Bond Mutual Funds are getting Killed

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Vin Diesel's picture
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I have clients holding funds that are down 10-15% from last week
what do I tell clients(besides that I was wrong)?

runswithbulls's picture
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I guess just tell them they still have their yield...

blarmston's picture
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What bond funds are you in? High Yield? Emerging Market? Mortgage backed?
My boy Dan Fuss at Loomis Sayles is down a little bit the past couple weeks- just convey to your clients that you have conviction in your strategy, are confident in your managers ability, and that this short term volatility is not only normal but has been expected...

Greenbacks's picture
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Ther where several articles out over the last couple of months about the high yield bubble! Low spread warnings!
So I switched all the high yield funds into Loomis Sayles no later then last month!

Dust Bunny's picture
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That bond funds, just like individual bonds, fluctuate inversely with interest rates.  When rates go up the value of the bonds goes down. The bonds still pay the same coupon rate. 
In a bond fund, the fund manager will be able to add newer higher coupon bonds in the future which will help the overall portfolio. Unlike an individually held bond where the client either bites the bullet and holds to call, maturity or hopes for a reverse in interest rate trend.
If your clients are not using the income and they are reinvesting, they are buying more shares per dollar than when the share prices were higher.  Dollar cost averaging is a good thing when prices periodically (not permanently) decline.
That's really simplistic and there are a lot more factors, as BondGuy can surely tell us, depending on the duration of the bond portfolio, credit quality, leverage in the fund etc.
Don't say you were wrong. No one can predict the market and hopefully you explained that bond funds can fluctuate just as much as stock fund so your clients are prepared for this.

Vin Diesel's picture
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im in muni's

AllREIT's picture
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Vin Diesel wrote:im in muni'sTell them that a lower coupon rate leads to higher duration, and thus more interest rate sensitivity, given equal maturities. So if you reach for yield by going to the long end of the muni curve, expect some bounce.I do hope that given the inverted Y/C (a highly unstable situation) you had clients mostly in very short duration instruments. http://finance.yahoo.com/q/bc?t=3m&s=TLT&l=on&z= m&q=l&c=SHY%2CTLH%2CIEF So here we see what happens to 1-3, 7-10, 10-20, and 20+ Tbonds as the yield curve steepen via long rates rising. I'd tell clients, that the bond funds are currently bouncey as a result of the yield curve instability. Over time the funds should recover as bond portfolio's roll over.

troll's picture
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Tax free + tax Loss make Vin Diesel look like a investment GENIUS!
"Mr. Jones, let's sell this open end fund that is trading at it's nav and buy that closed end fund that is trading at a discount to it's nav! This way we can replace the income and when the pressure comes off the bonds this fund will revert back to trading a a premium. Meanwhile we've been able to stick uncle with our loss against all those gains I've made for you and $3,000 against ordinary income for as long as it lasts!"
Huh? What's that? You bought them in an IRA? (just kidding)
 

troll's picture
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"But Vin, if I sell the bond fund now at a loss and I buy discounted CEFs that I'll sell later at a gain...Won't I be paying tax on those gains?"
"EYYYYYY! Mr Jones! Whattmatterforyou? I'm Vin Diesel! I'll have losses for you by the time we take dose profits! Bet on it!"

AllREIT's picture
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Dust Bunny wrote:Don't say you were wrong. No one can predict the market and hopefully you explained that bond funds can fluctuate just as much as stock fund so your clients are prepared for this.For our company, we are basicly positioned with a core TIPS allocation, and remainder is in very Short treasuryRight now I am avoiding latent credit risk in bond portfolios, and in positioned for higher rates. I see  two sources for this,  organic steepening  of the Y/C at the long end *and* widening credit spreads. http://www.bmonesbittburns.com/economics/focus/20070608/feat ure.pdf

blarmston's picture
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Ther where several articles out over the last couple of months about the high yield bubble! Low spread warnings!
So I switched all the high yield funds into Loomis Sayles no later then last month!

