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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35361  
Subject: What be them day traders up to? Date: 1/23/2008 5:11 PM
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http://www.bloomberg.com/markets/rates/index.html

Not really interested in "why" markets completely reversed. I assume short sellers covering in a panic or the usual.

But it really does raise doubts about the "certainty" that intermediate and long rates will go down along with Fed cuts and a swooping economy. There is a complex supply and demand with more government borrowing.

I still think I'll rollover an existing CD near end of month to Pen Fed. But I'll be curious what Pen Fed does come Feb 1, and I'm glad I'm not in any bond funds.
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Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22801 of 35361
Subject: Re: What be them day traders up to? Date: 1/23/2008 5:29 PM
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Loki

I don't know what PenFed will do but E*Trade is offering only the 6 mo. CD above 4% (everything else is less than 4%) and the Complete Savings is now down to 4.40%. Doesn't look good.

brucedoe

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Author: blearynet Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22804 of 35361
Subject: Re: What be them day traders up to? Date: 1/23/2008 7:52 PM
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Could you elucidate why you are glad you are not in any bond funds? I am, because I find it daunting to select bonds individually. I realize that bond funds never mature, etc. But you seem to be saying something else, and I must be too dense to get it. Thus, I would appreciate your clarification.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22809 of 35361
Subject: Re: What be them day traders up to? Date: 1/24/2008 9:34 AM
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Could you elucidate why you are glad you are not in any bond funds? I am, because I find it daunting to select bonds individually. I realize that bond funds never mature, etc. But you seem to be saying something else, and I must be too dense to get it. Thus, I would appreciate your clarification.

Same reason as always. When interest rates go back up, funds lose value (lower NAV) and the increasing yield on the fund will not compensate for the lower NAV.

If you bought fund shares when rates were higher, you are now sitting on a capital gain (higher fund NAV) and if interest rates only go back up to your starting point, you will break even on NAV, unless the fund has lost money for another reason than interest rates (default risk, refinancing risk, which happens if the fund owns even high quality mortgage bonds when Dr. Tarr refinances). A bigger problem will be if interest rates go much higher, which basic arithmetic says must happen when the SS surplus reverses.

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Author: loveoldcars Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22811 of 35361
Subject: Re: What be them day traders up to? Date: 1/24/2008 11:12 AM
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Hi Guys,

Same reason as always. When interest rates go back up, funds lose value (lower NAV) and the increasing yield on the fund will not compensate for the lower NAV.

Defeatist attitude! The NAV's go up and down. Common stock NAV goes up and goes down, but with good companies, one winds up with large growth in NAV.

Let's say I put all my money in 5% CD's (to insure no loss of principle at any time) After taxes (my state and fed. = 31%), I have made 3.45%; after inflation (say 3.5%, way too low right now) I have made nothing! How will this benefit me going into retirement?

I have a considerable amt. in several Nuveen Muni-CEF's. Have owned them for several years and watch the price/NAV closely. One learns the price range and can cherry-pick the one to add-to, by 'knowing' when the price is 'low'. Not market timing (don't care what the market is doing); call it 'price-timing'. Muni-CEF's are high now, in Dec. they were very low, and one could buy at 5 to 6% div. This div. being 'tax-free' is a far superior return to a CD (especially going forward). My return is 'pretty much' locked in, whereas CD returns are plummeting with the FED lowering rates (more reductions coming). Soon, CD returns will be below inflation BEFORE TAXES!!

Monthly 'tax-free' checks are very nice to receive!!

rk (Muni-CEF bagholder)

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Author: theHedgehog Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22812 of 35361
Subject: Re: What be them day traders up to? Date: 1/24/2008 11:26 AM
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Defeatist attitude! The NAV's go up and down. Common stock NAV goes up and goes down, but with good companies, one winds up with large growth in NAV.

Bond Fund NAVs do not grow for any other reason than a decrease in interest rates. They do not grow of their own accord, no matter how good the underlying investment. If interest rates shoot up, the bottom will drop out of the NAV. You really need to have a visceral understanding of this before you invest in bond funds. The only similarity between bond funds and stock funds is that they use the same word (funds) in their name.

Hedge

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Author: loveoldcars Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22813 of 35361
Subject: Re: What be them day traders up to? Date: 1/24/2008 12:06 PM
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Hi Hedge,

Bond Fund NAVs do not grow for any other reason than a decrease in interest rates.

Absolutely false! Bond fund NAV's change every day as the 'underlying' bond NAV's change. These bonds; corp., Muni; etc. are traded every day. The last price paid IS the NAV. Int. rates don't change by the minute, but the price/NAV does!!

