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Fire and Ice

This is a hard time to be managing fixed income.  Yes, if you are at a big shop with access to deal flow, not so bad — but when you are small like me and have limited tools for a small client base (less than 10% of my assets are fixed income… smart people, because I am better at equity investing) it is really difficult.

Everyone knows interest rates have to rise.  That is why I own long Treasuries.  If the certainty level were truly that high, we would have sold off a lot more by now.  As it is, oldsters, their intermediaries, and pension plans are investing in longer fixed income to provide long-term income.  The need for income, at least for now, holds rates down.  If price inflation kicks up, my view will change, and so might the view of millions of others.

I call that position “ice.”  What will do well if the global economy goes cold?  That’s 20% of the portfolio.

Then there is “fire,”  credit risk in mild and stronger forms.  40% of assets in short investment grade bonds.  20% in bank loans.  20% in short-dated junk.  What will do well if the economy expands?  “Fire” will do well.

What I did wrong last year

My big mistake last year was owning emerging market bonds, both dollar-denominated, and local currency.  That market fell apart after Bernanke uttered the word “taper.”  I held, thinking there might be some recovery, only to sell in November, ahead of the first real taper.

I forgot what I knew, that immature/emerging financial markets are disproportionately sensitive to changes in monetary policy from developed markets.  Michael Pettis’ book, The Volatility Machine, makes that point ably.

On the bright side, maybe I missed the second half of the losses.  As for now, Fire and Ice is working, and providing returns to the small number of clients that use me for fixed income.

Banks, Bonds, Macroeconomics, Portfolio Management | RSS 2.0 |

One Response to Fire and Ice


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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