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bale002

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  • Now's Really Not The Time For A Liquidity Crisis [View article]
    Hold cash in FDIC-insured deposits and/or buy short-term Treasury bills.

    Indicators? Try to read up on the Federal Reserve and its role in the repurchase agreement market (search, for example, Key Mechanics of Tri-Party Repo Markets, or ON RRP testing Federal Reserve New York, or Money Market Fund Reform Rules).

    In short, the interbank lending market (fed funds) is still moribund, perhaps dead forever, and the only way, mechanically, the Fed can raise short-term rates is to lend to some banks and to the shadowing banking system (e.g. money market mutual funds) from its vast supply of financial holdings (e.g. Treasuries, agency MBS) in exchange for cash, hence draining liquidity.

    But it is not clear 1) that the attempt will work, 2) why they would actually do it in the face of a still sluggish economy.

    Anyway, make sure you have enough cash or short-term treasury bills for basic spending for as long as you can reasonably afford (up to two years, for example, or at least six months).
    Jul 3, 2015. 03:04 PM | 1 Like Like |Link to Comment
  • Inverse Floaters: Attractive Yield But Beware Of The Risks [View article]
    The municipal bond section of the Nuveen site has something similar, downloadable in pdf.

    At the start of 2015, the consensus expectation was a flattening curve. In the event so far, it has steepened.

    After reaching dizzying heights in the first few months of the year, investment grade long-term bonds have come down in price over the past several weeks on profit-taking and the arrest in disinflation and in some cases outright deflation, and not because of an imminent rise in short-term interest rates.

    Economic growth is sluggish and there's only a 50-50 chance of a rise in policy rates this year.

    At any rate, I agree with the author: leveraged municipal bond funds are appropriate as part of an overall diversified portfolio, including cash, and, I would add, mainly for income-oriented, tax-shy investors with a long-term view and who can dollar-cost average.

    There are currently high quality leveraged muni CEFs with discounts to NAV in the neighborhood of 15% and yields around 6%. Still, not for those who are squeamish about daily portfolio NAV.
    Jul 2, 2015. 10:48 AM | Likes Like |Link to Comment
  • IGR Vs. AWP: What's A Yield Worth? [View article]
    In a tax-deferred account, I accumulated a lot of AWP in the 2007-2009 period and up to around 2012, so altogether I have an around 15% long-term capital gain plus all that monthly pay-out. I could sell the whole things, but it's hard to beat the distribution rate, so over the past three years or so instead of reinvesting in the same, I reinvest the monthly proceeds in other sectors for greater diversification.
    Jul 1, 2015. 07:48 PM | 1 Like Like |Link to Comment
  • Bonds Or Bondage? [View article]
    Not necessarily laddering, but for example, say I have $10,000 in cash today and I know in, say, three years I will have an $11,000 expense or reasonable estimate of $11,000 (e.g. school tuition). I could gamble the $10,000 in the stock market or leave it in an insured demand deposit or CD account or buy a two-year investment grade bond (Treasury, gov't agency, muni or IG corporate). To be sure, I will compare deposit rates with bond rates and related expenses. In the meantime I don't care what the general inflation rate is, I am focused on covering that expense, whose increase going forward could be greater or less than general inflation.

    As for leveraged bond funds, the point is at the start of the year, the main concern was that short-term rates would rise at a faster pace than long-term rates. But so far this year, leveraged bond funds have suffered no damage for the fact of being leveraged and they have continued to generate higher yields than unleveraged funds, as they have for 6-7 years now. To be sure, if short-term yields shoot up quickly, it could lead to heavy losses, but so far there is little chance of that and, if anything, the opposite could occur: the curve remains relatively steep or steepens further, allowing leveraged funds to generate even higher yields going forward.

    Finally, generally speaking, surely I would not recommend to a young investor, with a relatively small quantity of money to invest, to focus on bonds with the aim of long-term growth, certainly not in the current environment. But there are all kinds of investors with all kinds of asset levels and all kinds of objectives over all kinds of time horizons, and bonds, coupled with cash and other assets, can fulfill many of them, and rising rates and leverage present as many opportunities as they pose risks of losses, realized or not, inflation-adjusted or not.

    To sum up, then, we agree that investors should not be afraid to leave even significant sums in cash: even short-term bonds do pose capital risks. However, I don't like these "either/or" propositions: usually it is more nuanced than that and sophisticated investors have all kinds of uses for, and/or obligations to use, bonds, regardless of the level and possible direction of interest rates.
    Jun 29, 2015. 11:07 AM | 1 Like Like |Link to Comment
  • Bond insurers tumble as Puerto Rico heads to default [View news story]
    Agree with you.

