fixed income volatility

Discussion in 'Financial Planning' started by dumbstruck, Dec 9, 2010.

  1. dumbstruck

    dumbstruck Guest

    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/con...ter/1011/document/Asset_Allocation_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).
     
    dumbstruck, Dec 9, 2010
    #1
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  2. dumbstruck

    rick++ Guest

    You have to assume risk if you want more return than a Treasury or
    immediate annuity.
    Bonds are shakey lately.
     
    rick++, Dec 9, 2010
    #2
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  3. dumbstruck

    dumbstruck Guest

    On Dec 9, 9:11 am, "rick++" <> 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?
     
    dumbstruck, Dec 9, 2010
    #3
  4. dumbstruck

    Bill Guest

    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.
     
    Bill, Dec 10, 2010
    #4
  5. dumbstruck

    Lowrie Guest

    On Dec 9, 7:25 pm, "Bill" <> 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?
     
    Lowrie, Dec 10, 2010
    #5
  6. dumbstruck

    Bill Guest

    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.
     
    Bill, Dec 10, 2010
    #6
  7. dumbstruck

    Ron Peterson Guest

    On Dec 9, 12:03 pm, dumbstruck <> 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
     
    Ron Peterson, Dec 11, 2010
    #7
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