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I'm not talking about whether the US will default or not. In anticipation of default or if there is debt downgrade, will bond funds tank? Even the short-term bond funds?
Is it safer to be in cash until 8/2/11 has passed?
First, the 8/2 date is not real. Its a fake date the politicians set. Second, I would look to be liglhter on bond funds but not necessarily out. Depends on the type of bond fund, duration, volatility, etc.
I would never say never. But it would seem very unlikely that bond funds, as a whole, will tank if there is no agreement. And there will be an agreement eventually. That being said, I don't know why anyone should own a long-term, long-only U.S. government bond fund. I believe that if investors use flexible-mandate fixed-income funds that have relatively short to intermediate maturities and reasonable duration, there should be no lasting fallout. The worst thing people could do would be to sell funds based on what surely will likely be a short-term effect, if it occurs. This is another media-concocted crisis du jour, but it's lasted for several months now. Once we are past it, the wonderful folks in New York will find something else that will surely mean the end of the financial world as we know it.
If there is an agreement where hard decisions are made, changes occur right now (instead of being backloaded 10 years away or something ridiculous), then at least some - if not more - of the wind gets taken out of the sails of the trade.
I don't see #3 as particularly likely, and #2 is more likely than I thought it would be. I think #1 is most likely.
It's as real a date as one can get. Unless you believe that the US will not default if the debt limit is not raised, then by the intermediate value theorem, there will be a precise date when the US first defaults. (That is, if the cash on hand minus current outflow is positive today, and cash on hand minus current outflow is negative in a month, then somewhere between now and then, it will hit zero and the US will first default.)
Having addressed the threshold question of whether the idea of any default date is real, we can look at the 8/2 date. This is admittedly an estimate, but one made by bean counters in the Treasury, not by politicians. If you have the daily US cash flow numbers, you may be able to come up with a slightly better estimate, but it won't be significantly different. As noted in the Washington Post article referenced this morning by NPR, UBS and Wells Fargo are estimating that the date is a few days later (a week, at best).
These bankers are also not politicians.
P.S. I agree with BobC that any effect will be short lived. If you're a trader and a gambler, this presents opportunities; if you're an investor, you stand pat, assuming that you've delegated to your bond fund managers the selection of market segment to participate in. If you're managing your portfolio by using lots of narrowly defined funds (long term government, emerging market, high yield corporate, etc.), then you have a bit more thinking to do, but it's still long term positioning, and not a matter of picking the portfolio of the week.
Folks, I'm specifically asking about short term bond funds. If we default or if there is rating downgrade interest rates should rise. Bond prices should fall. The fall should be more for the long term bonds right? I'm asking about short-term bond funds. Should I be worried.
All of you are opining about gold and long term bond funds. I don't have a lot of money in bond funds. I do have some balanced funds though and are trusting my managers to handle that. But I do have VIPSX. Just trying to get a feel for things that's all.
Reply to @BobC: "I don't know why anyone should own a long-term, long-only U.S. government bond fund". Insurance companies and pension funds will always have long duration government debt funds to match their liabilities.
We do not plan to move our bond funds monies and we have a bunch.
There will be some kind of plan from the DC crowd, be it short term fixing right now and more fixes to come. Unfortunately, the DC thing is a hugh political battle for the 2012 elections, not unlike a bunch of roosters posturing for the fight.
The world still relies upon Treasury issues as a form of payment/money and although the countries that hold large amounts likely don't like what is going on; they have few other options at this time. This does not mean there won't be changes down the road for the largest holders of Treasury issues; but not this year.
IF, and a big IF; the equity markets do not react well to a prolonged stalmate about the debt ceiling, I would not be surprised to find buyers in the Treasury sector and actually pushing yields lower/higher prices.
The short term T-bills actually lost a bit of value today, while the longer term issues gained value. I am unable to account for this action today.
There are several Treasury auctions this week; of which, I try to view. But, I won't be around a TV or PC for my normal viewing/reports. We'll be running blind for a few days.
In particular for your holding of VIPSX; if we held a straight TIPS fund now, we would not be selling.