    What's even more unbelievable is that even some respected plain-vanilla muni bond mutual funds, like those managed by Franklin Templeton, have insisted in keeping their allocations to Puerto Rico.

    I wouldn't give those people a dime.
    Jun 29, 2015. 09:57 AM | 3 Likes Like |Link to Comment
  • Bonds Or Bondage? [View article]
    You are wrong on so-called myth # 1.

    A bond buyer who can count knows his asset/liability profile over time and matches accordingly, knowing, or at least having a reasonable estimate, in advance what his own inflation profile is, using both bonds and, yes of course, cash.

    Over any given period of time, stocks can lose a lot, and not necessarily having anything to do with inflation.

    Sure, if the goal is simply "to make money", well, there are lots of other things people can do.

    Bond yields are low simply because nominal and real growth rates are low and the outlook is for continuing slow growth for years, probably decades, to come, and for some very apparent fundamental reasons.

    Are bond prices in a "bubble"? "Bubble" is not really a technical term, sure there is a dictionary definition of it, but somebody, a person, writes a dictionary, and somebody else can define a term as one wishes.

    To me, the question is, are investors bending over backwards borrowing money to buy bonds? Are asset/liability matchers bending over backwards borrowing money to buy bonds?

    There are some, many, bond funds that borrow, up to 35%-50% of the fund's assets, short-term to buy long-term bonds.

    At the start of this year, the consensus view was that the bond curve would flatten.

    In the event, so far this year it has steepened.

    So the consensus has been wrong. Again. Again.

    And, if anything, the economic fundamentals, as well as some ongoing crises, militate against a rise in policy rates this year, despite some cheerleaders for break-away growth masquerading a central bankers.

    And what, exactly, would the fed funds rate be a transmitter of anyway?
    Jun 29, 2015. 09:40 AM | 1 Like Like |Link to Comment
  • Should You Worry About Rising Bond Yields [View article]
    Agree that there is no fundamental economic evidence of a significant upward change in growth or inflation momentum.

    In fact, as you mention, growth is chronically slower than Fed projections and on the inflation side it may well be simply that the pace of disinflation, and in some cases downright deflation, has slowed.

    In any case, in my view, the purpose of bonds, as well as cash, is asset/liability matching over time. If the bond/cash balance is done properly, declining bond prices should pose no cash flow problem and rising rates present an opportunity.
    Jun 26, 2015. 09:29 AM | 1 Like Like |Link to Comment
  • Is This What Our Bond Bear Market Already Looks Like? [View article]
    I define a bond bear market as failure by the bond buyer to properly match assets and liabilities, being forced to sell bonds at a loss before maturity, or issuer default.

    Choosing this or that six-month period can be quite arbitrary. In fact, it is quite arbitrary.
    Jun 22, 2015. 10:29 AM | 1 Like Like |Link to Comment
  • Bonds And Banks [View article]
    They say the cure for higher prices is higher prices.

    If US Treasury prices swoon, there will be buyers and a new equilibrium will be achieved.

    All these authors of articles on an implosion of bond prices due to inflationary pressures omit any real economy analysis of why actual inflation should accelerate (official inflation underreported or not).

    Right now we are experiencing old-fashion profit-taking on sky high bond prices and a slowdown or arrest in the pace of disinflation (or downright deflation by some measures), not an actual acceleration in inflation.

    Again, let's see some real numbers analysis supporting the scenario of an acceleration in actual inflation, e.g. real wages, industrial production, capacity utilization, commodity prices, and the like.

    The numbers that I have seen lately do not support such a scenario.

    Please provide supporting current and forward-looking data.
    Jun 21, 2015. 09:17 AM | 1 Like Like |Link to Comment
  • Stressing The Stress Tests [View article]
    The countries that use the euro are not sovereign in monetary terms. The whole crux of the eurozone crisis is that no one knows exactly who is sovereign. EU/eurozone institutions are vague.

    Greece is more comparable to Puerto Rico than to a proper sovereign country, and there is no Chapter 9.

    Countries that default on debt issued in foreign currencies cannot be properly called, by my definition, sovereign default.

    Sovereign default is politically wilful default on debt in a currency issued by a clear sovereign in its own currency with clear institutional relationships between its own treasury and its own central bank.

    Anything less than that has a risk profile similar to municipals and territories and corporates, of better or lesser quality as the case may be.
    Jun 21, 2015. 06:31 AM | 1 Like Like |Link to Comment
  • The Bond Bear Market Has Begun [View article]
    The same article ... cut and paste, cut and paste, cut and paste ... for the past two, three, four, five, even six years now.

    Long-term bond prices are off today, and the 5Y noticeably. Probably shorts taking profit, after longs had been taking profit these past several weeks. The current spate of bond market volatility is probably nothing more complicated than that.

