I’ve had good returns on bonds over the last year, largely because I invested in long deflation investment grade bonds. I took on a lot of duration risk by investing long, and it paid off. I’ve reduced the size of my duration bet, but it is still large relative to the consensus. That said, momentum tends to persist.
But what to do now? Yes, rates could still go lower on the long end. Credit spreads could still tighten on the long end and elsewhere. Most of my credit related positions have done well, including preferred stocks of banks.
I have a positive view on conforming mortgages, though I have no position there now.
On illiquidity I have a negative view because things are volatile enough that you need flexibility.
On FX, I am long the Swiss Franc, and it has been a loser. I suspect that with weakness in the euro, the Swissie will not break its link with the Euro. At present, the US Dollar seems ascendant. What can stand in its way?
I am tempted to put money into emerging markets debt, because their economies are run in a more orthodox manner than the developed economies, but not by much.
Really, I am scratching my head over all the various risks, and thinking that short-term investment grade credit is the only thing that I like. Beyond that, I am open to suggestions.
what about DBLTX?
I don’t use open-end mutual funds — only closed-end funds and ETFs.
Gundlach is a clever guy, though.
thanks, I always enjoy your blogging and find it very informative.
why only closed end?
It said, “only closed-end funds and ETFs.” Regular bonds are too illiquid, and my custodian does not allow for open end funds.
Me too, the returns are way decent given the short duration, which makes me think what’s the tail risk they are hiding. Then I remember, that in 08 GE would have had to default on its CP if Immelt had not had a direct line to Paulson et al. Could you ever have imagined that GE, the supposedly best run company in America, was so inept? These guys are geniuses for f*ing up, which means there is always more credit risk than we see in corporates. This is all too easy to overlook when the spread is so wide over US debt of the same duration.
You asked for suggestions? What’s looking good to me is the 5-years – 10 TIPs, where you are still getting paid to insure against inflation vis a vis nominals. There is a play there.
http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/
5-10 year TIPS have a negative yield excluding the CPI accrual. That means locking in a loss against CPI inflation, but that may be the right strategy against avoiding an even bigger loss vs the CPI.
1 – gold stocks as a result of the current sell-off: Many of them now pay a higher yield than do 5-year U.S. Treasuries. A few even pay more than a 10-year Treasury. I am thinking low cost producers (AUY, GG, …)
2 bet against the euro. China’s second quarter GDP numbers may disappoint and take the euro down more.
Have you looked into swapping out some of your long-term treasuries for long munis? The long end of the muni curve is a little steeper than Ts and ratios are pretty wide right now. At these rate levels, muni yields tend to be driven more by credit than yields, which is nice because short-term noise in between the two has been inverse as of late, meaning muni yields have kept very stable.
Most of my bond accounts are IRA money. I can understand putting in a muni when it yields more than a Treasury, but still, it doesn’t look good.
Perhaps you could do the reverse of the last post’s suggestion. I don’t see how floating rate paper can get a much lower yield, but there is a chance for upside.
These aren’t too cheap (what is?) but you could look at ISM, OSM, or SLM pr B.
If duration doesn’t scare you, there is WFC pr L, which is for all intents and purposes immune to call risk.
I would disagree on conforming mortgages. At 3% the risk of rising rates makes for a terrible picture , with the added whammy of prepays slowing to a crawl when rates rise. The strong performance of mbs in the current environment is due to their preferred status amongst regulators when reviewing bank balance sheets.
As far as the bigger picture of investing in bonds, the attraction here is a relative one, equities are over-priced here held up by quantitative easing and a belief the fed has the ability to keep prices high, but the prospect of slower economic growth in the face of very high valuations on a CAPE ratio basis means a very real prospect of declines on the order of perhaps 40%. With high quality bonds, you face little risk of nominal principal loss and at least a small coupon vs cash. But you must do bonds and not mutual funds or you never get principal paid back and are stuck with the duration risk forever.
Where things could change is if rates come down even more, we’re very close to the point where holding cash has more attraction than holding bonds, or as Jeff Grundlach would say, why give someone a suit case of cash, if all you are promised is that same suit case back in the future.
With a bond, when rates go up, the true economic loss is the same as with a bond fund. The market value of the bond declines, just as with the bond fund. The fact that you can’t check the newspaper to see that this has happened to the bond does not change this.
This thinking is wrong. You buy a bond fund with an average maturity of 7 years, a year from now it will still be 7 years as the portfolio manager is maintaining his duration. Bonds have definite maturities, so that while on a day to day basis their prices fluctuate each day your time to maturity shrinks and at the end of 7 years your principal is returned.
I get that. What you overlook is that (1) there are offsetting benefits from keeping a constant duration (2) reinvestment risk is diversified over time with a bond fund because, in a sense, a bond fund is a continuous bond ladder, which many people consider to be a good way of holding bonds. If I knew what interest rates would be in the future, the choice of bond vs. bond fund would be easy. But in general, the best prediction of tomorrow’s rates is today’s rates, and bond funds are going to price that in as efficiently as individual bonds. Bond funds are different from individual bonds, but you can’t say one is necessarily better than the other, as you seem to be arguing, unless you know the future better than does the market.
In the current “Barrons,” there’s an article about Paul Isaac which touts multiple branch[?] banks of Credit Agricole indicating that they sell at a small fraction of book and have a rich dividend stream. However, the same issue suggests that the Euro may drop to parity with the dollar. In any event, an interesting idea.