Last fall, anticipating that a crash was overdue, I sold off all bonds that should have been sold off and figured that the higher quality stuff I still held onto would weather the storm. WRONG! and here's an example. Microsoft's triple-AAA rated, 4's of '55 --that I got into years ago at slight discount to par-- were trading at 138 as recently as March 9. Today, just ten day later, they are trading at 104. That's a helluva paper loss. Obviously, the selling time is past, and the buying time hasn't yet come. But I'm going to have to go through every one of my positions and figure out which losses I ignore and which I try to hedge. COVID-19 is a just contagious flu that markets should be able to discount and deal with. But they aren't, because COVID-19 is bringing to the fore structural problems that the Fed has been papering over --literally, with its printing presses-- ever since Easy Al bailed out the counter-parties to LTCM's trades in '98. That's when the real "flu" began --central bank stupidity-- that's going to kill the US/global economy. Welcome to the Greater Depression.
I feel ya. But Microsoft isn't going to default, and so the quotes no don't really matter, do they? Not unless you have to sell, or you're interested in buying.I think it's evident that cash-constrained entities have found themselves forced to sell anything of value, which includes high-quality bonds, preferreds, and the like.I've got cash, and I'm looking to buy. But not yet.We'll get through this. Covid is not Ebola. Total # cases in China has been basically flat for weeks now (obvious data issues aside), S. Korea is seeing light on the horizon. If everyone essentially sheltered in place for a few weeks, we'd come out the other side pretty much OK. I'm expecting Italy to show signs of recovery imminently. We'll see.(PS: I say this as someone who'll turn 71 later this month. I'm well aware of the significant variation in impact by age group.)
Yes, the cash-constrained are now selling what they can, rather than --months ago-- what they should have. But the knock-on effect of marked-down holdings isn't fun. Two things are going on. One is the medical situation, which is merely the catalyst for, not the cause of, the second, which is the unraveling of the central banks' Ponzi schemes. COVID-19 is just a contagious flu for which treatment already exists, hence, the irrationality of the panics and shut-downs. We all knew that the debt-fueled bubbles would burst sooner or later, and we knew so 22 years ago when the Fed bailed out the counter-parties to LTCM's bets. But once Wall Street was assured that the Fed had their backs, no risk became too great to take, and now Main Street --once again-- is bearing the brunt of that greed and recklessness. No, MSFT won't default, as won't most of what I own. I just don't like being marked up and then marked down.
Now that some rationality has returned to the the bond market, spreads have narrowed and the better quality stuff is being bid back up, all the while that the marginal credits are being down-rated. Temporarily, the worst seems to be over, and now I'n down less than (-2) YTD. I suspect, though, that this is just a pause and fake-out before markets decline further.
Do you normally keep bonds until maturity?
"Do you normally keep bonds until maturity?"Rich, I buy with the intention to hold until maturity. But that isn't what happens. About one-third gets called. A sixth defaults and goes into Ch 11. Another sixth I sell off, because they aren't working out. Maybe a twenty-fourth I'll trade out of to capture an unexpected fat gain before time-decay takes the profit back. The rest do mature as hoped and plannedNormally, I'm carrying 200-300 positions, selected from treasuries, agencies, munis, corporates, and foreign sovereigns, sized as follows: for the low-tier stuff, a max of 2 bonds per issuer. For the mid-tiers, 2-5 bonds/issuer. For top-tier, 5-10 bonds max per issuer. In short, I'm running my own "spectrum bond fund". On some positions, I've made as much as 100% per year for my holding-period. On others, I've suffered a 100% loss. But by and large, my returns have been consistent with the top 5% of managers with that investment objective. So I'm content. Arindam
Normally, I'm carrying 200-300 positions, selected from treasuries, agencies, munis, corporates, and foreign sovereigns, sized as follows: for the low-tier stuff, a max of 2 bonds per issuer. For the mid-tiers, 2-5 bonds/issuer. For top-tier, 5-10 bonds max per issuer. In short, I'm running my own "spectrum bond fund". On some positions, I've made as much as 100% per year for my holding-period. On others, I've suffered a 100% loss...Man, that seems like a lot of positions. I stick with corporates. Pretty much investment grade and purchases of 10. With a par value of $560,000, the mark-to-market prices shown before the pullback was just over $600,000. Today it is $558,700 and that is after about a $10,000 recovery from the lows. I too have had plenty of bonds get called, but none that have come close to default (so far). Jim