I would take my boy Fuss Face over any bond manager out there....

Dust Bunny's picture
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For our company, we are basicly positioned with a core TIPS allocation, and remainder is in very Short treasury
Me too.  I also like some of the CPI linked bonds with shorter durations and the death put.
**in case you guys wonder why I'm posting so much during biz hours, I'm home sick

AllREIT's picture
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Dust Bunny wrote:For our company, we are basicly positioned with a core TIPS allocation, and remainder is in very Short treasury
Me too.  I also like some of the CPI linked bonds with shorter durations and the death put.
**in case you guys wonder why I'm posting so much during biz hours, I'm home sick If you don't mind the bounce, then TIPS are the place to be.When I build portfolios I tend to go along the lines of TIPS --> REITs --> Dividend Stocks --> General Market.A risk spectrum of investments that benefit from inflation. Long muni's are damn near the worst place to be in an environment of increasing inflation and interest rates.

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I'm sorry, my clients don't buy long term muni's or bonds to sell on the market later on.  If you are in the top 2 tax brackets, this is a great time to buy and own long term muni's IF they are part of your ladder.  I would encourage high net worth clients to start buying last weeks issues that are still outstanding.  For them, it means getting a discount on some nice AAA rated, 7% TEY muni's that are LESS likely to be called early.  I don't want to sell 8% to people because the people you sell munis to are not going to want them to be called nor are they going to want to sell them on the market.  Who do you people sell muni's to anyway?  I also find much less value in bond funds because this type of panic that occurs.  If you are worried about losing value on fixed investments, then buy CMO's.  You can at least get your principal back when rates change. 

BankFC's picture
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AllREIT wrote:If you don't mind the bounce, then TIPS are the place to be.When I build portfolios I tend to go along the lines of TIPS --> REITs --> Dividend Stocks --> General Market.
 
Call me a "unsophisticated" adviser if you want, but you are building portfolios around TIPS???  With yields less than 3% (not including the management fee), who on earth is dumb enough to invest their money with you?  I can use the freaking MONEY MARKET within our brokerage accounts and earn 4.39% for the clients and not charge them a fee to do so.
 

BankFC's picture
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By the way, I have been using the ING Senior Income Fund for awhile now, and it has not been "killed" at all.

troll's picture
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Yeah, damn near it... Unless they need to raise tax rate to pay for the higher interest costs and inflated cost of running a government. How do higher tax rates figure into your limited universe?
Short term treasuries are damn near the worst place to be in an environment of increasing inflation (at least in this cycle of increased inflation) STTs were paying less than 2% pre tax (so call it 1.33 after tax) meanwhile commodity prices more than doubled in the past 5 years.  At 1.33% it'll take 54 years for your money to double.
Keep in mind that we had increased inflation for far longer then we've had increased interest rates. meanwhile, the true rate of inflation has been dramatically higher than the CPI, we all know that to be true. You're getting royally screwed on the TIPS when it comes to actual, real world purchasing power.
So maybe yours isn't the advice anybody ought to take for serious. 
The only bubble you should be worried about is the one you live in.
 

Mike Damone's picture
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Those floating rate funds scare me and for some reason I think they're a time bomb.

troll's picture
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Mike Damone wrote:Those floating rate funds scare me and for some reason I think they're a time bomb.
Probably because they were at the heart of the derivative disaster of the mid '90s.
Franklin came out with the Adjustable Rate Mortgage fund and it was bank qualified so it sucked up huge money. Then Louie Ranieri came out with his Adjustable Rate Mortuary fund and crammed it chock full of IO's and PO's and inverse floaters and all of the other subatomic particles that come out when you split a mortgage.
Who Knew?   Ka.........    BOOM!

troll's picture
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BankFC wrote:By the way, I have been using the ING Senior Income Fund for awhile now, and it has not been "killed" at all.That would be because it's not terribly interest-rate sensitive by nature of the adjustable rate loans.  The NAV should hold up relatively well when rates are moving up.  Of course, it won't appreciate(much) when rates move down, either.Your primary vulnerability in that fund is credit risk.  Unfortunately those sorts of problems tend to happen pretty quickly and are driven by unexpected events.  So, if something does happen the damage will already likely be done by the time you read about it in the newspaper.