You are right, Vintage, that large pension funds, insurance companies, etc. will own long-term government bonds. My comment was directed to individuals. We have a client in his late 70s who insisted on buying a 30-year treasury last year...for the higher yield...saying he did not care what happened to rates over the next 10 years, since he had all the rest of his monies in short-term treasuries. He just wanted the higher income. No kids, no relatives, so what happened to the bond when he died, he said, was of no concern. Well...a few months later, and he calls to unload about the folks in Washington "screwing" with his long-term treasury bond and how the value could get smacked. Individual investors tend to have very short memories when it comes to the decisions they make. When interest rates increase, and they will, my guess is that he will keep squawking about the "value" of his bond, ignoring why he bought it in the first place.
"Late Monday, the Chicago Mercantile Exchange, the main center for the trading of derivatives, one of the major forms of financial speculation, announced that it would no long classify short-term Treasury bills as risk-free when used as collateral by traders. The exchange also will require traders to provide larger amounts of longer-term Treasury bonds when using them as collateral.
The “haircuts” applied to the value of government securities used as collateral for trades ranged from half a percentage point for Treasury bills to a full percentage point for Treasury notes and bonds, with the changes to take effect on Thursday. (July 28)
The CME justified the increases as a response to the greater volatility in the prices of US government securities because of mounting speculation that there will be at least a short-term interruption in US government payments to bondholders."
Reply to @scott: Watch cascade of unintended consequences if the congress cannot reach a compromise and increase debt ceiling. This could snowballing effects around the world requiring more collateral for futures, swaps etc. It could be destabilizing...
Hi Scott, Thank you for the CME note. This explains the slight up move in yields for the 1/3 month T-bills yesterday....that I could not define for a reason.
Oh, certainly. That's also a question of mine in terms of funds and other entities with govt paper as collateral, etc.
I guess my concern is also perception. At some point, even if a short term, kick the can down the road solution is offered, I tend to think that there will be a point where perception of the US financially will move beyond repairable (much already being made of the Dow Chemical CEO's comments this morning that the US is starting to be percieved as a "laughing stock" in other parts of the world because of this) - it should already be quite clear that those in government can't work together. A solution that clearly "kicks the can down the road" will - I'm guessing - simply be percieved as such.
I know everyone continues to say some variation on "US Treasuries - where else are people going to go?" But I still think there will be a point where people are forced to find that answer - and no one in this country is going to like it.
As I will be away from the home trading desk in a day or two; ya think it would be prudent for a bit younger person (me); to purchase a large package of "Depends" or as I have called them over many years...for the boys; "Penie Pads". I don't have a need for them with normal, everyday life; but I wonder whether something coming or not coming out of DC will cause me and likely many others to want to wet my/our pants...:)
It was one thing to find the circus arrive unannounced in Sept. 2008; BUT the sad part of this current event is that we have been able to see and watch this circus coming to town and there are many, many trucks loaded. We just don't know the extent of which thrill rides are inside of the trucks and how many clowns will arrive with the trucks or be showing up later in their own vehilces.
Reply to @scott: Kicking the can down the road sounds bad but you cannot really solve this problem right now in one broad strike. The consequences will trigger a 1937 style recession. But you can do some right now and start the process of moving to the desired target over time. We did not accumulate this debt in one day.
It took decades and while I am not advocating for decades to get out, a credible long term plan possibly indexed to GDB (so in good years you do more to solve the problem) goes a long way. It is much more responsible and common sense. I also think the solution should not constrained to just cuts. We do need multi-prong approach. There were earlier such deals in the US history that had such approach and they worked well and more broad social buyout. However, this time around it seems political participants are too rigid. This is not leading. This is not governing. This is a very destructive behavior.
I certainly agree that the attempt currently is trying to solve a 6 month discussion in 6 days (or whatever it is at this point.) However, we're at this point after many people acted like the debt didn't matter and that we could just spend spend spend - and this issue isn't new - there has been plenty of time to discuss. The other issue is that anyone actually willing to believe that any of the people in government will EVER make a difficult decision is baffling to me - there has been no indication and there remains no indication that they are willing to do so.
As I noted in another thread, it reminds me of the Schiff quote - the fault in thinking that they're just going to do something down the road to fix this, they're not - if they can't make the difficult choices now, why would they make decisions twice as difficult in the future?
