When it comes to bonds I have four main ideas.
- Invest in areas where you are more than adequately compensated for the risks.
- Try to be as unconstrained as possible.
- After a credit crash, wait for the momentum to return to credit, and pile on.
- During a time of debt deflation, be willing to hold long-duration high quality debts.
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