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"It's my worst nightmare," says a long-only bond fund manager. "There's nothing I can do - the...

"It's my worst nightmare," says a long-only bond fund manager. "There's nothing I can do - the checks come in every day, and I have to invest (the money)." Aging baby boomers following conventional wisdom by steering their accounts away from stocks and to fixed income at these low rates could get a very expensive lesson, writes Jonathan Trugman. (see also)
Comments (38)
  • Now, there's something about which we don't have to speculate.
    25 Nov 2012, 08:09 PM Reply Like
  • Right--interest rates are going up!
    25 Nov 2012, 08:36 PM Reply Like
  • Yup, I have a broker who insists bond funds are okay. There ain't no way I would touch bonds.
    I feel for you (fund mgr), but gotta go with it. If the client wants bitter herbs, then serve 'em up.


    Capt. Brian
    The Lost Navigator
    25 Nov 2012, 08:28 PM Reply Like
  • Yes,this is tough scenario to manage in for sure, so long-only, long duration bonds are not the play right now. This is going to be a rude awakening for investors, if and when rates start rising. Once rates start up, everyone will be rushing for the door at the same time, leaving long duration bond funds. The exodus will feed on itself and I doubt that the Fed has enough capacity to prevent it from happening. The new breed of financial planner does not want to take the blame for losing market value when they have been putting their clients into long bond funds (not to mention losing fees as AUM declines!) Don't forget, timing is everything!


    No one wants to buy or hold bonds when they think rates are going to rise, a classic "liquidity trap" problem, but Bernanke has done his best to allay rate fears by saying rates will stay low for an "extended" period. Aside from an unlikely Japan-scenario in the U.S., we know that rates have to rise someday if for no other reason than to bail out the insurance industry that is on precarious footing with all of the long term liabilities on their books that can't be supported by the low level of rates in the U.S. as well as retirees trying to live on bank CDs (are you kidding!!) In these cases, the sooner rates rise the better. Just not too quickly, or that will shock the economy back into another crisis. High yield bonds, investment grade bonds, medium term bonds, and high dividend stocks are best plays in this market, as the market activity has shown by its actions.
    25 Nov 2012, 08:32 PM Reply Like
  • Why do you think the Japan scenario is unlikely for the U.S.?
    26 Nov 2012, 10:00 AM Reply Like
  • Not a problem. Interest rates are zero forever....or until the US, Japan, & Europe are officially disolved and a worldwide corporate governing body is declared. Queue the Rollerball theme and get the John Houseman holigram ready
    25 Nov 2012, 08:53 PM Reply Like
  • The same dumb asses were chasing Nasdaq in 1999.
    25 Nov 2012, 09:17 PM Reply Like
  • Just hold cash. In the long run that's what will work out.
    25 Nov 2012, 09:23 PM Reply Like
  • Didn't work during the 70s stagflation.
    25 Nov 2012, 10:11 PM Reply Like
  • We're not in the 70"s. Whole new ball game, cash is king! Study EW and you'll see what i mean. Gold back at 700 and silver at 3. So far my trading doing 10% annual gain so i must be doing something right.
    25 Nov 2012, 10:17 PM Reply Like
  • Or ever, since there has been inflation, for ever.
    25 Nov 2012, 10:18 PM Reply Like
  • Nice job. I don't believe I'll let you manage my money with that brilliant strategy. That is about the worst investing advice you could give someone. Assuming inflation does kick up someday, you'll be stuck with cash that loses value on a daily basis. However, people probably thought that was a good idea back in 1923 Germany and we know how that turned out.
    25 Nov 2012, 11:10 PM Reply Like
  • uhuh and how did it go past 10 years holding cash?
    please. dollar as all currencies is going down steadily but surely. only sure way to lose is to hold cash.
    25 Nov 2012, 11:24 PM Reply Like
  • I'm not even a gold bug and I think holding cash is the worst idea in the world. Inflation is running at 2+%, how is cash a good idea?
    25 Nov 2012, 11:28 PM Reply Like
  • I'm not a big bond investor. I do understand the inverse relationship between price and yield. The thing i don't understand is all this bubble talk. The fed is supposed to keep rates near 0% until at least 2014 so where is this big bubble in the next 2 years? Also what is the mix of people that own real bonds and hold to maturity vs those who hold bond funds or do not hold to maturity and therefore are more concerned about principal instead of yield?
    25 Nov 2012, 09:34 PM Reply Like
  • If you buy bonds at 1.6% and the yield goes up to 2.6% you just lost 1% gain over the maturity period. That's all they are actually saying. If you sell the bond the larger rate will reduce the sale price. Keeping it till maturity is a safe deal, even at a 1% loss if you DCA.
    25 Nov 2012, 09:46 PM Reply Like
  • I can hear the load cheer in the Bernank household knowing he is killing off the middle income people of America.
    25 Nov 2012, 09:45 PM Reply Like
  • I think that the low rates are actually bad for the economy besides the extermination of the middle class. As some TV person admitted once, I think Maria Bartaromo, the US is the finest horse in the glue factory. How long can we be the finest horse?
    25 Nov 2012, 10:00 PM Reply Like
  • Ripe for the picking. CE


