Is All Debt Created Equal?

Includes: AVK, GIM, TEI
by: Old Trader

For sometime now, it seems that the topic of a bubble in the price of debt is being as hotly debated as the price of gold, and precious metals in general. At least, it seems that way, judging by the number of articles suggesting that the bull market in bonds may well be nearing the end of its run.

As an older income-oriented investor, I’ve got a fair amount of exposure to debt/fixed income in my portfolio, although not anything close to what traditional guidelines would suggest as “appropriate”. (The old “rule of thumb” was to have 10% of a portfolio in bonds, for every 10 years of age, so a 60 year old investor “should” have an exposure of 60%; mine is 30 %.) As a result, the possibility of a sharp sell-off in bonds is of more than academic interest to me.

Yet every article I read seems to be focused exclusively on the price of US Treasuries, as if the universe of bonds consisted solely of USTs, of various durations. It strikes me that this would be somewhat like me writing an article suggesting that equities are cheap/expensive, and using IBM’s price in support of my argument.

Certainly, USTs form the largest, most liquid market, and whatever ends up happening in that market, would have a knock-on effect on the whole universe of debt, generally speaking, and sovereign debt, specifically. I suppose that a somewhat relevant analogy could be drawn from what has been often argued in terms of investing in real estate; should one buy the best house in a bad neighborhood, or the worst house in a good neighborhood?

Should those that opine the bond bull is on its last legs be correct, my guess is that the market will serve up some opportunities in mispriced debt securities, as babies get thrown out with the bathwater.

Disclosure: I am long GIM, TEI, AVK.

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