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Posted by dumbstruck on January 22, 2008, 5:25 pm
Any thoughts about bond allocation strategy in light of recent events?
Hold steady, or change the percentage or type of bond holdings?
Commentators are saying the Treasuries are terrible values now, due to
flight to quality raising costs and falling interest rates. I guess so
if you want to hold to maturity, but if you are holding a mutual fund
or etf for a limited time, things are looking pretty good as your old
inventory increases in value.
Bank loan funds have been a great disapointment, continually losing
value due to the crises. Commentators say the next good bond area will
be corporates, after the bottoming has happened and defaults start to
look less likely. Tempted to go the bond ETF route in the future
because can maintain stop loss orders over them...
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Posted by John A. Weeks III on January 22, 2008, 5:55 pm
In article
> Any thoughts about bond allocation strategy in light of recent events?
> Hold steady, or change the percentage or type of bond holdings?
I don't see bonds as a good bet for the small investor. You
cannot possibly own enough bonds to get over the risk of default,
and even high rated bonds are going into default. Bond funds
would seem to increase diversity, but they end up being mostly
bets on interest rates, and those look like they will be falling
until a new government is formed and gets the economy back on track.
-john-
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John A. Weeks III 612-720-2854 john@johnweeks.com
Newave Communications http://www.johnweeks.com
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Posted by Elle on January 24, 2008, 6:36 pm
What overall allocation strategy are you using?
Your query puzzled me, because AFAIC, there are only two
bond categories: Good and garbage. Good includes CDs,
treasuries, and what's called high quality "investment
grade" corporate bonds. The garbage includes junk bonds, the
issues of certain undeveloped countries, etc.
The typical online asset allocator is referring only to the
good ones when it spews out a percentage for bonds.
If you're asking about mortgage backed securities, they have
been an anomaly this past year. They once were what I would
call a bond fund with more risk than the "good" bond funds,
and less risk than junk bond funds. What happened to them
makes me not trust the bond rating agencies anymore.
It also sounds like you are trying to chase bond returns.
That's a mistake. The good ones are not very volatile. They
just hum along, earning the "prevailing interest rate," and
reduce your portfolio's overall volatility. Letting a person
sleep at night.
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Posted by anoop on January 25, 2008, 3:20 am
> If you're asking about mortgage backed securities, they have
> been an anomaly this past year. They once were what I would
> call a bond fund with more risk than the "good" bond funds,
> and less risk than junk bond funds. What happened to them
> makes me not trust the bond rating agencies anymore.
Now that we can no longer trust the bond rating agencies,
how do we go about deciding what bond/bond fund will
be good? I had planned to buy into a bond index fund
when interest rates stabilized, but with all the subprime
mess, I've just stayed with a stable value/money market
fund.
Anoop
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Posted by Elle on January 25, 2008, 9:42 am
> Now that we can no longer trust the bond rating agencies,
> how do we go about deciding what bond/bond fund will
> be good? I had planned to buy into a bond index fund
> when interest rates stabilized, but with all the subprime
> mess, I've just stayed with a stable value/money market
> fund.
>From my reading, only bond funds with a heavy exposure to
mortgages (and only subprime ones at that) took a meaningful
hit. Seems to me the media would have reported on bonds
besides MBS that took a hit. I suppose corporate bond
ratings are still about as valid as they formerly were.
Money markets have stayed in fine shape. But funds like GE's
"Enhanced cash fund" (which I think was known to invest in
MBS) did not, due to its exposure to MBS. You can find a
discussion on the GE fund here in November.
Of course the recent correction to yields on money market
and "good" bond funds is due to the Fed's lowering of the
benchmark yada rate the other day.
Interest rates have been on the low side since about 2001.
But the Fed's job is to control the money supply to minimize
inflation and recession. Interest rates have always varied
as a result. Have they been unusually volatile? I don't
think so, but someone else might want to google and post
here.
Of note perhaps is that bank (U.S. and overseas) preferred
stocks took a huge hit recently but seem to be recovering.
Non-bank preferreds, not so much. This reflects investors'
doubtfulness about the banking system. Remember, banks have
long been priced on the low side when it comes to P/Es.
Arguably this crisis is one reason why. It's perfectly
reasonable for investors to doubt all issues of a bank,
preferred, common stock, whatever, in this situation.
I personally was glad the European Central Bank left
interest rates unchanged, following the cut here. This gives
me more confidence in the integrity of the world economy in
the coming months. Not that the U.S. Fed's rate cut was
wrong. That still remains to be seen, IMO.
1.5 cents
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