    (P.S. Before that though I still think we could see a 1% print on the 10-yr)
    25 Nov 2012, 10:10 PM Reply Like
  • white,
    Yep someday interest rates will go up, but that could be many years away yet. And yes, you might be right and see a 1% print on the 10-year first.
    25 Nov 2012, 11:32 PM Reply Like
  • Yeah i tend to think the same thing whenever i read these articles. They said natural gas would not go any lower, gold would go to $3000/oz, etc... I don't see a good reason why yields could not go down to 1.2% or lower.
    25 Nov 2012, 11:37 PM Reply Like
  • What will such a scenario do to the dividend growth stocks?
    25 Nov 2012, 11:18 PM Reply Like
  • Bond investors, are always smarter than stock speculators.
    25 Nov 2012, 11:40 PM Reply Like
  • Cash actually is a good investment with all assets sitting atop frothy levels.... When the sand hits the fan in the bond market high yield (junk) bonds and investment grade corporates will also see red.... You see everyone is comparing yield to an inlfated treasury --- from dividend paying stocks to corporate or municipal bonds... This final bubble will be the greatest of all because everyone running to chase yield based on this hyperinflated marketplace will get clobbered.


    Cash is king here because no one is being offered anything to put it to work. They want savers to part with it -- to take it... Damn fools... There will be a time to invest in everything from junk bonds to stocks --- just not now.... Patience is the key.... Inflation nick investors, but crashes kill 'em....The problem is everyone thinks they will be smart enough to avoid the next bg meltdown. Let's see how that works out...If you want to trade these markets, fine.. However, having 60% plus in cash at all times will be the truly brilliant strategy when this finally comes crashing....
    26 Nov 2012, 12:15 AM Reply Like
  • Cash is king... if you use it wisely (when you can) to buy (cheap assets, e.g. March 2009). If you keep cash as a strategy you may not be loosing money on your financial assets but over time you will definitely lose money, a lot of money!, due to inflation and rising cost of living. Idol cash is the WORST thing a long-term investor can wish for.
    Bonds are very expensive, sure, but yet - as many other respondents ahead of me wrote - this may well be a long-standing phenomenon. There's no reason to believe that Bernanke won't hold rates at record low till - and possibly beyond - 2015.
    In such an environment BONDS MAY STILL BE A DESCENT PLACE TO BE IN but you must adjust and prepare yourself for possible higher interest rates (hope for the best, prepare for the worst): low-medium duration, strict and sound bonds picking and a flexible/dynamic investment trading path, i.e. some bonds are good to be a buy-and-hold and some, probably the majority, should be traded if the prices keep n shooting up (or if 2015 arrives...). For example (and I’m running a fund which is mainly based on bonds, but not necessarily LONG-only...):
    Short-term of more attractive IG (Italy and Spain can be good picks NOW, possibly Portugal. Ireland WAS a good pick. Wouldn't touch Greece)
    Short-medium term HY (where there's still a lot of juice)
    Perpetuals (mainly of financials, not necessarily banks), where the interest rate is steady or going up after the next call date
    I wouldn't yet short bonds, even not the UST (though I would definitely not buy into it); it's too early and it can be a painful early-bird entry.
    Don't forget that low interest rates can be, well, even lower and may stay here for long, much longer than 2015. The US can easily follow the footsteps of Japan. Worthwhile take a look at the following presentation to understand how clear, close and vivid this path may be:
    26 Nov 2012, 01:38 AM Reply Like
  • Point well taken, but I think the Japan and low interest rates for years to come are already the common theme being spouted by investors in this marketplace.