There isn't any 'maturity date', for a bond fund, so 'face value' is meaningless for a bond fund. Price = NAV, exactly like a common stock mutual fund.

rk

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Author: loveoldcars Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22814 of 35361
Subject: Re: What be them day traders up to? Date: 1/24/2008 12:22 PM
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I should 'clarify'!

There isn't any 'maturity date', for a bond fund, so 'face value' is meaningless for a bond fund. Price = NAV, exactly like a common stock mutual fund.

I should say 'for me' the investor. Each day after the market closes, Nuveen posts the price/NAV for my CEF's. They both change every day. And they post the price 'discount', or 'premium' to NAV. The NAV is different every day. It doesn't stay 'unchanged' for some period of time, waiting for 'int. rates' to change and then undergo some large NAV change.

rk

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Author: theHedgehog Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22815 of 35361
Subject: Re: What be them day traders up to? Date: 1/24/2008 12:28 PM
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The last price paid IS the NAV. Int. rates don't change by the minute, but the price/NAV does!!

The only thing I can say about this understanding is that it's wrong. You cannot have the NAV change in a bond fund (or a bond) without having the interest rate for that fund (or bond) change correspondingly. It's a simple matter of math, and it's absolute.

There isn't any 'maturity date', for a bond fund, so 'face value' is meaningless for a bond fund. Price = NAV, exactly like a common stock mutual fund.

I agree with this part. However, this is the part that is difficult to understand. NAV is not going to grow based on earnings in the same way that stock price does. Why? Because you are generally not going to go above "PAR" for the underlying bonds. What this means is that there is an absolute bound on the upper value of NAV that directly corresponds to 0% interest rate. Once 0% is reached, the NAV is simply NOT going to grow anymore. Furthermore, new purchasers of a bond or fund would perversely be at 100% risk of a downward move on the NAV of their bond or fund.

One thing that is not obvious to purchasers of bond funds is that they don't actually own the underlying bonds. They, in effect, lease them for the duration specified in the fund's prospectus. This is the second important thing that affects a bond fund in a way that is not readily apparent to the bond fund buyer.

I have said it many times here, I do not like bond funds; especially at these rates. If you want to buy a bond fund, do it when the 10 year treasury is above 7% after having spent some time above 10%. Buying into a bond fund right now is just nuts.

Hedge

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Author: theHedgehog Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22816 of 35361
Subject: Re: What be them day traders up to? Date: 1/24/2008 12:32 PM
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The NAV is different every day. It doesn't stay 'unchanged' for some period of time, waiting for 'int. rates' to change and then undergo some large NAV change.

What's your deal with "waiting for interest rates to change"? What is it that you think is changing? Interest rates are what they are. They change second by second for each interest bearing investment vehicle as a result of every trade in that vehicle. If you use a calculator, it will tell you exactly what the interest rate is based on the NAV.

Hedge

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22822 of 35361
Subject: Re: What be them day traders up to? Date: 1/24/2008 1:18 PM
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The last price paid IS the NAV. Int. rates don't change by the minute, but the price/NAV does!!

The only thing I can say about this understanding is that it's wrong. You cannot have the NAV change in a bond fund (or a bond) without having the interest rate for that fund (or bond) change correspondingly. It's a simple matter of math, and it's absolute.

There isn't any 'maturity date', for a bond fund, so 'face value' is meaningless for a bond fund. Price = NAV, exactly like a common stock mutual fund.

I agree with this part. However, this is the part that is difficult to understand. NAV is not going to grow based on earnings in the same way that stock price does. Why? Because you are generally not going to go above "PAR" for the underlying bonds. What this means is that there is an absolute bound on the upper value of NAV that directly corresponds to 0% interest rate. Once 0% is reached, the NAV is simply NOT going to grow anymore. Furthermore, new purchasers of a bond or fund would perversely be at 100% risk of a downward move on the NAV of their bond or fund.

One thing that is not obvious to purchasers of bond funds is that they don't actually own the underlying bonds. They, in effect, lease them for the duration specified in the fund's prospectus. This is the second important thing that affects a bond fund in a way that is not readily apparent to the bond fund buyer.

I have said it many times here, I do not like bond funds; especially at these rates. If you want to buy a bond fund, do it when the 10 year treasury is above 7% after having spent some time above 10%. Buying into a bond fund right now is just nuts.


