I started investing in bond funds about 4 months ago. At that time I took some not very informed decisions. They haven't hurt me yet, but I want to do some shifts in my portfolio. I want to keep funds with lower average duration.
Right now I am looking to sell TGINX and buy DLTNX, is this the right time. Are the technical charts of any help in this case? Or I should just do the exchange, without caring too much about the technicals?
Without knowing too much about technical analysis, it seems to me that right now it might be a good time to sell TGINX.
Comments
Duration is a funny thing when it comes to mortgages. When interest rates rise, people are disinclined to refinance, so they hold their mortgages longer, and duration increases. At just the time you need it to be shorter (since rising interest rates mean lower bond prices). And vice versa - when rates drop, people refinance their now expensive mortgages, and you lose the advantage of having high paying mortgage bonds (another way of saying that duration falls).
Take a look at typical maturity - over 80% of DoubleLine's bonds are 20+ years. The average effective maturity is much lower because M* (and others) expect mortgages to be paid off early. That's always true (people move), but the number drops as rates go up. I'm suggesting looking at maturity to get a better picture of how much bonds being mortgage bonds skews the numbers.
All of this is why mortgage bonds tend to pay a little higher rate - not a lot, but enough to keep people happy in a gently varying rate environment. The risk is what happens when interest rates move quickly. IMHO, that's the expectation - that sooner or later, rates will begin to rise, and when they do, it will be quick.
If I wanted something with a lower duration that wouldn't have as negative a reaction to rising interest rates, I might look at something like USAA Intermediate Bond (USIBX). An "honest" duration under 3 years, better credit rating on the portfolio, similar low turnover, and a bit cheaper.
In short, mortgage funds make me uneasy in volatile times, and Grundlach is basically a mortgage bond manager. Lots of people like MBS funds, and I'll use them sometimes. I'm not sure now is one of those times. (Of course, I could be completely wrong, and rates stay low and sedate for a couple more years.)
How about the first part of the question, is there any reason to bother about technical analysis when selling and buying bond funds?
You don't mention what % of your holdings are related to TGINX & DLTNX.
Do you have other bond funds and/or other mixed funds which may also hold various bond types?
We hold FNMIX, and although there has been recent weakness in the emerging markets bond sector; we find no reason at this time to move away from this area. As to the mortgage bond area involved with DLTNX. This area may remain weak and perhaps the majority move plays here have already taken place in 2011 and some of 2012.
Both of these funds pay a decent yield at this time and I personally don't see any large downside fires for either of these funds, at this time. TGINX was at its 52 week high on 12-26-12 and is down about .4% since then; with DLTNX at its 52 week high on 9-26-12 and is down about .6% since then. NOTE: % change in NAV only pricing.
As to bonds in general. There has been weakness in some investment grade areas starting in late July of 2012; which was followed by a small positive recovery period which found many IG bond areas to peak in price near the first week of Dec. 2012. General weakness and losses have been in place since, for some bond sectors.
As to technical factors for buying or selling bond funds; not unlike any other investment sector is a science of long time study; but which is not perfect for this house and must be factored with many other areas in the broad market place, which includes everything, but perhaps the kitchen sink. The below chart is for 200 business days and includes DLTNX, TGINX, BOND, HYG and BND. Keep in mind that the last two are more or less static, without active management. You will see that they all have taken their own pathways; and in particular since Aug of 2012, the BND which is a rather generic and tame bond representation. Money in BND and related types has done very little since Aug., 2012. And not that this should really mean much, in particular; but this action is just after Mr. Draghi of the Euro Central Bank stated that the bank would do whatever it takes to support euro area bonds and other financial problems there. Now, similar statements come and go; and especially during the past 4 years. His particular message had real teeth for traders or others, apparently. The point being with what you find on this chart, is that there are many paths for bonds. Lastly, if our house used only technical aspects; we should have not placed monies into PONDX, as this fund continues to defy the technical aspects of a "too hot to handle" proposition. However, the management of the fund continues to produce returns; and is flying in the face of many events; at least as of today.
Various bond sectors, April 1, 2012-Jan 17, 2013
This chart measures PONDX against some broad equity sectors back to April, 2012. Note: hover the pc mouse over any chart line for date references, etc.
The current equity market rally may be drawing away some monies from some bond areas; at least at this time.
'Course, thinking about selling a fund brings forth the "what to do with the proceeds?".
If you sold both of these bond funds, where would you place the monies?
This is only my opinion, for what it is worth; about your question.
Regards,
Catch
Edit: You can't use traditional technical analysis on bond funds, most especially overbought/oversold indicators and oscillators.