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BankFC wrote:AllREIT wrote:If you don't mind the bounce, then TIPS are the place to be.When I build portfolios I tend to go along the lines of TIPS --> REITs --> Dividend Stocks --> General Market.

Call me a "unsophisticated" adviser if you want, but you are building portfolios around TIPS???  With yields less than 3% (not including the management fee), who on earth is dumb enough to invest their money with you?  I can use the freaking MONEY MARKET within our brokerage accounts and earn 4.39% for the clients and not charge them a fee to do so.Don't worry, you are unsophisticated.Of course TIPS are the baseline asset, as they should be. They are the only sure thing real return asset.But they don't generate most of the final portfolio's income or return which comes from mainly from the REITs and dividend stocks etc. The total blended portfolio's have yields ranging 5% to about 9%. The main question currently, has been should people own cash vs TIPS  given the imputed real return on cash vs TIPS. Right now my thinking is that TIPS are insanely cheap relative to nominal bonds.

BondGuy's picture
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Vin Diesel wrote:
I have clients holding funds that are down 10-15% from last week
what do I tell clients(besides that I was wrong)?

Wrong about what?
Umm, what funds are off by that amount? We have major positions in 4 high yield funds. The worst is off by about 2% from it's yearly high and about 1.8% from a week or so ago, and it's still trading above where it started the year. The others down less than 1%. Hardly a burst bubble and nothing to worry about. Especially considering their near term performance.
 
 
 

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BankFC wrote:By the way, I have been using the ING Senior Income Fund for awhile now, and it has not been "killed" at all.Well of course, that ING fund's duration is going to be very close to zero, and thus current value is unaffected by interest rate movements. OTH declinging interest rates will lower the funds yeilds, while rising interest rates will squeeze the obligors. But, go look up the credit ratings and then see if you still like it. I find it fascinating that ING does not disclose a weighted average credit rating for the fund. Try logging into Moody's and run a few names I'm reminded of what Seth Klarman said about Junk Bank loans, "The bank's may be senior, but everyone's at risk"

AllREIT's picture
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Whomitmayconcer wrote:Who Knew?   Ka.........    BOOM! That's just because Lew Ranieri and crew sold all those those CMO's to people who would look only at the term sheet, and not the prospectus. Alot of fixed income managers didn't have a chance as they had never delt with bonds with complex embedded options. Remarkably similar to people buying ABS today.....Bond portfolio managers were not used to the strong negative convexity of residential mortgages. They also didn't have clue with things like PO's which have a duration greater than Zero Coupon bonds, and IO's which have negative duration (e.g value goes up when interest rates go up) but are deathly sensitive to prepayment rates etc etc.It was a fun time.

troll's picture
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AllREIT wrote: For our company, we are basicly positioned with a core TIPS allocation, and remainder is in very Short treasury...
 
"WE"? 

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mikebutler222 wrote:AllREIT wrote: For our company, we are basicly positioned with a core TIPS allocation, and remainder is in very Short treasury..."WE"?  Yep we have four people in our company, small office but growing.

troll's picture
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Bond funds? Who owns bond funds?

troll's picture
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AllREIT wrote: But they don't generate most of the final portfolio's income or return which comes from mainly from the REITs and dividend stocks etc. The total blended portfolio's have yields ranging 5% to about 9%.
 
More like 3.5% to 4.25% if you're using Tips in the manner you claim and counting on REITs and equity dividends for the yeild bump.

troll's picture
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AllREIT wrote: mikebutler222 wrote:
AllREIT wrote: For our company, we are basicly positioned with a core TIPS allocation, and remainder is in very Short treasury...
"WE"? 
Yep we have four people in our company, small office but growing.
 