The FAQs discuss in detail the various factors that affect the NAV of bond funds. My comment had to do with conservative bond funds, such as a Vanguard bond index fund or other funds that track the Lehman Aggregate index. For these funds, NAV is primarily affected by interest rates, which means if you buy shares when interest rates are historically low, you will probably end up selling shares for less than you paid for them and increased yields will not compensate for loss to NAV. For funds with heavy "low risk" mortgage bonds (e.g., Lehman aggregate), there is the added refinancing risk, because people refinance when interest rates are low, which has cost funds about 1% loss to NAV each year. (When interest rates go back to a starting point, the NAV is lower because of this.)

With these kind of funds, default risk has not been that much of a factor for NAV. There aren't many defaults, and the fluctuating value of corporate bonds in the funds (worth more when default expectations are low, worth less when default expectations are high) has been a pretty small component of the overall fluctuation of NAV compared to interest rate factors and refinancing risk when an issue. (Call risk is not much of a factor, even with corporate only funds.)

With some corporate or muni funds, especially ones that hold junk or low investment grade bonds, and even more so with funds that use leverage, the default risk contribution to NAV valuation is much higher.

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Author: AcmeFool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22848 of 35361
Subject: Re: What be them day traders up to? Date: 1/26/2008 8:01 AM
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Defeatist attitude! The NAV's go up and down. Common stock NAV goes up and goes down, but with good companies, one winds up with large growth in NAV.

This analogy fails miserably when correctly analyzed.

Common stock NAV goes up and down based on corporate fundamentals. Over the long-term, however, they have always gone up because of economic growth. Unless you think there will no longer be long-term economic growth, you have to believe common stock NAV will continue to rise over time.

Bonds work differently. NAV *only* rises due to decreases in the market interest rate; the *only* fall due to increases in the market interest rate. Since current rates are dramatically lower than historical averages, it is only logical to believe the long-term direction of rates will be up. Therefore, logic dictates that you will have a long-term capital loss on any bond fund purchases made at current rates.



Monthly 'tax-free' checks are very nice to receive!!

I'm sure they are. But the fact that the check is tax free does not mean the investment was the best use of money.

Acme

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Author: AcmeFool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22849 of 35361
Subject: Re: What be them day traders up to? Date: 1/26/2008 8:05 AM
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I should say 'for me' the investor. Each day after the market closes, Nuveen posts the price/NAV for my CEF's. They both change every day. And they post the price 'discount', or 'premium' to NAV. The NAV is different every day. It doesn't stay 'unchanged' for some period of time, waiting for 'int. rates' to change and then undergo some large NAV change.

You are incorrect. Interest rates do not wait for the FOMC to make a move. They *DO* in fact change constantly to reflect new information, investor sentiment, corporate fundamentals, etc.

The Fed controls some rates; the market controls most. And the market is a constantly moving beast that is not content to let rates remain fixed for long periods and then make a big move.

Acme

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Author: TMFGalagan Big gold star, 5000 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22850 of 35361
Subject: Re: What be them day traders up to? Date: 1/26/2008 8:34 AM
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Bonds work differently. NAV *only* rises due to decreases in the market interest rate; the *only* fall due to increases in the market interest rate.

In one sense, that's tautological, if you're investing in a bond fund that owns bonds that themselves make up the "market interest rate."

One could say you could make money in corporates, however, even if the "market" rate changes, as long as the risk spread falls and the rates on those corporates go down relative to Treasuries (which is what I'd usually call the "market rate").

Same thing with munis. You could argue that muni rates are artificially high compared to "market" rates on Treasuries. Yes, the price rise comes from muni rates falling. But that wouldn't necessarily translate to rate decreases through the bond market.

This is how actively traded bond funds supposedly make their living. And while I'm skeptical about how you earn enough extra return to pay for your added expenses, I'm positive that market inefficiencies in the bond market exist, at least from time to time.

Just look at the performance of closed-end funds like GIM and TEI (which admittedly are global and have the foreign currency element to them). Up and down 5-10% in the matter of days? You can make (or lose) money no matter what rates do.

dan

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22852 of 35361
Subject: Re: What be them day traders up to? Date: 1/26/2008 11:33 AM
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One could say you could make money in corporates, however, even if the "market" rate changes, as long as the risk spread falls and the rates on those corporates go down relative to Treasuries (which is what I'd usually call the "market rate").

Same thing with munis. You could argue that muni rates are artificially high compared to "market" rates on Treasuries. Yes, the price rise comes from muni rates falling. But that wouldn't necessarily translate to rate decreases through the bond market.