    It will only take one pivotal market swoon as seen in 2000 and 2008 to offer the opportunity that will enable the cash heavy strategy to work extremely well. I am not saying have some exposure, but if anyone truly thinks the average dividend yield of 2.5% on equities and 6.9% yield on junk bonds is going to hold for the next three years based on all the macroeconomic headwinds facing most economies I think they are mistaken. I am willing to bide my time and put cash to work very slowly and sparingly in this environment.


    The FED already has admitted it cannot stave off a fiscal cliff, what makes anyone think it can stop the negative aftershocks of another impending recession. No. I like the sidelines at this time.
    26 Nov 2012, 01:53 AM Reply Like
  • The risks are clearly there but I think that you are underestimating the central banks ongoing (forever) printing money capabilities. They are doing it for 4 years already, why wouldn't they keep on doing so for the next 4 years, and possibly more?
    With Obama re-election, consequently no change to the monetary policy, we can be sure of one thing: more of the same.
    This means that they will print many more trillions (and keep interest rates low), there will be no Lehamn#2 (they won't allow and can't afford) and they will do anything in their power to keep on pushing people into the (mainly stock) markets.
    Overall, that sounds quite a favorable recipe for bonds!...
    26 Nov 2012, 02:12 AM Reply Like
  • Favorable? You gotta be kidding me. What about inflation. The real inflation rate is higher than your yield. The very fact the FED is devaluing has to give you a hint....
    29 Nov 2012, 09:59 AM Reply Like
  • I'm not referring to 1-2% YTM bonds but to higher yielding bonds, definitely higher than inflation.
    I'm running a portfolio which is Investment grade (on average), 6% average yield to maturity and 4 years duration.
    I see 4 years ahead of us in which yields may stay low throughout the entire period but even if they won't and, lets assume, rise in 2 year time, I'll be left (then) with a portfolio that has 2 year duration, i.e. hardly exposed to interest rate / yields going up.
    I wouldn't be surprised if record low interest rates (and almost no inhalation) would persist for much longer than anticipated.
    Shall I remind you that at the end of 2009 (!) many people, including legendary fixed-income investment managers (e.g. Bill Gross) were discussing whether the first fed interest rate hike takes place in Q1 or Q2 of 2010... guess what? - we're 3 years later, interest rates haven't changed a bit, yields are at record low and you know what? - this may be a temporary record low; time will tell...
    Throughout my career I've learned one thing for sure when it comes to capital markets: never say never.
    29 Nov 2012, 12:06 PM Reply Like
  • Newsflash - real inflation is higher than 6%. You are losing money at 6% even.
    30 Nov 2012, 08:39 AM Reply Like
  • Over the long term, cash clearly loses to inflation. But in the short term, considering risk vs reward, I think it's a better bet than treasuries or even equities. Call me a pessimist, but we are in a position now where we have to count on Congress and the Obama administration quickly to navigate numerous changes to the tax code and the federal budget. That makes me quite comfortable being in cash at least through the end of the year and likely longer. Why jump into potentially volatile securities for a promise of less than 2% average return?
    26 Nov 2012, 10:21 AM Reply Like
  • you should be more afraid of cash just because of this. what's going to happen is they are going to print and print as the alternative is too hard for them. your cash will just devalue. only safe place to park is in real assets.
    1 Dec 2012, 01:33 PM Reply Like
  • The long-term maturing US Treasury story is compelling. In no way does it make logical investment sense to invest in paper that yields 1.65% over 10 years from a country that has ~$16.3 trillion in debt. Especially with the global M3 money supply estimated at $15.5 trillion and steadily increasing. However, take a look at my blog post on TLT from Tuesday, November 13, 2012,