Ok, how about a count not including the two guys filling the vending machine and the guy who stopped in looking for the Subway....

Mike Damone's picture
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mikebutler222 wrote:
Bond funds? Who owns bond funds?

Some of my clients do.  I figure the fund managers can choose individual bonds better than me.
 

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mikebutler222 wrote:AllREIT wrote: mikebutler222 wrote:
AllREIT wrote: For our company, we are basicly positioned with a core TIPS allocation, and remainder is in very Short treasury...
"WE"? 
Yep we have four people in our company, small office but growing.
 
Ok, how about a count not including the two guys filling the vending machine and the guy who stopped in looking for the Subway....

Wow, you can actually be funny. 

AllREIT's picture
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mikebutler222 wrote:
More like 3.5% to 4.25% if you're using Tips in the manner you claim and counting on REITs and equity dividends for the yeild bump.

That would really depend on what REITs/stocks and how much is allocated to them. Be very careful about assumptions.

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AllREIT wrote:mikebutler222 wrote:
More like 3.5% to 4.25% if you're using Tips in the manner you claim and counting on REITs and equity dividends for the yeild bump.

That would really depend on what REITs/stocks and how much is allocated to them. Be very careful about assumptions.

 
 
The fixed income part of your portfolio, what should be the majority creator of yield, is plugged with your low yielding TIPs. To overcome that and produce the kind of portfolio yield you claim you'd have to grossly overweight REITs and dividend paying stocks.
ALLREIT, just a hint, but not everyone here entered the biz yesterday. Many of us can sniff out BS easily.
 

troll's picture
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BondGuy wrote:Vin Diesel wrote:
I have clients holding funds that are down 10-15% from last week
what do I tell clients(besides that I was wrong)?

Wrong about what?
Umm, what funds are off by that amount? We have major positions in 4 high yield funds. The worst is off by about 2% from it's yearly high and about 1.8% from a week or so ago, and it's still trading above where it started the year. The others down less than 1%. Hardly a burst bubble and nothing to worry about. Especially considering their near term performance.
 
 
 Hey BG....how much you want to bet this guy is loaded up on relatively new high yield CLOSED END funds....?

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mikebutler222 wrote: Bond funds? Who owns bond funds?

ME! And all of my clients. I'm going golfing tomorrow w/ a client who absolutely refused to position ANYTHING in a fund that said 'bond' on it. I'm gonna get hell.

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Ashland wrote: mikebutler222 wrote:
Bond funds? Who owns bond funds?
ME! And all of my clients. I'm going golfing tomorrow w/ a client who absolutely refused to position ANYTHING in a fund that said 'bond' on it. I'm gonna get hell.
 
 Sorry to hear that..

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mikebutler222 wrote:AllREIT wrote:mikebutler222 wrote:
More like 3.5% to 4.25% if you're using Tips in the manner you claim
and counting on REITs and equity dividends for the yeild bump.

That would really depend on what REITs/stocks and how much is allocated to them. Be very careful about assumptions.

The fixed income part of your portfolio, what should be the
majority creator of yield, is plugged with your low yielding TIPs. To
overcome that and produce the kind of portfolio yield you claim you'd
have to grossly overweight REITs and dividend paying stocks.
ALLREIT, just a hint, but not everyone here entered the biz yesterday. Many of us can sniff out BS easily.

Why should the fixed income portion of a portfolio be the main source of yeild? Fixed income is about safety of principal
and the interest payments based on it. If you want more than the risk
free rate, you either take on large amounts of duration or credit risk.

I'd never send a bond out to do a man's job.

So indeed I expect the equity/hybrid portion of the portfolio to generate most of the income and most importantly to grow that income at a rate faster than inflation.

If the income isn't growing at/faster than inflation, you are losing purchasing power. So the core TIPS grow at the rate of inflation, and REITs/Dividend stocks hopefully grow faster.

Investing for absolute real returns is very different than investing with the hope of beating (not trailing too much) some market benchmark that is not relavent to the clients goals.
 