This is how actively traded bond funds supposedly make their living. And while I'm skeptical about how you earn enough extra return to pay for your added expenses, I'm positive that market inefficiencies in the bond market exist, at least from time to time.


This is why it is important to understand all the factors that affect bond fund NAVs. But the fact is there is a huge difference between actively managed bond funds, especially those that use leverage, as conservative bond funds (bond index funds or those, like Vanguard's corporate and muni funds that do pick bonds but don't do much active trading). With conservative funds (excluding junk funds, if you want to consider Vanguard's "conservative" in that context), fluctuations in NAV due to interest rates far outweigh other factors, even changes in default risk perceptions for corporate and muni funds. (Refinancing risk does come into play for Total index and mortgage bond funds.)

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22856 of 35361
Subject: Re: What be them day traders up to? Date: 1/26/2008 7:23 PM
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Bonds work differently. NAV *only* rises due to decreases in the market interest rate; the *only* fall due to increases in the market interest rate.

I don't think this is true at all, for the following reasons:

1. Bond funds purchase various bonds at many different price levels. This means that NAV can vary due to bonds becoming more or less attractive for reasons other than prevailing interest rates.
2. Bond funds may contain bonds that default and this would cause NAV to fall.
3. And finally, as you mention above, prevailing interest rates may make bonds worth more or less at any given time which causes NAV to rise and fall.

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Author: theHedgehog Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22857 of 35361
Subject: Re: What be them day traders up to? Date: 1/26/2008 7:34 PM
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1. Bond funds purchase various bonds at many different price levels. This means that NAV can vary due to bonds becoming more or less attractive for reasons other than prevailing interest rates.

True, but you're ignoring the point: Ignoring the dealer's markup (profit), the price (NAV) of a bond can be calculated directly if you have the interest rate. By the same token, the interest rate of a bond can be directly calculated if you know the price. This is an ineluctable fact. It doesn't matter whether it's more or less attractive, nor whether it's printed on green or yellow paper. The two values are fixed in relation to each other.

Yes, you may buy the bond at X today, but that represents an calculated interest rate of Y. If you buy the bond at XX tomorrow, the interest rate will be YY.

Hedge

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Author: AcmeFool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22858 of 35361
Subject: Re: What be them day traders up to? Date: 1/26/2008 8:48 PM
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1. Bond funds purchase various bonds at many different price levels. This means that NAV can vary due to bonds becoming more or less attractive for reasons other than prevailing interest rates.

I was not specific enough -- I meant the market interest rate for the specific bonds. I did not intend to imply that market rates are a single rate that applies to all bonds.



2. Bond funds may contain bonds that default and this would cause NAV to fall.

It is true that I omitted this case. Though, using the idea that I intended for market rates, you could say that a defaulted bond went to a market rate of an infinite rate of return, so the NAV fell to zero. It's more than a bit of a stretch, but it is a mathematical explanation...

Acme

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Author: theHedgehog Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22859 of 35361
Subject: Re: What be them day traders up to? Date: 1/26/2008 8:54 PM
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I was not specific enough -- I meant the market interest rate for the specific bonds. I did not intend to imply that market rates are a single rate that applies to all bonds.

If there's one thing this thread points out it's that bond funds are much too complicated for the average person to properly comprehend. They sound so much like stock funds, yet they act nothing like them other than cosmetically. The fact that they move up and down masks the fact that they are essentially zero-sum bets. But, I suspect that the average person doesn't have a good grasp of what a zero-sum bet is, either.

Hedge

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Author: AcmeFool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22860 of 35361
Subject: Re: What be them day traders up to? Date: 1/26/2008 8:55 PM
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This is how actively traded bond funds supposedly make their living. And while I'm skeptical about how you earn enough extra return to pay for your added expenses, I'm positive that market inefficiencies in the bond market exist, at least from time to time.

Certainly inefficiencies can exist in the bond market. But the pricing of a bond is still going to be based on market rates -- for both bonds in general and that specific issue. When the market rates rise, the value of the existing bonds will fall; when the market rates fall, the value of existing bonds will rise. That's simply a fact of bond pricing.



Just look at the performance of closed-end funds like GIM and TEI (which admittedly are global and have the foreign currency element to them). Up and down 5-10% in the matter of days? You can make (or lose) money no matter what rates do.

As you know, closed-end funds are a completely different beast. The number of shares is fixed and they often sell at a premium or a discount to the NAV of the underlying assets. This allows them to move around in ways that are not directly tied to interest rate movements.

For open-end funds, however, the NAV is always tied directly to the underlying assets.

Acme

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