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Duration risk in the investment grade bond market (LQD) is leading fund managers to reduce...

Duration risk in the investment grade bond market (LQD) is leading fund managers to reduce exposure. The average yield on IG bonds has fallen to 2.66% and bond math says it takes very little backup in yields from this point to wipe out a year (or years) of coupon payments. Corporate bonds often yield less than the equity of the same company - a rare situation, says Matt Eagan. "We think you have a better chance of preserving principal on the equity side." This from a bond man!
Comments (4)
  • Tack
    , contributor
    Comments (12985) | Send Message
     
    Yes, bond-curve convexity is a now the major factor in many bond classes. Even though this lightbulb has barely switched on for many, at least if bond and equity capital flows are to be judged, it speaks volumes about the likely paths for capital flows for bonds and equities in the future.
    7 Dec 2012, 07:43 AM Reply Like
  • oroloco
    , contributor
    Comments (17) | Send Message
     
    Okay, help a novice out. What does "backup in yields" mean?
    7 Dec 2012, 01:20 PM Reply Like
  • Tack
    , contributor
    Comments (12985) | Send Message
     
    A rise in yields.
    7 Dec 2012, 02:13 PM Reply Like
  • Luke Girard
    , contributor
    Comments (37) | Send Message
     
    I doubt it is convexity, as the market considers convexity in pricing as it considers duration and other factors.

     

    I think the uneasiness of bond managers has more to do with the uncertainty that now exists with the future direction for interest rates. If the fiscal is resolved, or enough resolved, then interest will rise. Even if it is only 10 basis points this will affect bond performance considerably. If it is not resolved, we go into another recession, more easing by the Fed and perhaps more stimulus, resulting in yet lower interest rates. I think bond managers, by shortening their portfolios are merely assigning a higher probability to the former.
    7 Dec 2012, 05:41 PM Reply Like
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