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Ashland wrote:ME! And all of my clients. I'm going golfing tomorrow
w/ a client who absolutely refused to position ANYTHING in a fund that
said 'bond' on it. I'm gonna get hell.

Welcome to interest rate risk.

What I'd do is talk about the role of bonds in a portfolio *and* how
interest rate risk (which is the main risk of bonds) is only weakly related to equities.

Read this, and you should have plenty of things to say.

http://www.pimco.com/LeftNav/Viewpoints/2006/Role+of+Bonds+6 -2006.htm

And most importantly you should listen, let him vent out, and then
explain that part of having an advisor, is having someone who tells you
to do the right thing even if you don't want to hear it.

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AllREIT wrote: mikebutler222 wrote:AllREIT wrote:mikebutler222 wrote:
More like 3.5% to 4.25% if you're using Tips in the manner you claim and counting on REITs and equity dividends for the yeild bump.

That would really depend on what REITs/stocks and how much is allocated to them. Be very careful about assumptions.

The fixed income part of your portfolio, what should be the majority creator of yield, is plugged with your low yielding TIPs. To overcome that and produce the kind of portfolio yield you claim you'd have to grossly overweight REITs and dividend paying stocks.
ALLREIT, just a hint, but not everyone here entered the biz yesterday. Many of us can sniff out BS easily.
Why should the fixed income portion of a portfolio be the main source of yeild? Fixed income is about safety of principal and the interest payments based on it. If you want more than the risk free rate, you either take on large amounts of duration or credit risk.I'd never send a bond out to do a man's job. So indeed I expect the equity/hybrid portion of the portfolio to generate most of the income and most importantly to grow that income at a rate faster than inflation.If the income isn't growing at/faster than inflation, you are losing purchasing power. So the core TIPS grow at the rate of inflation, and REITs/Dividend stocks hopefully grow faster. Investing for absolute real returns is very different than investing with the hope of beating (not trailing too much) some market benchmark that is not relavent to the clients goals.  
 
You are so full of yourself and so in love with hearing yourself talk (or type, as the case may be) that you cannot stand the fact that REAL PROFESSIONALS on this board have called you out on your BS.
Risk free rate?  The risk free rate is far above what your sorry TIPS are generating.  One year and less CD's are paying north of 5%. Agencies, which are IMPLICITLY backed by the fed gov't are also in the mid 5%, and as I said before, even our FDIC INSURED MONEY MARKET is paying 4.39%.
In a million dollar portfolio, with a 50/50 equity/debt split, you are costing your clients over 200 bps on $500,000 =  $10,000 a year!!!
Not to mention your fee for such good advice...
 

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"I'm going golfing tomorrow w/ a client who absolutely refused to position ANYTHING in a fund that said 'bond' on it. I'm gonna get hell."
If that is the case, why does he have a bond fund?
Hell? You'll be lucky if all you get is hell. You ought to get an acat form. Hopefully you won't have a mark on your U4.
There are so many ways to skin a cat, why would you go putting a client who doesn't want to be, into a bond fund?
Because it's easier than seeking out alternatives.
You could have suggested that your client purchase an Adjustable rate preferred share (like the one that is trading at 42, has a 1.79 dividend which is a rate of 3.58% based on the $50 par value which is based on the constant maturity rate of the five year treasury, the one that resets in January of 2010) but I'm not naming names!
Don't mean to be mean, but, LEARN!

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AllREIT wrote:
Why should the fixed income portion of a portfolio be the main source of yeild?  
Sorry, the idiot alarms going off as a result of that statement make continuing this with you more trouble than it's worth. That comment is suitable for framing....
Clearly you're out of your depths here. You regurgitate the doctrine fed to you well, but where that doctrine fades you make a habit of saying absolutely foolish this that expose you as a neophyte in this business. The three ETF complete portfolio theory of your was just the first hint, many, many have followed. I think the forum members who have exchanged emails with me guessing that you’re some sort of a minor league academic that fancies himself an investment advisor and has less than 10MM in AUM have the story right.
 

