Controlling risk, that's why.
Controlling risk, that's why.
agip, sorry I saw the upper case A and assumed it was the Troll. Recently he has been posting using even my wife's name.
Anyway, since the recent interest rate low of July 2016, when the 10 Year was at 1.35%, as I mentioned the TLT lost around 20%. I believe about $142 a share down to $116. My view is that interest rates will not move significantly over the short term. Central Bank policies, slow global growth, declining demographics, global indebtedness, will likely cap rate moves. My argument against a large allocation to intermediate, long term, and high yield is the same as stocks, excessive valuation and risk, thus my preference for a large allocation to short term bonds. As you know, bond interest rate sensitivity is a fact of duration, whereby a 1% move up or down, for a ten year bond results in a 10% move the opposite direction.
I don't doubt in the short term a scenario where a significant drop in the stock market leads to funds flows and appreciation for bonds. Corporate debt leverage and over indebted governments insure large losses in longer dated bonds over the intermediate term.
My view remains capital preservation will soon dominate investment discussions. Speculation among most asset classes is breath taking, once again showing how little regard investors pay to fundamentals.
Igy
If you disagree with Igy, you are a troll. It's that simple.
agip,
BLV has an effective duration of over 14 years, medium quality (half of fund corporates, so assuming some high yield). NAV was $99 in September, $11 lower now. Performance lately illustrates the risk I have noted.
http://www.morningstar.com/etfs/ARCX/BLV/quote.html
Igy
Yo Yo Pa wrote:
If you disagree with Igy, you are a troll. It's that simple.
Spoken by the guy that posts using my wife's name.
Scumbag.
agip wrote:
this might surprise you all.
Without looking it up, which class of bonds do you think has done better over the last year, as interest rates have risen? A year ago, the 10 yr was yielding 1.75%, now it is yielding 2.4%
An utter disaster for bonds right? And probably a particular disaster for long term bonds, right? You'd guess that the best performer was short term bonds, no?
Wrong
(using NAV)
BIV (intermed) +.61%
BSV (short) +.62%
BLV (long) +2.74%
The value of a coupon is substantial in lessening the losses from rises in interest rates.
Doubleline Short Term Bond DBLSX distribution yield 2%. One year return over 3% and effection duration a liitle over one year. I think a better choice than any of the above.
Igy
Ghost of Igloi wrote:
Yo Yo Pa wrote:If you disagree with Igy, you are a troll. It's that simple.
Spoken by the guy that posts using my wife's name.
Scumbag.
While it is appreciated, you are not required to sign your posts.
You just insist on being a jerk. Hey it's your Karma bud.
agip wrote:
Ghost of Igloi wrote:Incorrect assumption. Central Bank Reserve Balances are not equal to Central Bank Balance Sheets. Here is the correct chart one should be looking at.
http://inflation.us/central-bank-balance-sheets/Igy
I'm not clear on the discrepancy
agip,
Central bank reserves balances are excess deposits held for emergencies. Required amounts determined by central bank. Percentage higher for U.S. financial institutions, less in Europe, and even less in China. Larger reserve requirement becomes a constraint on lending.
Central bank balance sheet is a liability, the asset in the case of the Federal Reserve is the Federal Reserve Notes circulated throughout the economy. A major reason so much hot money seeking a return.
Igy
Ghost of 29 wrote:
If you own a 30 year 3% $1000 bond and rates go up one percent, the value of your bond will drop to $882.24. So, you got your $30, but your asset's value dropped almost $120. Rates can't go any lower than they are now. They can only go up. And they will.
The bond will return $1000 plus interest after 30 years.
"The bond will return $1000 plus interest after 30 years."
Of course it will. But, if rates go up in the meantime, the value of the asset goes down. By the way, I made a miscalculation. A $1000 mortgage for 30 years at 3% would decrease in value to $882.24 if you needed to liquidate your asset - assuming the market rate went up to 4%. A 30 year bond would decrease to $827.08.
Here's another calculation. If you buy a 30 year bond for $1000 at 3%, and the rates instantaneously go up to 6%, your bond will have a present value of $587.06. Such a rate increase may be unlikely, but the scenario is worth considering, and the point remains the same. Long term bonds are risky if there is a significant chance of rates increasing.
You won't earn much in short term bonds, but short terms bonds are not as volatile. Part of investing is controlling risk. Especially if you are an old geezer like me.
By contrast, a 3 year $1000 bond at 3% would decrease in value to $972.25 if rates increased to 4%. Over a year's time you would break even if you bailed before maturity.
In the 40's, 50's and 60's savings banks loaned money at 6%, and borrowed at 4%. I'm sure everyone thought this could continue forever. The 70's changed all that. Suddenly mortgage rates shot up to over 10%, and peaked at 17.5% in 1981. . Banks got hosed. All the old fixed rate mortgages plummeted in value. Adjustable rate mortgages came into being to mitigate this risk. If the rate of the instrument adjusts with changing economic conditions, the principal will remain stable. This is really, really, really simple finance.
29,
You are correct on your bond valuation assumptions. There is additional risk in this cycle, including record debt issuance with light covenants.
Igy
Ghost of Igloi wrote:
Yo Yo Pa wrote:If you disagree with Igy, you are a troll. It's that simple.
Spoken by the guy that posts using my wife's name.
Scumbag.
Hi, Igy/K5! So your wife's name is 'Yo Yo Pa'? That's very original. Or maybe it's K5 since that's who you're responding to. Or maybe it's another of his/your aliases. It's hard to tell with all of the different handles you use.
Ghost of 29 wrote:
"The bond will return $1000 plus interest after 30 years."
Of course it will. But, if rates go up in the meantime, the value of the asset goes down.
False. Barring default, the value will always be $1000 for the last one holding the bond.
At the end of 30 years, but not before that.
Market Looks Set For New Records Ahead of Yellen Testimony Later in Week
DOW closing in on 20.4k
You guys believe me yet?
Referring the markets to historical norms is not now fruitful, has not been fruitful for some time, and will not be fruitful for some time to come. There has been a dislocation, a discontinuity.
The investor profile is different, and the trading profile is sufficiently different that historic norms no longer apply.
I got back in, broad-spectrum, when it bounced just above 20k again, after the brief dip under. I was looking for either above 20k sustained, or a while above, then a dip below, then a return above, which we got. I have no qualms about getting out, and only being in short-term.
Meanwhile my metals are doing great, I might even consider exiting that position temporarily. Some of that stuff is up insanely on the year, more than I thought it would be, like junior miners.
Yes Igy you can pick some scraps, but it's a new era. Huge price gains, tiny volume. That reinforces what I have been saying about the wealth of investors and the lack of need to sell. Also the fudge-factor regarding public accounts...upping market returns is the ONLY way to better the situation without serious trouble, and price rise is therefore absolutely inevitable...and more price rise than we have already seen, more enough to make the public accounts look solvent. And that's a lot.
The fix is clearly in, and so am I. A 10-15% "correction" will be irrelevant. The only problem is how much fickle Chinese money is in the markets, those guys tend to panic more quickly. If they can just relax, there will be no problem.
Maturity is king wrote:
Ghost of 29 wrote:"The bond will return $1000 plus interest after 30 years."
Of course it will. But, if rates go up in the meantime, the value of the asset goes down.
False. Barring default, the value will always be $1000 for the last one holding the bond.
but you have to factor in inflation. The $1000 you get back may have much less value than the $1000 you put in. That's part of the risk of holding actual bonds.