I see two roads: 1. Kick the can down the road and we have this discussion again in a year or two, only with more debt. This may trigger a downgrade or two anyway if it's just another BS plan.
2. We default.
"But you can do some right now and start the process of moving to the desired target over time."
What are you seeing that would give you confidence in that those in this government would act in a responsible fashion over the short or long term? I have zero confidence in this government and I didn't even see this discussion getting to this point.
Hi VF, I, of course; don't know how long the TIPS/funds will hold their gains; but your VIPSX gained a bit more wiggle room to the upside. This sector should continue to benefit as long as folks seek safety from the machinations in DC; and I feel this may persist regardless of a debt/debt ceiling agreement, which at the best; will not be a real fix to anything as I read/hear regarding the current proposals. Excellent............ Take care, Catch
Hi Maurice, Flight to a safe zone in lieu of cash. TIPS react, generally; the same as other Treasury issues when folks are seeking protection from the unknowns of the markets. You will find TIPS funds this year have had a great performance so far. You may also scroll up for my reply to Vintage Freak from a few days ago. Take care, Catch
10Y Treasuries' yield dropped by 14 basis points - huge! - yesterday. Apparently fear of a double dip (causing, like C-22 says, the traditional 'flight to safety") is outweighing fear of rising T yields with a possible downgrade or default.
The article says those in the know aren't taking the S&P downgrade warning too seriously - because the other two major rating agencies, Moody's and Fitch, aren't putting out any warnings. It's only one of the three major raters doing the warning.
From the article:
"Arnaud Mares, head of sovereign strategy at Morgan Stanley, told investors during a conference call on Thursday that a downgrade primarily would undermine S & P’s credibility."
Comments
chart: http://www.zerohedge.com/sites/default/files/images/user5/imageroot/draghi/GC 1_0.jpg
If we default, it continues (I believe.)
If there is an agreement where hard decisions are made, changes occur right now (instead of being backloaded 10 years away or something ridiculous), then at least some - if not more - of the wind gets taken out of the sails of the trade.
I don't see #3 as particularly likely, and #2 is more likely than I thought it would be. I think #1 is most likely.
Having addressed the threshold question of whether the idea of any default date is real, we can look at the 8/2 date. This is admittedly an estimate, but one made by bean counters in the Treasury, not by politicians. If you have the daily US cash flow numbers, you may be able to come up with a slightly better estimate, but it won't be significantly different. As noted in the Washington Post article referenced this morning by NPR, UBS and Wells Fargo are estimating that the date is a few days later (a week, at best).
These bankers are also not politicians.
P.S. I agree with BobC that any effect will be short lived. If you're a trader and a gambler, this presents opportunities; if you're an investor, you stand pat, assuming that you've delegated to your bond fund managers the selection of market segment to participate in. If you're managing your portfolio by using lots of narrowly defined funds (long term government, emerging market, high yield corporate, etc.), then you have a bit more thinking to do, but it's still long term positioning, and not a matter of picking the portfolio of the week.
All of you are opining about gold and long term bond funds. I don't have a lot of money in bond funds. I do have some balanced funds though and are trusting my managers to handle that. But I do have VIPSX. Just trying to get a feel for things that's all.
Hi VF,
We do not plan to move our bond funds monies and we have a bunch.
There will be some kind of plan from the DC crowd, be it short term fixing right now and more fixes to come. Unfortunately, the DC thing is a hugh political battle for the 2012 elections, not unlike a bunch of roosters posturing for the fight.
The world still relies upon Treasury issues as a form of payment/money and although the countries that hold large amounts likely don't like what is going on; they have few other options at this time. This does not mean there won't be changes down the road for the largest holders of Treasury issues; but not this year.
IF, and a big IF; the equity markets do not react well to a prolonged stalmate about the debt ceiling, I would not be surprised to find buyers in the Treasury sector and actually pushing yields lower/higher prices.
The short term T-bills actually lost a bit of value today, while the longer term issues gained value. I am unable to account for this action today.
There are several Treasury auctions this week; of which, I try to view. But, I won't be around a TV or PC for my normal viewing/reports. We'll be running blind for a few days.
