Through the first five trading days of 2013 on a *total return* basis (including dividends) those who have heeded the multitude of year end 2012 calls to "run don't walk to the nearest bond exits" have proved premature - to say the least. Thanks to a red hot non agency mortgage backed securities market the past two days, one of the bond leaders in 2013 has been ANGIX with 2013 returns of 1.40%. And junk bonds have adhered to probably one of the strongest anomolies in trading/investing - i.e. their January propensity to outperform - have racked up returns over .80%. Board fave PONDX, is also up over .80%, thanks to non agencies. PPSIX while not a bond fund but a yield fund specializing in preferred securities is up almost 1.25%.
While these returns lag the S&P, .80%+ over five trading days is nothing to sneer at in Bondland. I am as worried about the bond/yield bubble bursting as anyone. It could happen tomorrow or the next day or whenever. But in the meantime, why not enjoy the ride and wait for signs of weakness before throwing in the towell or being unduly influenced by the self proclaimed experts. There is a lot more to the bond markets than simply plain vanilla Treasuries.
Edit: #1 How could I forget, oft mentioned SUBFX is also off to a stellar 2013 start with gains close to 1%.
Edit #2 For those who live in a literal world, my title was sarcasm.
Comments
Thank you for your time and thoughts. After a quick look, it appears that EM bonds was the only clunker bond area today. I am too pooped today, to participate this evening; and am away to pillow time.
Take care,
Catch
http://news.morningstar.com/articlenet/article.aspx?id=580185
But cash does not explain much: Performance of SUBFX is better than of DBLTX, so I wonder whether DBLTX still remains a good choice looking forward...
"For 2013 - Bonds will continue to run for part of the year. PONDX may be up another 20% by April 1 ... (Eventually) higher yielding bond funds stall-out and returns turn negative .... Perhaps in 2014, "bondslide" and "bondbust" will (come to characterize) what has happened."
I can't recall anyone here predicting an imminent bond crash. Not saying you've set-up a straw-man argument, but it would help if you could specifically identify the poster, post, or linked article you're taking exception to. Thanks. (Getting a little jumpy in bondland - aren't we?)
Link to the thread - http://www.mutualfundobserver.com/discuss/index.php?p=/discussion/comment/18095#Comment_18095
The basic strategy there appears to have been to barbell agency mortgages against private, junkier but performing mortgages so the volatility is almost non-existent, in both directions (risk-off and risk-on). If he sticks with that approach, as it sounds like he's doing, I'd look at it over the next year as a safe source of 5%-ish yield, with not much opportunity for cap app and little risk of cap loss. He's said to expect ~ 6% TR from both DBLTX and DBLFX in '13. Who knows, that might look pretty good later on.
Sounds reasonable.
Personally, a few things:
1. Everyone and their cousin has run to fixed income. People can say "well, on a relative basis" and yadda yadda - all I know is that there has been massive inflow into bonds in the last few years - 2012 inflows were TWICE 2011's and I think on a chart starting in 2000, equity inflows are probably flat to slightly negative and outflows from stock funds continue (http://ici.org/research/stats/flows/flows_01_02_13). Fidelity manages more money in bonds and money market than stock funds.
2. One could say that people did not have enough bond exposure before and are now (in some cases) bringing it up to where they should be. They aren't doing so at exactly the most opportune time. I'd also be very curious where "average" retail money has gone in the bond world in terms of funds.
3. Money may continue to to roll into fixed income funds and out of equity funds, but as long as that occurs, I'd rather move towards equities. If money starts rolling out of fixed income, I question whether a lot of that retail money that jumped out of equities and ran towards fixed income is coming back to investing at all, but some of it will go into equities. One of the predictions by Doug Kass for 2013 is that retail fixed income money isn't going to come out of fixed income this year.
4. Some bond subsectors may fare better than others and continue to. However, as time continues to pass, this will increasingly require timing and others are welcome to deal with that. If I'm investing in something these days, it had better be something that - unless something really changes - is going to be at least a mid-to-long term holding. I don't want to have to watch that a fund falls under its 50 day MA or something to decide whether or not to sell it.
5. Will bonds tank? I think there's certainly scenarios where money could start really rolling out of fixed income (today's 'safe harbor' investments turn into the risky investments down the road; ""I wouldn't lend money to anybody for 30 years at 3.2 percent, especially not the U.S. government," says Carl Kaufman, manager of the Osterweis Strategic Income Fund - http://www.bloomberg.com/news/2011-09-13/the-risks-lurking-in-treasury-bonds.html) , but it could take longer than anyone may expect (and inflows just look like they're continuing.)
I can make X amount of investment choices and I have moved almost entirely to investments where I have a long-term (3-5+ year) view on the company and or broader theme. I also agree with liking equities for the reasons that skeeter discusses here: http://www.mutualfundobserver.com/discussions-3/#/discussion/4952/dividend-growth-soars-22-8-in-q4
If one can skillfully navigate the bond market and believes that they can move from sector to sector over the short-mid-long term great; personally, I think there are opportunities and themes of interest in the equities over the mid-to-long term. I don't have a positive long-term outlook on many fixed income sectors, but there is no one way to invest, which I think is one of the most wonderful things about it.