    The 52-week high in the 5Y is 1.87%, we're at 1.58% now; the 52-week high in the 10Y is 2.69%, we're at 2.27% now; the 52-week high in the 30Y is 3.52%, we're at 3.06% now. These rates after we had dove down into nose-bleed territory a few months ago. So what?

    Most likely we have been witnessing a slowdown, or arrest, in the pace of disinflation (even outright deflation on some readings over the past several months), but I doubt that were are on the cusp of an acceleration in inflation, at least not by official measures.

    I know a lot of people, including FMOC members, are trying to cheerlead a faster growing economy, including faster inflation as part of the narrative, but I challenge anyone to explain in terms of forward-looking _real economy_ exactly what the source or sources of such acceleration in inflation would be. (By the way, _real_ wages were actually down on the latest reading).

    Not saying that there aren't any, but someone list them concretely and the odds that they will actually occur in the next 6-18 months.

    [Crickets]

    In the meantime, bond prices remain a two-way street and the occasional volatility, either direction, can be fun.

    Good Luck!
    Jun 19, 2015. 10:37 AM | 1 Like Like |Link to Comment
  • Return Of The Bond Market Vigilantes? [View article]
    Long-term bond prices are off today, and the 5Y noticeably. Probably shorts taking profit, after longs had been taking profit these past several weeks. The current spate of bond market volatility is probably nothing more complicated than that.

    Most likely we have been witnessing a slowdown, or arrest, in the pace of disinflation (even outright deflation on some readings over the past several months), but I doubt that we are on the cusp of an acceleration in inflation, at least not by official measures.

    I know a lot of people, including FMOC members, are trying to cheerlead a faster growing economy, including faster inflation as part of the narrative, but I challenge anyone to explain in terms of forward-looking _real economy_ exactly what the source or sources of such acceleration in inflation would be.

    Not saying that there aren't any, but someone list them concretely and the odds that they will actually occur in the next 6-18 months.

    [Crickets]
    Jun 19, 2015. 10:23 AM | Likes Like |Link to Comment
  • Amerco: EXR/SSSS Deal Sheds Light On Hidden Asset Valuation, 55% Upside [View article]
    I view self-storage as a much more efficient extension of basic housing than indebting millions of people into inefficient McMansions that they cannot afford.

    Overall, indeed, urban logistics is a stalwart business ever since rubber met the road.
    Jun 19, 2015. 05:46 AM | Likes Like |Link to Comment
  • Return Of The Bond Market Vigilantes? [View article]
    The Fed consensus projections for 2015 growth were significantly downsized, the projection for unemployment was also adjusted from further decreases in the official unemployment rate to holding steady, and the inflation projection basically unchanged.

    Long-term bond yields came off during the press conference, though this morning so far they have stabilized and are a bit firm.

    Short-term rates haven't moved much.

    Real wages came in negative this morning as CPI accelerated to a whopping 0.4%, due to a rebound in gasoline prices, but below expectations of 0.5%, while core inflation remained unchanged at a whopping 0.1%.

    The GDPnow forecast for 2Q15 is currently 1.9%, which would mean about 1% or so for all of 2015.


    I do not view these numbers as bullish for an increase in the federal funds rate which would probably have little economic impact anyway.

    And the euro has broken 1.14 to the dollar, an indication that some do not expect the US to tighten policy any time soon.

    Nevertheless, even if the long-end of the curve drifts up another 50bps based on long-term inflationary expectations, I would not consider it significant.

    Contrary to expectations, again, it appears the curve is getting steeper not flatter, but neither one is necessarily a reliable indicator of the direction of policy rates, employment and growth.
    Jun 18, 2015. 10:00 AM | Likes Like |Link to Comment
  • Don't Fear The Fed Rate-Hike Bogeyman [View article]
    " ... a spike that I contend was not necessarily in anticipation of a Fed move, but profit taking among bond investors (both of the domestic and international variety) ... "

    Agree.

    " ... What the Fed will be raising, when they do finally "raise rates," will be the Federal Funds rate -- the overnight rate at which banks lend money to each other ... "

    And it may not matter what the Fed does with the fed funds rate because the old interbank market is moribund.

    It's 50-50 whether the Fed implements the new monetary policy regime involving the so-called shadow banking system and based on reverse repurchase agreements and whether it will start off with a one-tenth of a point increase, and it is 50-50 whether it will continue with the program into 2016 and whether it will raise again from one-tenth of a point.

    The biggest threat to long-term rates is inflationary expectations and actual inflationary pressures.
    Jun 17, 2015. 09:55 AM | Likes Like |Link to Comment
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