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joedabrkr wrote: BondGuy wrote:Vin Diesel wrote:
I have clients holding funds that are down 10-15% from last week
what do I tell clients(besides that I was wrong)?

Wrong about what?
Umm, what funds are off by that amount? We have major positions in 4 high yield funds. The worst is off by about 2% from it's yearly high and about 1.8% from a week or so ago, and it's still trading above where it started the year. The others down less than 1%. Hardly a burst bubble and nothing to worry about. Especially considering their near term performance.
 
 
 
Hey BG....how much you want to bet this guy is loaded up on relatively new high yield CLOSED END funds....?
Maybe. Are they down big? I'm still trying to figure it out.
Anyway, staying to course.
Don't predict anything. Just buy bonds.

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BankFC wrote:Risk free rate?  The risk free rate is far above
what your sorry TIPS are generating.  One year and less CD's are
paying north of 5%. Agencies, which are IMPLICITLY backed by the fed
gov't are also in the mid 5%, and as I said before, even our FDIC
INSURED MONEY MARKET is paying 4.39%.Quote:

Which is all jim dandy, except for the question of what is real risk free rate?

5.14 (10y CMT) - 2.72 (10y CMT TIPS) == 2.42% BIR

That's the current market expectation for annualised CPI inflation
over the next ten years. That spread (break even inflation) has to be
applied against the treasury real curve to get the treasury nominal
curve.

So after you take that 2.42% out, how much are those bank CD's etc really paying? That's the real question.

After you knock out expected inflation, the short end of the Y/C is the place to be.
Hence I've positioned portfolio's to have both TIPS and short
treasuries. This is what pretty much every TIPS manager is doing, since
the value was in the short end of the curve.  E.g same real rate,
lower duration.

Either way your not going to get huge real returns from fixed income
unless you make big bets on duration or credit risk. So as I've
explained elsewhere that's why recomend owning lots of NNN real estate
and other hard assets whose value/income can grow with inflation.

The rent roll/escalation clauses provide real return, and there is built in arbitrage between fixed rate debt and the floating rents/tolls .

My goal is to match clients CPI-linked liabilities (e.g living expenses) with CPI-linked assets (TIPS/REITs/MLPs/Dividend Stocks etc). Now some people, myself included , think this is a sound way to invest for the long term.

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BondGuy wrote: joedabrkr wrote: BondGuy wrote:[quote=Vin
Diesel]
I have clients holding funds that are down 10-15% from last week[/
P]
what do I tell clients(besides that I was wrong)?

Wrong about what?
Umm, what funds are off by that amount? We have major positions in 4
high yield funds. The worst is off by about 2% from it's yearly high and
about 1.8% from a week or so ago, and it's still trading above where it
started the year. The others down less than 1%. Hardly a burst bubble and
nothing to worry about. Especially considering their near term
performance.
 
 
 
Hey BG....how much you want to bet this guy is loaded up on
relatively new high yield CLOSED END funds....?
Maybe. Are they down big? I'm still trying to figure it out.
Anyway, staying to course.
Don't predict anything. Just buy bonds.

Buy bonds, huh?

Well, today was a good day for it. We picked up some bargains.

Oh and by the way...you're quite right. Don't predict anything. Is te Fed
going to raise? Will China dump Treasuries on the markets? Who knows?
Who cares? Iff that's the driving force for your clients, tell them to just go
to Atlantic City.

