Spoken by hollow man.
Spoken by hollow man.
I am not Igy.
Igy
Jokeyu wrote:
I am not Igy.
Igy
That is not me.
I am Igy.
I am Igy.
I am K5.
I am Igy.
I am Igy.
I am Igy.
inflation protected treasuries have rebounded completely from the big post election sell off.
bonds in general not yet - still down around 1-2%
bonds keep surprising to the upside...I think it is the massive amount of money around the world that needs to find its way to fixed income. I mean we focus on the day to day problems of the world, but meanwhile billions are finding disposable income for the first time. Much of that will find its way to bonds. Then equities. Look out for the giant whoosh when that happens.
Going into the year, most people would have been surprised if the Dow got as high as it has now dropped to by August.
When it went over 13,000 people got skittish.
Central banks have been a large part of the bond market. Add to that investor's search for yield. Neither of which I see as a positive.
What's the point of investing, if you're not after yield?
GoI, or anyone else who has thoughts on this matter.
I'm looking to rotate some of my stock gains into more safer bond funds. I was looking at Vanguard mutual funds. One that seems intriguing to me is their GNMA mutual fund. It is just made up of government mortgage backed securities. The average maturity is 5-8 years.
Overall its very low risk, and low yield. You it take it for what it is. But it does offer higher yields than treasury bonds of the same duration. The downside is the risk of prepayment. It appears this is what has hurt the fund's performance over the last 5 years. The average bond in the fund returns about 3.5 percent yet the average performance of the fund itself over the last 5 years has been only 1.8 percent.
But here is my theory, if rates gradually go up over the next few years, Shouldn't the volume of mortgage refinancing go down, (all other things being equal)? If so, I see this as a good investment opportunity. Just wondering what others think.
Ryan,
You are correct the volume of mortgage refinancing would go down in a rising interest rate environment. However, if interest rates rise dramatically the effective duration of the bonds would increase for the same reason. In that scenario the the principal value of the fund would be adversely impacted.
I personally prefer high quality short duration bonds for the scenario you presented. Low risk to principal, captures possible rise in rates, acts as a place holder for better valuations stocks or bonds.
Igy
Ryan,
If you drill down to an individual issue of MBS you can see what I am talking about. A factor is applied to the bond based on various scenarios of interest rates up or down. So generally speaking MBS will be more sensitive to interest rates up or down. Thus a fund that has an effective duration of 3 years could easily move to 5 or more if interest rates for mortgages were to rise. The most favorable environment would be stable interest rates since the bonds prices in the prepayment or extension risk, reflecting generally higher yields for similar quality and duration.
Igy
Gruntz wrote:
What's the point of investing, if you're not after yield?
A foolish assumption illustrating a lack of understanding.
It was a question, not an assumption.
Goi,
Thanks for pointing that out that duration could become longer when interest rates rise. I hadn't thought about that.
Still, my bet is that rates will very gradually rise. And I think there is at least an equal chance that rates could go flat or down again as much as they could spike sharply up.
Generally I feel like I want to create a strong floor under my portfolio while investment times are good. My goal is to want to be in a position to enjoy a recession whenever it comes.
Gruntz wrote:
It was a question, not an assumption.
OK, not a rhetorical question then. Well yield comes from dividends or interest, but there is always capital appreciation and capital loss. More aspects then your original comment.