When you toss-out a negatively loaded phrase like "self proclaimed experts" without identifying a target, it makes me, at least, wonder whether the reference is to those of us on the board who have voiced serious concerns over the elevated bond markets. As one of those, I don't mind being taken issue with - as long as it's done above-board. (Hopefully, I'm not alone in that desire to be dealt with openly.) As for Gundlach - just an incorrect guess on my part as to whom your reference might apply, as he's been mentioned quite a bit on the board. I have, however, recently linked a couple negative commentaries on bonds - one from the Chief Investment Officer at Vanguard. Another from a Goldman Sachs investment strategist. One may agree or disagree with what they had to say - however, "self-proclaimed experts" they are not. Thanks for identifying the intended targets of the jab. I try to tune-out those TV talking heads - the worst of the breed in my book. I'll also try hard not to comment further on the bond markets; as I've made my skepticism known and don't wish to seem antagonistic towards those holding different views. Regards.
You noted: Per your link above to the original "name the bond blowup" thread; the thread was in jest to some point for naming, but with a defined serious note. While it may be true that Treasury issues theoretically can not move a lot lower in yield; I know that you would agree that in spite of the fact that some other bond types get their yield clues from 10 year Treasury issues, there are many bond types.
Your comments are always appreciated and needed here; otherwise this forum becomes of less value. You never know when a word or statement you write will help have a strong and positive meaning to another reading at this board, someone you will likely never know or meet; other than through words here.
With some exceptions, I do my best to consider who may be reading anything I comment about or upon. Are they new to the world of investments and trying to figure out the difference between investment grade and high yield bonds; or large cap versus small cap equity? Perhaps someone is reading here who has a PhD in economics or is bright enough to have achieved the status of a certified financial planner; and reading my formally uneducated economic viewpoint(s), and then scratching their head. Speaking for myself, I am sure there have been more than enough times; as I have no problem running my mouth about some things, that any number of people who read here are quite sure that I don't begin to know what I am talking about or have a clear understanding of a given topic. That indeed is true about this vast world of investments. I intake as much as I choose about investments and all areas that drive the marketplace; but I also have other desires, with the family being foremost, of which I willingly place my other hours of the days, weeks and the year.
I grew up and into an equity-centric investing world. Either our house has changed or the investment world has changed; or both. Perhaps our house has merely expanded our horizons and suitable investment sectors. I personally find little comfort in many investing sectors; at least to the point of asurrance of a globally healthy structure. There are way too many bonds being issued by everyone; and I remain skeptical about valuations for companies, too. The mantra remains, "growth". But, at what cost? Some days the investment world reminds me of the best of the "hawkers" on tv trying to sell something to anyone.
Hopefully, our house will realize in a timely fashion; when we are indeed stretched to far into particular investment areas and have already started changes to the portfolio that may present stability and returns.
Regards,
Catch
At this point my effort to understand the bond market boils down to - especially at the below investment grade end - trying to understand the dynamics of things like fund flows, public perceptions and crowd behaviors; rather than relative valuations, interest rates or economic trends. It's all very confusing. So, I'm inclined to take a breather from that fool's game - for awhile. BTW: enjoyed Scott's summary (above) - Regards
I don't have anything against bonds in the way that I might a company that I don't care for and think I would short if I could (to throw out an example, Gamestop.)
The thing for me is:
1 Everyone and their cousin is going for yield and/or the perception of "safety" in bonds versus stocks after 2008. A quote from the manager of Ivy Asset Strategy: "Once the herd tramples in, however, Avery expects the equity rally to end. “I suspect a year from now I’ll have less equities, more cash and be more defensively postured,” he says. “Generally if you move in the opposite direction where the masses want to go, you not only survive but you tend to do well.” (http://www.businessweek.com/printer/articles/399092?type=bloomberg)
I don't necessarily agree that this will be the year that those out of the market will come back in or that bonds will tank or anything of that nature, but I do agree with the core concept - I see giant inflows into bonds and have seen giant inflows into bond funds for week upon week. I'd rather go in the other direction, personally.
2. I don't have an "over the horizon" outlook for fixed income (whereas someone can make a long-term case for, say, health care, given statistics and trends - http://www.patriotledger.com/opinions/x1671799230/MICHAEL-KRYZANEK-The-weighty-issue-of-obseity, for example - or any number of long-term themes, such as agriculture). While some sectors may continue to fare well, fixed income to me just feels overly crowded in many regards and it starts to feel very much a "timing" scenario, which I've become less and less fond of. I read posts like "You think you can trust those countries?" in regards to emerging market bonds a few years ago and now you have various EM bonds popping up all over the place and they've become a very popular asset class. Additionally, I also agree with what Hank said: "trying to understand the dynamics of things like fund flows, public perceptions and crowd behaviors; rather than relative valuations, interest rates or economic trends."
3:) A couple of the alternative/somewhat alternative products seem interesting, including newer Pimco's Mortgage Opportunities fund (which is an absolute return fund) and I think, if anything, flexibility/an "absolute return" strategy is going to be increasingly appealing in fixed income funds and to some degree, lessens the feeling of "timing" - the managers provide a good interview here: http://www.pimco.com/EN/Insights/Pages/PIMCO-Introduces-the-Mortgage-Opportunities-Strategy.aspx
Still, I can only invest in x amount of things though, and it becomes what's a priority?
Anyone who can navigate the fixed income market going forward, I'll definitely give you credit and nothing against it. I just think there are opportunities elsewhere, but again, there's not just one path in investing.