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AllREIT wrote:
BankFC wrote:Risk free rate?  The risk free rate is far above what your sorry TIPS are generating.  One year and less CD's are paying north of 5%. Agencies, which are IMPLICITLY backed by the fed gov't are also in the mid 5%, and as I said before, even our FDIC INSURED MONEY MARKET is paying 4.39%.Quote:
Which is all jim dandy, except for the question of what is real risk free rate?
5.14 (10y CMT) - 2.72 (10y CMT TIPS) == 2.42% BIR
That's the current market expectation for annualised CPI inflation over the next ten years. That spread (break even inflation) has to be applied against the treasury real curve to get the treasury nominal curve.
So after you take that 2.42% out, how much are those bank CD's etc really paying? That's the real question.
After you knock out expected inflation, the short end of the Y/C is the place to be. Hence I've positioned portfolio's to have both TIPS and short treasuries. This is what pretty much every TIPS manager is doing, since the value was in the short end of the curve.  E.g same real rate, lower duration.
Either way your not going to get huge real returns from fixed income unless you make big bets on duration or credit risk. So as I've explained elsewhere that's why recomend owning lots of NNN real estate and other hard assets whose value/income can grow with inflation.
The rent roll/escalation clauses provide real return, and there is built in arbitrage between fixed rate debt and the floating rents/tolls .
My goal is to match clients CPI-linked liabilities (e.g living expenses) with CPI-linked assets (TIPS/REITs/MLPs/Dividend Stocks etc). Now some people, myself included , think this is a sound way to invest for the long term.

 
Is this the language you use to present this to clients?

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AllREIT wrote:
BankFC wrote:Risk free rate?  The risk free rate is far above what your sorry TIPS are generating.  One year and less CD's are paying north of 5%. Agencies, which are IMPLICITLY backed by the fed gov't are also in the mid 5%, and as I said before, even our FDIC INSURED MONEY MARKET is paying 4.39%.Quote:
Which is all jim dandy, except for the question of what is real risk free rate?
5.14 (10y CMT) - 2.72 (10y CMT TIPS) == 2.42% BIR
That's the current market expectation for annualised CPI inflation over the next ten years. That spread (break even inflation) has to be applied against the treasury real curve to get the treasury nominal curve.
So after you take that 2.42% out, how much are those bank CD's etc really paying? That's the real question.
After you knock out expected inflation, the short end of the Y/C is the place to be. Hence I've positioned portfolio's to have both TIPS and short treasuries. This is what pretty much every TIPS manager is doing, since the value was in the short end of the curve.  E.g same real rate, lower duration.
Either way your not going to get huge real returns from fixed income unless you make big bets on duration or credit risk. So as I've explained elsewhere that's why recomend owning lots of NNN real estate and other hard assets whose value/income can grow with inflation.
The rent roll/escalation clauses provide real return, and there is built in arbitrage between fixed rate debt and the floating rents/tolls .
My goal is to match clients CPI-linked liabilities (e.g living expenses) with CPI-linked assets (TIPS/REITs/MLPs/Dividend Stocks etc). Now some people, myself included , think this is a sound way to invest for the long term.

You are ridiculous.  I agree with Mike, I am certain now that you are not an adviser, but rather an academic with an inflated ego from bullying college feshmen around and no real productivity other than your useless drivel.
I don't care what equations you use, but you'll never convince me or one of my million dollar clients why, for their short term fixed income investing, they are better off making 3% than 5%.
 

Dust Bunny's picture
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Joined: 2007-05-07

You are ridiculous.  I agree with Mike, I am certain now that you are not an adviser, but rather an academic with an inflated ego from bullying college feshmen around and no real productivity other than your useless drivel.
I don't care what equations you use, but you'll never convince me or one of my million dollar clients why, for their short term fixed income investing, they are better off making 3% than 5%.
I had decided he didn't know how to sell to clients and was a money manager with no contact with the public.  All theory and no personal skills, but now I believe you guys are correct.

troll's picture
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Joined: 2004-11-29

