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This Might Be the Bond Market’s Dot-Com Moment ("Stop that, it’s all got frightfully silly")

This cautionary read argues in some detail it is very reasonable to wonder if a negative yield world is really in our future...
Stock markets are known for often going too far. So can bond markets, although they tend to go mad a little less often, and to do so in a way that’s far less visible to the general public. And as bond markets are generally thought to be more sober, the extraordinary rally in recent weeks has generally been taken as a sign that a recession is at hand. That, after all, is what $15 trillion in negative-yielding bonds around the world, and a virtual all-time low in the 30-year U.S. Treasury bond, would imply. But it is at least possible that this is the moment when the three-decade-long bull market in bonds has at last reached an untenable extreme, ready to snap back. This might, in other words, be the bond market equivalent of early 2000 and the dot-com bubble in the stock market.

... there are plentiful signs that markets may have reached a point of revulsion, or untenable extremes. Or, in Monty Python terms, the moment the brigadier with the big mustache appears on the screen and says: “Stop that, it’s all got frightfully silly.”


  • Disclaimer!! - Boys and girls don't try this at home - remember we are strictly professionals.
  • Huh. I am unsure about what to do as I wish to swap part of my large PONAX holding (dived the last month or more) for FTBFX (seriously risen during that time).
  • The article notes the bond rally in the past few weeks; but the movement started several months ago, although the recent rally has had the spotlight.

    For you @davidrmoran et al
    The below chart is typical for a total return bond fund that has been invested in investment grade bonds. This chart happens to be set for FTBFX. Of note for the tech. analysis folks is the teal colored green area above the chart. This area represents a relative strength indicator above 70; with 70 being the top end before a charted security or fund starts to move into the "overbought" area. How long will this overbought condition persist? I don't know. I only know there are many factors pushing money to bonds and related safe havens; in spite of the fact that there remains a whole lot of money raised by issuance of investment grade corp. debt over the past years. Part of my concern is that corps. begin to fail to have positive business cash flows of the amounts needed to pay off the bonds they've issued. Perhaps part of a pressure point to "damage" bonds.


    Have a good remainder.
  • It might be "silly", but the US Trsy market still remains "hi-yield" compared to other OECD sovereign debt markets. So IF there is a bubble, our bond market is NOT the epicenter of it. Japan has had low rates for decades. So the "moment" can last a very long time. And Europe, which has lower rates than the US, well, tell me, does anyone expect rates there to materially increase in the next 1, 3, 6,or 12 months?

    And oh, that long overdue recession? Well, its still overdue -- out there somewhere in front of us, and would act as support for elevated bond prices, were it to occur.

    Would point out further: any significant pullback in bond prices, will likely be accompanied by an even more dramatic pullback in equity prices. -- Recall that is exactly what happened in Q4-2018, and makes intuitive sense too: as bond yields rise, bonds become more competitive for investment dollars vs. stocks, and companies' financing costs rise.

    So those hoping for a safe harbor from "bond market madness", should not embrace equities.

    A correction in bond prices wouldn't surprise me. In fact, I lightened up last week on my longest-duration fund holdings. But I will use any bond market correction to "buy the dip". -- Probably NOT targeting index products, but certain favored bond CEFs and individual preferred offerings.
  • @davidmoran, I am thinking the same on PONAX/PIMIX as well. By the way, many PIMCO bond funds are trailing this year comparing to their peers. PONAX It is a multi-sector and mostly domestic bond fund. It also uses swaps and other instruments based on PIMCO's forecast on the bond market. Most of the time PIMCO has been more right than wrong that led to their out-performance over the US Agg bond index. More recently PIMCO Income and Total Return funds are nowhere nearly as dominating as they once were. I speculate that is due to the sheer size of these funds (AUM) and the challenges to making bigger and more "bet". Both are significant hurdles for active managed funds, bonds or equities.

    @Edmond, which bond CEFs that are worthwhile to consider today? Thank you.
  • @Sven, fwiw, I am still buying PCI, not any longer PDI, and still reinvesting in FRIFX, not a bond fund, exactly, but you know.

    What you say is true, and even w MINT it is possible to lose moneys (a little)
  • @davidmoran, you are more experienced with CEF bonds. I have not been tracking PCI for decent entry points, i.e. discounts/premium. Sometime volatility of close-end bond funds is unnerving. What do you consider a reasonable discount on PCI?

