repay. As this generally relates to the economy's overall health, that's one reason these securities tend to track equities more closely than they do interest rates. In the case of PRHYX, which I jettisoned a month ago, the fund leans to the conservative side, normally holding 5-10% in long term Treasuries. For this reason, more conservative "high yield" funds like PRHYX may be impacted by swings in the Treasury market more than others.
My view is the economy will continue to slog along and not return to the "great recession" lows anytime soon. In this case, long term interest rates should trend higher in the coming decade(s). However, nothing moves in a straight line. There will be periods ranging from months to entire years when rates will retrench. However, IMHO longer duration Treasuries and higher quality dollar denominated bonds are not a good place to be for the long term - though successful fund managers may navigate the waters with limited success.
I've long held that lower grade bonds are a shaky investment - as many investors are not aware of the risks inherent here and have piled in under the false notion that "a bond is a bond" - attaining a false sense of comfort from this notion. That said, I greatly respect the power and inertia of "bubbles" of all types, so would expect the lower end bonds to run awhile longer (several more months) until some unknown "hiccup" - economic or otherwise - causes them to falter. At that point, it may be too late to safetly exit. (As noted, I've already sold.)
My bond holdings are quite limited - mainly falling within these areas: (1) those held through balanced funds, (2) floating rate funds, (3) international bond funds (4) diversified income funds like RPSIX and DODIX. All are relatively "safer" alternatives. However, all are susceptible to some degree to any carnage in bond-land if and when it occurs. I'd fully expect a fund like DODIX so suffer mild losses over shorter periods of a year or two - but to hold up reasonably well over longer terms as managers continually buy and sell in the changing interest rate environment. In this case, their diversification, higher credit quality, and relatively short durations will be assets.
Oh - a note on the Fed. They'll "talk the talk". It's called jaw-boning and is a tried and tested way to move markets one way or another - without really having to do anything. To some extent, it involves floating "trial balloons" to help them gage investor reaction to potential policy shifts. So, the talk has value - especially to the Fed - but should always be taken with a "grain of salt" by investors. There's a lot of pressure on the Fed to abandon their stimulative stance (One need only read some of the comments here at MFO.) They're trying to balance policy "accommodation" - as they call it - with political reality. When they think it's reasonably safe to withdraw stimulus they'll be most happy to do so - not withstanding past pronouncements (which I've previously likened as "not worth a cup of warm spit".) Enough said!
Treasuries hit record low yields (July 2012) http://buzz.money.cnn.com/2012/07/16/10-year-yield-slumps-to-record-low/
We've seen this movie before, and the sky didn't fall, so why is it absolutely inevitable that it will this time around? Just as, in 2004-2006, interest rates went up and core bond funds still made money, and then? Interest rates went down again. Sure, stocks are always good to have in a long-term portfolio ... but so are bond funds, of the diversified species.
To diversify the opinion here a bit, Gundlach said the other day that tactical interest-rate decline plays are beginning to look interesting.