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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35362  
Subject: When should a bond be bought? Date: 11/29/2011 11:12 PM
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Charlie wrote today, ""Prices fluctuate." So a lazy investor like myself scrambles to buy what should be bought, when it should be bought, and then hunkers down for the long haul."

Charlie also pointed out that a wise bond investor looks for a reasonable risk-adjusted yield.

The Federal Reserve tracks bond yields, spreads and total return daily.

I have constructed a spreadsheet that links to these databases, as well as to the weekly Federal Reserve financial conditions and financial stress databases.

http://dl.dropbox.com/u/45054803/Bond%20Yields.xlsx

Many thanks to whafa for constructing the spreadsheet of Federal Reserve data links from which I selected these.

The data in these sheets can be used to help decide whether the timing is right to buy a bond.

During times of extreme financial stress (e.g. the 2008-2009 crisis), it's reasonable for bond prices to be low. There was a real danger that the financial system would collapse.

I bought TIPS in late 2008 because their prices dropped even though there was no default risk and (in my opinion) no risk of long-term deflation greater than the yield.

It isn't reasonable for risk-free bonds to be extremely expensive during a time of not-extreme risk. The financial stress database shows that the current risk is somewhat elevated. It's not a serious concern...unless you think that Europe will collapse and the financial system will slide into a 2008-type credit crunch.

I agree with Charlie that Treasuries and AAA bonds are overpriced and this isn't a good time to buy.

Charlie kindly posted his portfolio. A substantial number of his bonds are B, BB, and BBB.

http://research.stlouisfed.org/fred2/series/BAMLH0A2HYB
http://research.stlouisfed.org/fred2/series/BAMLH0A1HYBB
http://research.stlouisfed.org/fred2/series/BAMLC0A4CBBB

Rating........Spread
B.............8.00%
BB............5.91%
BBB...........3.12%

The difference between B and BB is 2.09%.
The difference between BB and BBB is 2.79%.

The bond data can be superimposed over the financial stress data to detect divergences.

We each have to use personal judgment to time our purchases. At this time of potential crisis, nobody knows whether financial stress will remain moderate or suddenly break skyward.

I hope that this data will help.

Wendy
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