    With declining bond yields investors are driven toward riskier bonds including junk and EM bonds, and they can change quickly as showed late 2018. Majority of my bonds fared decently last year. For now I am focusing on dividend paying equities including FRIFX and balanced funds, PRWCX. Still like FRIFX and the likelihood of higher rates is unlikely this year which is positive for the fund.
  • From John M. Boyd - Fidelity Monitor and Insight
    "bonds were (are) unattractively valued versus stocks, professional fund managers had the lowest allocation to stocks versus bonds since the current bull market began. This is even more true for individual investors. In just the last year and a half, investors in mutual funds and ETFs have pulled an estimated $108 billion out of equities while pouring $309 billion into bonds. And that trend has clearly accelerated this year.

    If you think that such a large gap in flows seems very unusual, you’re right. According to the investment firm AllianceBernstein, so far this year, the difference between flows into equity funds versus bond funds is three standard deviations below normal and is the lowest level in the 15 years they have been tracking this data series. (For the non-statisticians out there, only 0.26% of all values in a normal distribution fall more than three standard deviations higher or lower than the mean or average!)

    Why is this note-worthy? Well, over those 15 years, there were five prior occasions when the gap was two or more standard deviations below normal. In all those cases, the stock market was higher over the next six and 12 months with average gains of 10% and 17% respectively. This is not surprising as investment markets are generally "mean-reverting," which simply means that when something gets significantly higher or lower than its long-term average it tends to "correct" back towards that average. And if that happens with fund flows and money starts to move out of bonds and into stocks, that would provide additional fuel to propel stocks higher."
  • @Sven, nobody knows quite how to value CEFs, it appears, if there even is a general rule.

    PDI has been premiumed forever, large delta. PCI has swung to premium and on paper less attractive than when it was discounted. I just buy and reinvest everything.

    Start here, maybe:

    "[over time] the share price does tend to revert toward, and then through, the NAV. Again, when investing in CEFs, discounts and premiums don't ultimately matter. What matters is your cost basis and the subsequent total return."

    See if you can somehow study these:

    You know all this background, I bet:

    (Often Fido education materials are better and blunter than other outfits, or that used to be the case. I do see other plainspoken instructional materials now, sometimes even marcom. I once wrote some such customer guides [bonds, Fido] and was allowed to be marginally franker and balder in the wording than some other companies I have written for.)

    How you gettin' into PRWCX?
  • @davidmoran, I invested in PRWCX 10 years ago before it closed several years back. Today It is not possible to get in as new investors. You need to do some research to find a reasonable alternative balanced fund in the brokerage you are using. As I recall Fidelity is your main brokerage, correct?

    I just checked and PCI is traded with a 3.2% premium as of 8/9/19. Seven months ago it was traded at > 6% discount. Since the fund is leveraged, swings in either directions are magnified relative to the open-ended Pimco Income fund. The 3.2% premium is not bad but I will monitor for the entry points. I need to study up on CEFs. My past experience with CEFs has been spotty at best due to my inexperienced.
  • Roger, studying up is why I gave you those links, also that quote, which is quite in opposition to your timing tactic.

    I have much liked (and in the past been invested in) JABAX for many many years, and yes Fido and ML are my only brokerages, and it is available in each.

    I have instead been diy 60-40 or whatever w/ DSEE/NX + PONAX, augmented by some PCI and FRIFX, and that's it. Am looking to shift some of existing PONAX to FTBFX or similar more conventional general multisector bond fund. Maybe.
  • @davidmoran, thank you for all the links. I have not follow Janus for a long time. Make sure this Janus Henderson team has a consistent track record. You may want to analyze the fund on for performance and risk analysis relative to a benchmark.

    Have you consider target date funds as the core and having the other sectors/special funds as complement to it? You have solid brokerages to work with. Vanguard's TDFs are offered in my 401(K) and it would simplify everything as I have another 5-7 years to go before retirement.
  • edited August 2019
    M* is your friend:
    MPinto has been at JABAX for like 14y. Quite unsung,

    I have considered everything else, I believe, from preferreds to target dates and ETF blends and beyond, and zero interest in any of them on my part.

    It is easy enough to diy w equity fund(s) and bond fund(s), and at 72 I have found conventional, or even unconventional, equity diversification (SC, MC, foreign) not to add a lot of value or counter behaviors to SP500. Also have dialed down investment OCD pretty much.

    I did buy a large slug of BIVRX thanks to DS recent writeup, and it immediately jumped up, and then has been quite the dog since. I shall hold and monitor.
    I may sell when it is past penalty clock and back to breakeven, and put all that slug into PDVAX. (Yes, not the same area.)
  • Congratulation, you are indeed very active at 72. Lately we have been consolidating our IRAs for ease of management and also in case of declining health in the future. TRP or Vanguard's TDFs would certainly simplify our lives.
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