Yeah, I admit, some of the numbers in the columns are confusing. I should have included the asking prices and whether the bond is callable. Those facts are what's needed to unravel the discrepancies between what E*Trade estimated the nominal YTM would be and my number for its estimated after-tax, after-inflation YTM. But I trust my numbers, and I've done the exercise hundreds of times, across thousands of bonds, and it's nothing more than a starting point. If a bond can't pass my tax-and-inflation filter, I don't dig into it further. Obviously, there are exception to that rule of thumb, such as when I'm deliberately looking for mis-priced high-quality debt whose holding is going to cause me a loss of purchasing-power. But most of what would fall into that category has gone ballistic in price these days and is trading at premiums so far above par as to be toxic to one's account, a point that Ben Graham made in The Intelligent Investor. Overpaying for what would otherwise be high-quality assets is to buy trash. Conversely, buying trash at deep discounts creates a high-quality investment. So 'price' --relative to 'value'-- matters hugely, and right now, the bond market is very over-bought, which is not to say that the bull bond is dead, or maybe even dying. Secular bull markets --like secular bear markets --of which we are currently in one for equities, with at least another 6 to 7 years to run -- have strong rallies and strong retracements within them. A commonly used metaphor to describe the various cycles is 'ripple', 'wave', 'tide'. Was the move up in the interest-rate for the 10-year a ripple, a wave, or the manifestation of tide? Who knows? and no one should have positioned themselves to be harmed if they guessed wrong. The bottom for interest-rates might have been put last July when the long bond tagged 2.47%. Or the bottom might lie ahead of us in negative territory. I have no idea, nor do I attempt to forecast. Such prediction games, as Taleb argues, cannot be done, because meaningful predictions can't be made in the 4th Quadrant. At best, one should focus on the other half of the problem, protection from the unexpected and unforecastable, and stop doing things like building houses on "100-year" flood plains or listening to "market strategists". Rates are going to up from here, and rates are going to go down from here. That's a bettable certainty. "Your worst draw-down is yet to come." But the 'whens' and 'whys' are beyond our ken. So, get used to living with uncertainty, which is actually good for you (up to a point), as he argues in his recent book, and about which nothing can be done anyway. Governments, economies, and markets are going to blow up, especially when efforts are made to prevent those blowups. Charlie
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