Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
An interesting analysis by PIMCO's Gross, warning about dangers of Fed policy of low rates. But he represents an enormously large fund company which is financially supported mostly by success of its bond funds. I wonder whether there is any hidden self-serving interest in claiming that "low yields have increasingly negative effects on the real economy"? Surely low yields have negative impact on PIMCO.
This is the reason I don't understand bond funds. Higher yield on a bond is desirable when you buy the individual bond and hold it to maturity. In the interim, price swings of the bond become meaningless. You buy a bond at inception and hold it to maturity, whatever happens, you get X% per year + original principal at maturity.
Bond funds are priced through their NAV which is a representation of prices of the bonds in its portfolio. Steadily falling yields in bonds have actually jacked the prices up of bond holdings in funds and made their NAV performance better. Falling yields = rising prices have therefore generally been good for bonds funds. Let's say yield on the 10 year bond drops 50% today it will actually be good for PTTRX.
One reason I gave up on the "economist" Muhlenkamp is that he kept saying "bull market in bonds is over all through the 1990s and into 2000s. What he meant was rising yields of bonds is over, YET eschewed bonds and bought stocks. Yields kept falling (sure bear market for bond YIELDS) and bond funds kept doing better. And what happened to equity funds? ANALysis can bite you in A**
Low yields only have negative impact on very short bond funds and money market funds. because the portfolio turns over faster. When short term yields jump initially it can be strain on the NAV, until payday of the bond.
I read it and I see it self serving and he is crying wolf. Until now, PIMCO has benefited by declining interest rates. So, he turns critical when there is no longer appreciation possibility.
Ironically this is what Fed wants. Fed wants risk taking and money to go riskier and more productive venues. I guess they just succeeded
You noted: "Ironically this is what Fed wants. Fed wants risk taking and money to go riskier and more productive venues."
more productive venues
Tis ironic that bonds as a financial instrument/group are the most productive devices in respect to business function, globally. Without bonds being accepted as a financing instrument; very few organizations (govt's) or other public/private business forms could have birth or exist without bond acceptance. They, bonds; however, are lightly "marketed" in a large fashion, with the exception of Pimco and Gundlach to the masses. Equities are the mass marketed area of preference for theoretical best performance.
The real rub for individiual investors is to attempt to perceive where the large market movers have preference for money flows in an overall market of equity and bonds that is perverted by both central bank policy and deriviative products issued against both equity and bond sectors as a form of insurance to protect againse failure of the "product".
We all know about this house of cards from 5 years ago; and sadly, the cards continue to be played today.
One may only perform their best understood method of defining what investment area at any given time suits the risk and reward factor, that they choose to tolerate.
We have never held individual bond issues. I/we at this house, don't have that much time available for study, nor the tools to use to protect against market forces that will affect bond pricing.
As to bonds overall, for our house; they are not held for yields, but for capital appreciation via pricing, not unlike the same reason one holds equity positions; hoping that the perceived underlying value of an issue will rise from demand of the product.
One exception to the above would be extreme market and pricing actions, not unlike the high yield bond sector in late 2008 and early 2009. But, the risk was in place too; in order for one to find high yield bonds whose pricing had been beaten to a pulp and was reflected in a 20%+ yield for several months.
You noted: " Low yields only have negative impact on very short bond funds and money market funds." There are many more qualified at this board, than I; to comment about this statement. I will only note that in a "pure" world of supply and demand for bonds (or anything); certain expectations could be in place for what happens to short versus long bond issues and their yield and pricing. The whole market place continues to operate in a perverted mode and I expect this will continue past the time when I still exist in my present form.
Today (this week) and perhaps going forward for several months into the end of the year may prove to be one of the most "interesting" market periods since 2007-2009. One finds an equity market that just keeps being pushed by hot money since mid-November, 2012; and a Treasury bond market that will likely find long term buyers (pension funds, etc.) in the current yield range of 2-2.4%. Bond markets in general terms, has found some tough travel in the past few months; with the likely beginning of some changes in July, 2012.