    "As much as it doesn’t make logical investment sense, TLT is headed higher. When holding cash is not an option, money has to head somewhere and amazingly, investors still believe that TLT is a safe investment. Since we are currently long TLT (for a trade), i guess we should keep quiet. But man, this does not make sense.


    Regardless of what we think is logical, technical indicators are smarter than we are, therefore, they should be respected. Price, momentum, trend, and intermarket indicators are currently forecasting higher prices in long-term US treasuries. With the next overhead level of supply at ~127, we may see some consolidation over the coming days. However, we should expect this to be brief because...this thing wants to go, higher. A sustained move above 127.72 will likely set up a test of the all-time highs near ~132."
    27 Nov 2012, 11:34 AM Reply Like
  • MONY:


    You know, it didn't make any sense for people to take all the equity out of the primary homes and invest it in one or more "flippers" after prices had already zoomed, but, the "technicals" said prices were just going higher and higher, so many did. And, that continued rise may just even occur for some minor additonal "delta" in the Treasury markets. But, when one considers the magnitude of the reversal that could ensue when people discover the Treasuries aren't "safe," like they assumed, coupled with a scary convexity curve, is it really worth the risks for the marginal returns offered?
    27 Nov 2012, 11:41 AM Reply Like
  • It depends on your investment time horizon. For long-term investors no, the risk is perhaps too large. There remains tremendous downside risk in holding long-term US treasuries for a 3+ year time window. For short to intermediate-term investors, yes it may be worth a long allocation with an appropriate risk management strategy. The capital markets can be irrational at times (i.e. 2001 tech bubble, 2007 housing bubble, current bubble in gold, and current bubble in US treasuries to name a few) and leading up to the busts of these bubbles was, and still is a great opportunity to realize profits. Technical indicators allow investors to ride these bubbles to profits and then exit when the bubbles pop. In fact, reversals in long-term trends also present great opportunities to realize profits so reversing the original investment may also be worth consideration during a bubble pop.
    28 Nov 2012, 12:21 PM Reply Like
  • MONY:


    If you're some foreign government needing to park billions, maybe you have few options besides Treasuries. But, for the average investor, personally, I cannot see the slightest reason to hold Treasuries, even if you're scared to death. Why risk the sizable risks of principal loss for a 1% yield? At current levels of convexity, a years worth on interest can be lost in a day, literally. Any perceived safety is illusory.


    For the truly alarmed, for whom principal protection trumps all other considerations, cash is better than Treasuries, although I think a balanced allocation of corporate bonds and preferred shares would easily outperform either.
    28 Nov 2012, 01:24 PM Reply Like
  • Tack, I mostly agree with you relating to the sensible outlook. One final question:


    Would you buy TLT today if you thought it would test the all-time high at 132.21 over the next two months? That's a potential +5.6% ROE from its current level and you could limit your downside risk with an appropriately placed stop loss.
    28 Nov 2012, 04:06 PM Reply Like
  • MONY:


    No, I wouldn't for two reasons: 1) I don't think that rate ROE is attractive, given risks, based solely on short-term speculation about Treasury prices; 2) as a deep-value, high-yield investor, I make longer-term plays based on high income, coupled with gradual price recovery, so Treasuries interest me not at all, and even more so, given their all-time-high pricing (i.e., low yields).
    28 Nov 2012, 04:23 PM Reply Like
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