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fixed income volatility

 
 
dumbstruck
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      12-09-2010, 06:03 PM
Fixed income is taking some wild swings in price lately, for example
in a few days wiping out equivalent of a year or two worth of future
interest. I wonder what the prudent investor is supposed to do - grit
your teeth and assume it is a cycle that will correct itself? I
realize treasuries have been called a bubble by some, but am thinking
of other fixed income.

Here is last months tactical asset allocation policy of the respected
Northern Trust Bank
http://www-ac.northerntrust.com/cont...ion_111610.pdf
(default tactics along bottom, current tweaks in green bar). Although
they had throttled back from almost 40% to closer to 30%, I wonder if
this months chart will shrink fixed income even more.

Some have been avoiding the danger by going to high yield, which seems
to be hanging on. But corporates and TIPS and emerging market bonds
have had significant swoons. It is my impression that bank loan funds
and convertibles have been doing better (I don't document specific
numbers because sometimes the results don't show up here).

 
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rick++
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      12-09-2010, 07:11 PM
You have to assume risk if you want more return than a Treasury or
immediate annuity.
Bonds are shakey lately.

 
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dumbstruck
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      12-09-2010, 10:53 PM
On Dec 9, 9:11*am, "rick++" <(E-Mail Removed)> wrote:
> You have to assume risk if you want more return than a Treasury or
> immediate annuity.
> Bonds are shakey lately.


You are talking about risk of returning principle, and I think that is
what is killing emerging market bonds. Only because they have focused
on "emerged" who have sovereign risk, rather than true emerging.

I was talking more about risk to present bond value due to higher
inflation or interest rate environment. For these, I expect treasuries
are sagging the worst, then corporates and so on. Move on up to junk,
and they seem the "safest" now because they have high interest rate to
begin with, and aren't thought much default risk in improving economy.
I don't know where TIPS fall in this spectrum, but seem to be getting
hammered even with negative interest rates.

P.S. several times I have found finance.yahoo.com featuring an article
on the same exact subject I have posted here but 5 minutes behind me.
It also happens after some other folks postings. Maybe coincidence,
but I wonder if there is an editor there using this forum for ideas on
which pre-written article to pop up. Or it could be an automatic
snooper assigning the yahoo postings based on the user contributions
seen here?

 
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Bill
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      12-10-2010, 12:25 AM
It appears that a very large number of fixed income investors are
chasing yields by increasing the duration of their portfolios. I
suspect far more than the number who are chasing yield by increasing
default risk at the same duration. I suspect that most of the
individual investors and some of their financial planners do not
understand the correlation between bond price and duration. At some
point interest rates will move up and these investors will panic and
sell. That's the bubble we have to worry about and I suspect the
prospect of a large price drop when rates move up is a major factor in
the volitility we see now.


--
.Bill.

 
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Lowrie
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      12-10-2010, 04:17 PM
On Dec 9, 7:25*pm, "Bill" <(E-Mail Removed)> wrote:
> It appears that a very large number of fixed income investors are
> chasing yields by increasing the duration of their portfolios. I
> suspect far more than the number who are chasing yield by increasing
> default risk at the same duration. I suspect that most of the
> individual investors and some of their financial planners do not
> understand the correlation between bond price and duration. At some
> point interest rates will move up and these investors will panic and
> sell. That's the bubble we have to worry about and I suspect the
> prospect of a large price drop when rates move up is a major factor in
> the volitility we see now.
>
> --
> *.Bill.


What'll happen to TIPS in this scenario. Won't inflation likely kick
in to stabilize them?

 
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Bill
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      12-10-2010, 06:46 PM
Lowrie wrote:

> What'll happen to TIPS in this scenario. Won't inflation likely kick
> in to stabilize them?


If I could answer that with certainty I would be getting $1,000,000 a
day as a consultant to banks and governments.<g> Past recessions
clearly show that you can have increasing interest rates without
excessive inflation so the answer is a definite maybe.

--
.Bill.

 
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Ron Peterson
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      12-11-2010, 03:41 PM
On Dec 9, 12:03*pm, dumbstruck <(E-Mail Removed)> wrote:
> Fixed income is taking some wild swings in price lately, for example
> in a few days wiping out equivalent of a year or two worth of future
> interest. I wonder what the prudent investor is supposed to do - grit
> your teeth and assume it is a cycle that will correct itself? I
> realize treasuries have been called a bubble by some, but am thinking
> of other fixed income.


Stocks paying a dividend can be a good alternative to bonds. The risk
can be reduced by the use of options.

--
Ron

 
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