In particular for your holding of VIPSX; if we held a straight TIPS fund now, we would not be selling.
'Course, the above is just my opinion.
Take care,
Catch
The “haircuts” applied to the value of government securities used as collateral for trades ranged from half a percentage point for Treasury bills to a full percentage point for Treasury notes and bonds, with the changes to take effect on Thursday. (July 28)
The CME justified the increases as a response to the greater volatility in the prices of US government securities because of mounting speculation that there will be at least a short-term interruption in US government payments to bondholders."
Hi Scott, Thank you for the CME note. This explains the slight up move in yields for the 1/3 month T-bills yesterday....that I could not define for a reason.
Regards,
Catch
I guess my concern is also perception. At some point, even if a short term, kick the can down the road solution is offered, I tend to think that there will be a point where perception of the US financially will move beyond repairable (much already being made of the Dow Chemical CEO's comments this morning that the US is starting to be percieved as a "laughing stock" in other parts of the world because of this) - it should already be quite clear that those in government can't work together. A solution that clearly "kicks the can down the road" will - I'm guessing - simply be percieved as such.
I know everyone continues to say some variation on "US Treasuries - where else are people going to go?" But I still think there will be a point where people are forced to find that answer - and no one in this country is going to like it.
Hi OJ,
As I will be away from the home trading desk in a day or two; ya think it would be prudent for a bit younger person (me); to purchase a large package of "Depends" or as I have called them over many years...for the boys; "Penie Pads".
I don't have a need for them with normal, everyday life; but I wonder whether something coming or not coming out of DC will cause me and likely many others to want to wet my/our pants...:)
Take care,
Catch
It was one thing to find the circus arrive unannounced in Sept. 2008; BUT the sad part of this current event is that we have been able to see and watch this circus coming to town and there are many, many trucks loaded. We just don't know the extent of which thrill rides are inside of the trucks and how many clowns will arrive with the trucks or be showing up later in their own vehilces.
AARRGGHH !!!
Regards,
Catch
It took decades and while I am not advocating for decades to get out, a credible long term plan possibly indexed to GDB (so in good years you do more to solve the problem) goes a long way. It is much more responsible and common sense. I also think the solution should not constrained to just cuts. We do need multi-prong approach. There were earlier such deals in the US history that had such approach and they worked well and more broad social buyout. However, this time around it seems political participants are too rigid. This is not leading. This is not governing. This is a very destructive behavior.
As I noted in another thread, it reminds me of the Schiff quote - the fault in thinking that they're just going to do something down the road to fix this, they're not - if they can't make the difficult choices now, why would they make decisions twice as difficult in the future?
I see two roads: 1. Kick the can down the road and we have this discussion again in a year or two, only with more debt. This may trigger a downgrade or two anyway if it's just another BS plan.
2. We default.
"But you can do some right now and start the process of moving to the desired target over time."
What are you seeing that would give you confidence in that those in this government would act in a responsible fashion over the short or long term? I have zero confidence in this government and I didn't even see this discussion getting to this point.
Hi VF, I, of course; don't know how long the TIPS/funds will hold their gains; but your VIPSX gained a bit more wiggle room to the upside. This sector should continue to benefit as long as folks seek safety from the machinations in DC; and I feel this may persist regardless of a debt/debt ceiling agreement, which at the best; will not be a real fix to anything as I read/hear regarding the current proposals.
Excellent............
Take care,
Catch
Hi Maurice, Flight to a safe zone in lieu of cash. TIPS react, generally; the same as other Treasury issues when folks are seeking protection from the unknowns of the markets. You will find TIPS funds this year have had a great performance so far.
You may also scroll up for my reply to Vintage Freak from a few days ago.
Take care,
Catch
http://www.nytimes.com/2011/07/31/business/economy/taking-a-closer-look-at-a-downgrades-effects.html?pagewanted=1&_r=1&hp
The article says those in the know aren't taking the S&P downgrade warning too seriously - because the other two major rating agencies, Moody's and Fitch, aren't putting out any warnings. It's only one of the three major raters doing the warning.
From the article:
"Arnaud Mares, head of sovereign strategy at Morgan Stanley, told investors during a conference call on Thursday that a downgrade primarily would undermine S & P’s credibility."