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On Bond Investing

When it comes to bonds I have four main ideas.

Those are my strategies and simple enough.  But what do I do when they are disagreeing with each other?  I play for time.  I play my best ideas, and wait for the market to make a big move that I can ride.

I have owned long duration Treasury bonds for the past year, but have not owned them only, but other ideas as well.  Being long credit has worked, whether in:

  • Floating rate loans,
  • Long duration corporates, or
  • Bank preferred stocks

That does not mean I did not have my failures.  I lost a decent amount of money expecting that the Swiss National Bank [SNB] would eventually break its peg versus the euro.  I still have a small bet on that, and still expect that I will make money on the trade, as the position of the SNB is becoming more difficult by the day.

My goal as a fixed income investor is to make money.  Unlike most fixed income investors, my goal is to make a lot of money when it is favorable to do so, and tread water the rest of the time.  I’m treading water now.  Rates are low; yields are low – there aren’t that many distortions to take advantage of.

I await an environment with more opportunities.  I wonder if this is how Seth Klarman feels toward the end of a bull market.  I’m just schnitzeling, and waiting for some real opportunities to show up.

As it is, I use two proxies to guide me: AGG and CSJ.  My performance over the last year was between the two.  In the short run, I look to exceed CSJ.  In the long run, I look to exceed AGG.

Full disclosure: long CSJ

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10 Responses to On Bond Investing

  1. says:

    Any thought on end of year cliff with congress?

    • Too speculative. As it is, the bond market might better off going over the cliff in the short run. Stock market, not so good.

      Think the odds are 1 in 4.

  2. maynardGkeynes says:

    I agree on the SNB. How do you play that? Long FXF?

  3. [...] Aleph Blog: 4 things every bond investor should know. – Invest in areas where you are more than adequately compensated for the risks. Try to be as [...]

  4. cig says:

    In what way is the SNB’s situation “getting more difficult”?

    Do you have a scenario in which the undisclosed difficulty could cause an operational issue that will prevent continuation of the peg? Running out of their infinite supply of CHF perhaps? I guess we could say that you are short infinity.

    If nothing else, given that they still have a deflation problem, it would make sense for them to tighten the peg, to say 1.15, and there’s no operational reason they can’t do that if they wish to.

  5. maynardGkeynes says:

    The commitment could expose the SNB to massive losses. It is holding massive quantities of euros, whose value has steadily declined in Swiss franc terms. We are talking 100s of billions in potential losses if the market tests them, which it will eventually

    • cig says:

      The “massive losses” are possible but irrelevant. Imagine all euro assets the SNB holds go to zero tomorrow morning: it would be a total non-event. It just makes their capital account negative which as such is no problem for a central bank, because it can operate with infinite negative capital for an infinite duration. The balance sheet for a central bank running a fiat currency has no solvency value, it’s just a way to record its history.

      The market therefore has nothing to test. Let’s imagine you could command 100% of the liquid capital in the world to this task, you still couldn’t take down the SNB: you’d just end up with 100% of the world liquid capital as a CHF denominated cash balance at the SNB to your name, and the SNB in turn owning all world assets that you have just sold to them to acquire those CHFs. The value of those assets is in essence irrelevant to the SNB’s ability to do its job.

      The “market test” situation only applies when a central banks want to support an exchange rate in the other direction, that is when they need real assets (be it foreign currencies) to buy their currency to support its value, in which case they can indeed run out of assets, which is what the market can and does test.

  6. [...] Merkel is short infinity. More precisely, he’s conceptually long the EUR/CHF exchange rate  (via an imprecise route, [...]


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.

Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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