A rise in the benchmark 10-year note's yield to around 2.39% from just over 2% and the 30-year bond to 3.46% from 3.10% doesn't sound like much. But the resulting price rises wiped out several years' worth of the paltry income these securities generate. The popular iShares Barclays 20+ Year Treasury Bond exchange-traded fund (TLT), which tracks the long end of the market, lost 6.5% in the wake of the March FOMC meeting. That was equivalent to an 800-point-plus drop in the Dow.
It is important to understand what bond prices with longer maturities will do should yields move up meaningfully.
Training all day (literally) for the Fire yesterday and hazmat class all day today, normal blogging should resume Monday.
5 comments:
Lots of retail investors stretching for income are going to be burned with long term bonds.
For me, long term is anything beyond three years duration at this time.
Preferreds with inflation protection seem a decent route to explore, so long as they trade below the call.
The dividend zealots appear to think that common stocks throwing out regular dividend increases are biblically divined.I am trying to proof this, but so far I have failed.
T
What most folks don't seem to ever understand is that when you buy a bond, you are actually loaning money to the seller of the bond. In the case of a government bond, you run the risk of not actually getting the same kind of money back that you loaned. That is to say, a government can give you some of your original money and some that they printed out of thin air. This is a very risky transaction to make. Very risky.
Every time the long bond twitches up a few bips the pundits in the financial rags begin to moan OMG, think of the losses (tell that to the equity investors). This used to be regularly followed by dire warnings of inflation but even a financial pundit can wise up a bit after missing that call for a few decades so it's usually just a mumble, "we'll be sorry one day."
Regardless, when the yield goes down again as it has for the past forty years, we get the sound of crickets.
OTOH when a secular bull market, in bonds or anything else, gets this long in the tooth it's reasonable to expect a reversal and there is pretty much only one way bonds can increase in price sufficient to compensate for the risk of holding them these days: Negative interest rates AKA deflation.
In terms of the labor market deflation is where we currently are without a doubt but there are other forces in the world w/ commodity shocks and currency troubles not the least of them so the risk of further agitation in bond yields seems entirely plausible if not likely.
One thing prevents me from liquidating my last long bond positions though: Uncertainty; risk that cannot be adequately assessed justifies a somewhat larger hedge than might otherwise seem prudent IMO and there is still, to my way of thinking at least, a possibility we will pass through another financial convulsion as this "lesser depression" rolls its way into history so ...
NB: My strategic portfolio follows a global asset allocation model and hasn't substantially changed in many years other than periodic re-balancing but when I look at my tactical portfolio these days it looks like a barbell: Not much in the middling risk category, either far out there or an anchor.
PS: If anyone can explain how to tell the difference between "original money" and money that was just printed I'd love to collect some. Might be a better bargain than this http://tinyurl.com/85y7lgx
For an "interest bearing" allocation I have taken to writing cash-secured puts on SPY and select individual stocks. In ALL cases the stocks are names I would not be unhappy to own if assigned. I ladder my puts from 1-4 months and annualized returns average 10%. Not bad for 90 day money...again, the downside being I own blue chip names 10% cheaper from where they trade. Stocks like DE, SPLS, HON, GG, OXY to name a few. I wish I'd discovered years ago!
the downside being I own blue chip names 10% cheaper from where they trade.
this is factually incorrect.
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