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Author: imdajunkman Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35377  
Subject: Re: Yield-Math Madness Date: 6/21/2006 12:31 PM
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Fred,

I'm going to duck your Bloomberg question and let you pursue that one. But I'll comment on something else you said.

So really you're saying that this may not bode well for the stock market, not the bond market or Treasuries, right? Yes, a bad market can impact bonds, but typically mainly of lower quality, and not treasuries.

The relationship between the stock market and the bond market is a bit more complex than that. The fate of lower quality credits is due more to the fortunes of the underlying company than the broad economic environment. However, that broad environment affects their costs of borrowing and affects the extent to which they can sell goods or services and thus receive cash to service their debts. So rising interest rates and a down stock market (as a proxy for a down economy) can trash lower quality credits. But lower quality credits, judiciously chosen, are a lot more risk-free with respect to several types of very important risks, the chief of which is inflation, on a risk-adjusted basis, than credits which avoid credit quality risk. But, as always, there is no one size that fits all. Each person has to decide what matters to them most and then pursue that path.

An aside: There are roughly 30 to 50 types of risks that investors need to be aware of. How they choose to rank their importance is for each person to decide. For a good sample of those risks, read a half dozen mutual fund prospectuses and their catalogs of the endlessly things for which they disclaim all responsiblity but, instead, shift to their shareholders.

Lastly, as Dan suggested, if the US defaults, we've all got big problems to worry about. But the measures the government puts into place before they default aren't likely to be investor-friendly either, and servicing its debts is becoming an increasingly bigger problem for the US gov't, as other nations are becoming increasingly aware and increasingly concerned (which the currency traders translate into action).

Charlie

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