Central banks and the politicians of these countries want "x" amount of growth (by their measures, not mine) and are currently willing to risk whatever it takes. Only time will show about how well the monetary theories process.
For all individual investors, their perceived risk and reward will guide the investment choices.
I didn't really say much to your thoughts; but thank you for helping to expand the thinking and talking out loud that takes place at this house.
Comments
Bond funds are priced through their NAV which is a representation of prices of the bonds in its portfolio. Steadily falling yields in bonds have actually jacked the prices up of bond holdings in funds and made their NAV performance better. Falling yields = rising prices have therefore generally been good for bonds funds. Let's say yield on the 10 year bond drops 50% today it will actually be good for PTTRX.
One reason I gave up on the "economist" Muhlenkamp is that he kept saying "bull market in bonds is over all through the 1990s and into 2000s. What he meant was rising yields of bonds is over, YET eschewed bonds and bought stocks. Yields kept falling (sure bear market for bond YIELDS) and bond funds kept doing better. And what happened to equity funds? ANALysis can bite you in A**
Low yields only have negative impact on very short bond funds and money market funds. because the portfolio turns over faster. When short term yields jump initially it can be strain on the NAV, until payday of the bond.
Anyone please correct me if I'm wrong.
Ironically this is what Fed wants. Fed wants risk taking and money to go riskier and more productive venues. I guess they just succeeded
You noted: "Ironically this is what Fed wants. Fed wants risk taking and money to go riskier and more productive venues."
more productive venues
Tis ironic that bonds as a financial instrument/group are the most productive devices in respect to business function, globally. Without bonds being accepted as a financing instrument; very few organizations (govt's) or other public/private business forms could have birth or exist without bond acceptance. They, bonds; however, are lightly "marketed" in a large fashion, with the exception of Pimco and Gundlach to the masses. Equities are the mass marketed area of preference for theoretical best performance.
The real rub for individiual investors is to attempt to perceive where the large market movers have preference for money flows in an overall market of equity and bonds that is perverted by both central bank policy and deriviative products issued against both equity and bond sectors as a form of insurance to protect againse failure of the "product".
We all know about this house of cards from 5 years ago; and sadly, the cards continue to be played today.
One may only perform their best understood method of defining what investment area at any given time suits the risk and reward factor, that they choose to tolerate.
Take care,
Catch
We have never held individual bond issues. I/we at this house, don't have that much time available for study, nor the tools to use to protect against market forces that will affect bond pricing.
As to bonds overall, for our house; they are not held for yields, but for capital appreciation via pricing, not unlike the same reason one holds equity positions; hoping that the perceived underlying value of an issue will rise from demand of the product.
One exception to the above would be extreme market and pricing actions, not unlike the high yield bond sector in late 2008 and early 2009. But, the risk was in place too; in order for one to find high yield bonds whose pricing had been beaten to a pulp and was reflected in a 20%+ yield for several months.
You noted: " Low yields only have negative impact on very short bond funds and money market funds."
There are many more qualified at this board, than I; to comment about this statement.
I will only note that in a "pure" world of supply and demand for bonds (or anything); certain expectations could be in place for what happens to short versus long bond issues and their yield and pricing.
The whole market place continues to operate in a perverted mode and I expect this will continue past the time when I still exist in my present form.
Today (this week) and perhaps going forward for several months into the end of the year may prove to be one of the most "interesting" market periods since 2007-2009. One finds an equity market that just keeps being pushed by hot money since mid-November, 2012; and a Treasury bond market that will likely find long term buyers (pension funds, etc.) in the current yield range of 2-2.4%. Bond markets in general terms, has found some tough travel in the past few months; with the likely beginning of some changes in July, 2012.
Central banks and the politicians of these countries want "x" amount of growth (by their measures, not mine) and are currently willing to risk whatever it takes.
Only time will show about how well the monetary theories process.
For all individual investors, their perceived risk and reward will guide the investment choices.
I didn't really say much to your thoughts; but thank you for helping to expand the thinking and talking out loud that takes place at this house.
Must get back to stimulating the local economy.
Take care,
Catch