It is a taxable account.
For all practical purposes; our house follows pricing as much as anything for trying to determine where a sector may travel. 'Course, this is tied in with whatever else one chooses to have for all of the other outside factors, too. The "perversion factor" that has been handed to the market place by central bank policies is another area to have to deal with for many sectors today. Not sure how one could truly study what is or is not fundamental today to evaluate "something".
As to PONDX, as you have noted, too; is that it continues to move positive without a "burp".
A technical chart for PONDX, at least for relative strength; has continued to run stronger and longer than any other fund I have ever viewed.
1. Why PONDX has negative cash? Is it borrowing money, does that mean that in a case of bond market depreciation, the fund will lose value even more?
2. DLTNX credit ratings are pretty solid, compared with STHTX and MWHYX. DLTNX saw a bigger growth since inception than the other two. Is it because the credit rating of the fund evolved over the past few years?
Please correct me where I am wrong.
This brief writeup provides a decent overview of the tools used by some funds. Check the end of the write and the cash position example.
As to DLTNX; my opinion is that when Mr. Gundlach formed Doubleline, a lot of money flowed to the new funds from previous accounts at his prior employer. as Mr. G. is known for his abilities with, and understanding of bonds.
My 2 cents worth.
Regards,
Catch
Here is PIMCO's own words regarding negative cash:
http://investments.pimco.com/MarketingPrograms/External Documents/Understanding_Negative_Cash_PU006.pdf
In other words, yes negative cash indicates leverage:
Basically instead of holding cash collateral they are using riskier bonds for derivatives exposure and yes in theory if the collateral lose value fast it can cause problems.
They also get leverage by use of the following schemes:
* Reverse repurchase agreements
* Loans of portfolio securities
* When issued, delayed-delivery, forward commitment transactions
* Derivative instruments
http://investments.pimco.com/MarketingPrograms/External Documents/PIMCO_Income_Fund_Overview_PO4021.pdf
Another fund using leverage is SUBFX. It also delivered similar stellar returns.
There are two things that I don't understand about it:
1. It has a negative duration: -2.1 years
2. 30 day SEC yield is 1.24% but YTD (2012) return is 23.07%, aren't those suppose to be correlated?
Whenever I don't understand things, I remember this
(I do know that it has something to do with derivatives, but I don't understand them. Aren't those the ones that put us in trouble in 2008? When they supposedly eliminated the risk)
1. For clarity, we're talking about effective duration, not modified duration, and certainly not Macaulay Duration.
As the CFA study guide linked to on Investopedia states: "Effective duration takes into account the way in which yield will affect the expected cash flows." We can use a favorite of mine, interest only (IO) derivatives, to see how this can result in negative duration.
An interest only instrument consists of only the interest payments on a bond. It's what's left over when you strip a bond of its coupons. That is, one can take a bond paying, say 5%, separate it into two parts - the promise to repay the principal at maturity (i.e. a zero coupon bond), and the 5% coupons. For simple, non callable bonds, the value of that interest stream would simply be the present value of each payment (i.e. sum of each payment's dollar amount discounted by the current market rate).
But when you have an IO instrument that came from a mortgage security, things get tricky (didn't I say this in a previous post
But as interest rates rise, the expected life of the mortgage also goes up. That's because people are less likely to refinance. Since you own all the interest payments, you now expect to get more interest payments (the underlying mortgage lasts longer). So, even though the present value of each payment drops as rates increase, you expect more payments. The sum of all those payments (present value) goes up, not down. Thus, as interest rates rise, the value of the IO derivative goes up. That's negative duration. One can construct other instruments that behave similarly.
The key is expected cash flows.
2. As Investor said, this is due to appreciation. Just as an individual bond has a yield to maturity (YTM), the SEC yield approximates the YTM of an entire portfolio. So we can think about individual bonds - that's simpler and the idea's the same.
Take a bond that is trading at par, and pays 2%. Its YTM is 2%. (Fill a portfolio with these bonds, and that portfolio's SEC yield will be 2% also.) Suppose interest rates drop. The price of the bond will go up. Your asset just became more valuable. The YTM didn't predict this, because it assumed interest rates didn't change.
What about the new YTM, i.e. what would a someone now purchasing the bond get? The simple answer is the current market rate. If rates dropped to 1%, then the the buyer would have to pay a premium large enough so that the YTM, taking into account the loss of principal at maturity, came out to 1%. And the SEC yield on a portfolio of such bonds would also have dropped to 1%. All of which just means that if interest rates stopped changing, then the investor (in the individual bond or in the portfolio) could expect a total return rate of 1% over the long term.