Ray Hendon

Sleeping with Short Bond ETFs

If short interest rates go down further, which some are predicting, then you will get a little price bump of SHV or SHY--less so on BIL or USY.

You must forgive me if I tend to write as if all accounts were like mine, were almost everything is in a tax protected account. The disavdanatage is that you don't have the freedom to move your money around into and out of savings accounts.

This is one of the oddest periods, financially, that I have every experienced. So much of what we expect is not relevant today. But, I think more normal times will return once the dust settles on the banking and credit crisis we have experienced.

Thanks for the comment.

Ray

Sleeping with Short Bond ETFs

I think money markets are fine, most of the time, but usually short bond ETFs and short bonds will outperform MMs. As you extend out the curve, to 2+ years AD, it is almost impossible for MM to keep up with the yield.

When you say that most of the funds mention are not performing well, how do you mean that? I see them as performing fine. If, by chance, you mean over a few days or weeks, then I can see that. But, if you will look at the average duration of a prospective fund, and measure the average duration against the length of time you can keep your money invested, then as long as the AD is as long as your investment horizon, you cannot lose money. The arithmetic of average duration will work that way.

I got out of MMs some time ago because of their returns were well below inflation. Now, however, almost all short durations obligations are below it, too. So, I try and at least keep as close to inflation as I can, and a longing short-term bond ETF is the best bet, at least as far as I can see.

Best wishes,

Ray

Sleeping with Short Bond ETFs

Good question. With my fixed income holdings, I use current market conditions to determine where new monies go. In a rising or unstable interest rate environemnt, I always go short. In a falling or stable interest rate environment I extend out to the intermediate range. I do not try and time the market. I simply go where I see the best spot at the moment. Fortunately, going from an average duratio of 2.5 to, say 4.5 is not exactly a techtonic shift in assets. And, in my view, one cannot be over or under-weighted in short or intermediate bond holdings. There isn't that much difference to justify any kind of attempted precision in allocation percentages.

For most of my fixed income portfolio, I keep my allocations fairly constant, but do vary the short-intermediate allocations slightly as market conditions change, but only to the extent that I am putting in new money.

In terms of "after the fact", I could say right now, that any time the equities market takes a major downturn, short fixed income investments will beat equities. This is not rocket science, but merely the simple observation that short bonds do not fluctuate much in price. I can also say with great precision exactly how much a bond fund will appreciate or depreciate given a 1% change in interest rates. This is not because I have any special predictive powers, but rather it is because the relationship between bond prices and interest rates is scientifically defined by the value of the funds' average duration.

Best wishes,

Ray

Bond Wars Update: International and Junk

Doubling down is a risky strategy, although I have used it successfully in the past. It does lower your average share price and if a recovery occurs, your profits are enhanced. I'm not certain about PCY's prospects for recovery as far as timing. There is great turmoil in the markets now. I would certainly never recommend it--just point out the risks and leave it to you. My risk preferences are probably much more conservative than yours.
However, I am bullish on emerging markets over the long haul. Russia and Turkey have a lot of room to grow, but it's going to be bumpy. My concern in Russia is the fate of the ruble. It is mostly a free floating currency, as far as I know. It could take a huge hit if the political situation there gets much worse.

Good luck.

Bond Wars Update: International and Junk

Greg: Remember that EMB holds only dollar denominated debt. So there is no currency risk. There is, of course, credit risk, but when a foreign government issues dollar denominated debt it is usually a higher credit quality. While this fund will not capture any currency gains, neither will it lose to currency falls.

Also, with regard to trading below NAV, I suspect that since the Russian exchanges have been unable to trade for a few days, there is no reliable way to evaluate their debt obligations. When trading opens again, which I am sure it will, then we will get a better understanding of the value of the ruble and the value of their securities. Until then, the market apparently holds a dim view of their real value.

Bond Wars Update: International and Junk

Looking at the detail of their holdings, it looks like the death list of an airlines crash where there no survivors. Chilean debt is their largest holding, and the Chilean economy and currency has been besieged lately. This is also true for most of Latin America. Then they have Bulgaria, Hungary and Turkey--two of which (Hungary and Turkey) have currencies under severe attack. I don't have good data on Bulgaria, but it is a former vassal state of Russia, with little experience in modern capitalism.

Then, they have over 4.5% invested in Russian bonds. Russia's equity market has been forced to close for the last two days, attributable to the meltdown of some of their largest banks--all are severely undercapitalized (like the U.S. banks, only more so), and the ruble has been vanquished.
I have no time table for when any of these collapses will conclude. At the edges of the financial world, all these countries, indeed almost all emerging markets except China and India are suffering greatly as the world's investors try and get a grip of what's happening. I don't think there is going to be any fast recovery for them. But, when they do recover, it will be twice or three times the rate of developed economies. The volatility of emerging markets equities, currenies and debt is exceptional. You must be prepared to take some big lumps if you get into these investments. Personally, I have confidence that most of those I listed will recover. Their economies have far to go on the upside. But their fairy tale growth has ended for now, and it may be some months before all the commotion settles down.
For now, there is an international flight to quality--can you believe U.S. Treasuries? They are still the prime debt instruments in the world.

Best wishes,

Ray
Ray

Bond Wars Update: International and Junk

Turbo Grande:

You are correct about EMB. This fund does buy only U.S. dollar denominated debt. My apologize for my error in my first response.
Thank you for the information.

Ray

Bond Wars Update: International and Junk

We buy them with dollars, but the sponsor buys them in local currencies. Even if they didn't, however, fluctuation in the exchange rate between the two currencies would be reflected in the NAV. There is no escaping the currency risk unless you hedge the amounts.

Best wishes,

Ray

Report from the Bond War Frontlines

The last sentence should read: They poorly reward tyhe investor...

Report from the Bond War Frontlines

Duration is one of the critical variables in a bond fund. The longer durations have much more volatility, for now, not much extra yield. Ultimately it is a personal decision as to which yields and duration are best for your portfolio. Personally, I do not recommend any long term funds. They poorly reqard the investor for the increased risks and yield.

Best wishes,

ray