BankFC wrote:AllREIT wrote:
BankFC wrote:Risk free rate?  The risk free rate is far above what your sorry TIPS are generating.  One year and less CD's are paying north of 5%. Agencies, which are IMPLICITLY backed by the fed gov't are also in the mid 5%, and as I said before, even our FDIC INSURED MONEY MARKET is paying 4.39%.Quote:
Which is all jim dandy, except for the question of what is real risk free rate?
5.14 (10y CMT) - 2.72 (10y CMT TIPS) == 2.42% BIR
That's the current market expectation for annualised CPI inflation over the next ten years. That spread (break even inflation) has to be applied against the treasury real curve to get the treasury nominal curve.
So after you take that 2.42% out, how much are those bank CD's etc really paying? That's the real question.
After you knock out expected inflation, the short end of the Y/C is the place to be. Hence I've positioned portfolio's to have both TIPS and short treasuries. This is what pretty much every TIPS manager is doing, since the value was in the short end of the curve.  E.g same real rate, lower duration.
Either way your not going to get huge real returns from fixed income unless you make big bets on duration or credit risk. So as I've explained elsewhere that's why recomend owning lots of NNN real estate and other hard assets whose value/income can grow with inflation.
The rent roll/escalation clauses provide real return, and there is built in arbitrage between fixed rate debt and the floating rents/tolls .
My goal is to match clients CPI-linked liabilities (e.g living expenses) with CPI-linked assets (TIPS/REITs/MLPs/Dividend Stocks etc). Now some people, myself included , think this is a sound way to invest for the long term.

You are ridiculous.  I agree with Mike, I am certain now that you are not an adviser, but rather an academic with an inflated ego from bullying college feshmen around and no real productivity other than your useless drivel.
I don't care what equations you use, but you'll never convince me or one of my million dollar clients why, for their short term fixed income investing, they are better off making 3% than 5%.
 They get 3% COUPON PLUS adjustments for inflation.Frankly some of what ALLREIT is saying about funding cost of living expenses with growing income streams makes some sense to me.But you can't talk to clients with that kind of language or they'll never get it.

BankFC's picture
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I take no issue with allocating X amount of dollars to risk free investments to cover someone's monthly nut.  That would be a prudent decision.
However, I've looked into TIPS in the past as well as recently, and I must say, I'd rather get a 5.25% coupon and my money back 9 months later to reinvest (ala a CD) than buy TIPS with a 2.85% to 3% coupon and some type of adjustment.
And again, you can't work for free selling TIPS, so there has to be an adjustment for management fees.  Often times, I'll have the customer open up a bankside CD (especially recently during this inverted yield curve) for the fixed portion of their money.  I don't particularly like dealing with bonds, although I do sell them periodically.
The point is ALLREIT is obviously not a retail adviser.  So I would urge all of you to take that in consideration and not get awed by his silly equations like he would have you do.

troll's picture
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http://www.bls.gov/news.release/cpi.t01.htm
"My goal is to match clients CPI-linked liabilities (e.g living expenses) with CPI-linked assets" AllReit
Allreit,
The above link is to the CPI data.
The point that i"d make to you from it is that the everyday living expenses have gone up dramatically higher than the overall CPI rate.
Water and sewer and trash collection        &n bsp;         &n bsp;         &n bsp;         &n bsp;         &n bsp;         &n bsp;         &n bsp;         &n bsp;         services (2)..........................     & nbsp; .897    141.806    142.184     5.0     0.3     0.5     0.3     0.3  {bolded is rate of increase YOY) 5% while overall CPI grew at 2.6%
Look at food, only Other and Dairy are below the overall rate of inflation.
Does it really help anyone that the drop in the prices of used cars (down 4.3%) is curbing the inflation index?
Pegging return to inflation as judged by the CPI is a sure path to the cat food aisle!, if this isn't true then how can it be that Seniors depending on SS with a CPI based COLA are the ones getting less and less by  on less and less?

EDJ4now's picture
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Joined: 2006-02-08

BondGuy wrote:Vin Diesel wrote:
I have clients holding funds that are down 10-15% from last week
what do I tell clients(besides that I was wrong)?

Wrong about what?
Umm, what funds are off by that amount? We have major positions in 4 high yield funds. The worst is off by about 2% from it's yearly high and about 1.8% from a week or so ago, and it's still trading above where it started the year. The others down less than 1%. Hardly a burst bubble and nothing to worry about. Especially considering their near term performance.
 
 
 

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