I don't know how long you've been doing this, so this question may not be appropriate, but have you found that investing in bonds have been easier or harder as interest rates decline?Obviously the raw interest rate is going down, but the price per bond would be going up since their rates would look more attractive over time.Rich
Rich, I got into the bond game in late '99 when stocks were so ridiculously over-priced from the point of view of classic, Ben Graham-style, value investing that I was unwilling to buy them, but bonds were being despised and deeply discounted. Back in those days, getting 15%-20% YTMs on double-BBs wasn't hard, and the research was easy to do. Ditto 2009, 2010, and maybe even 2011. Reasonable discounts could again be found. But by 2018 through early 2020, little worth buying was coming to market. Now, discounts are again being created. But uncertainties have gone though the roof, and it's become a traders' market where the only sensible things to do are either to stand aside until some clarity emerges, or to get in and out fast. That can be a fun game. But it's high-stress and something I'd rather avoid. Yeah, as interest-rates have fallen, bond prices have risen. E.g., some of the stuff I got in on at prices of 70-80 are now trading at nearly twice that. But, so what? What would one do with the cash if the bonds were sold? In short, savers and conservative, fixed-income investors are being screwed by our dear central bank and its the hyper-financialization. Arindam
Jim, How many positions one carries --be it stocks, bonds, whatever-- is a direct function of one's personality which --in turn-- determines one's investment plan. I HATE to make big bets, but I'm willing to make many, many small ones, none of which will get me thrown out of the game. As to sticking with corporates alone, that, too, is a personal decision, but one I think isn't smart or consistent with classic, Ben Graham-style value investing. When munis are being trashed --as they were in the fall of '10 (or whenever), but after Meredith Whitney's pan of them happened-- solid, upper-tier credit could be picked up that offered safer, better returns than corporates. Same-same with every niche in the asset markets. You've gotta buy what's on sale, when it's on sale, and you never, ever worry about "laddering", or "diversifying", or any of the other MPT nonsense. However, here's the irony. If your buying is disciplined and consistent and your risk metrics emphasize prudence, you end up "properly diversified" with a robust, 'all-weather' portfolio that lets you sleep at night. E.g. YTD, I'm now down just (-1.49%). That's tolerable, and it gives me the ability to step back and to wait things out. Arindam
You've gotta buy what's on sale, when it's on sale, and you never, ever worry about "laddering", or "diversifying", or any of the other MPT nonsense ———————————Just curious: What do you have against a laddered portfolio? Bill
Bill, I've got nothing against bond ladders. What is stupid is the effort and expense to construct them and the belief they offer some kind of financial magic. What's the usual advice given to bond newbies? Something like, "Pick a time frame/time range and then go into the market to buy the rungs." However, those rung are NEVER priced equally with respect to any sensible metric you want use. Instead, some maturities are over-bought. Some are under-bought, depending on a whole bunch of factors, including institutional forecasts. What makes far better sense is to buy whatever the prevailing "sweet spot" is and to leave some of the rungs unfilled. What you'll find, however, is that soon enough another and different sweet spot will occur. Over time, and with consistent and disciplined buying, a fairly good ladder will result, none of whose rungs were over-priced. What distinguished the fixed-income game from the equity game is that every basis point matters and that it's an institutionally-dominated market where "the big boys" have all the advantages. The small bond investor has to buy as cheaply as he/she can and buying campaigns that over-pay so they can quickly build tight ladders are stupid nonsense that just puts money into brokers's pockets. Arindam
WRONG! and here's an example. Microsoft's triple-AAA rated, 4's of '55 --that I got into years ago at slight discount to par-- were trading at 138 as recently as March 9. Today, just ten day later, they are trading at 104. That's a helluva paper loss.And now a couple of months later, they are back trading at 133/137, pretty close to where they were before all this began.Are you selling?
Mark, Other than to accept a couple of no-brainer tender offers, I haven't been selling any bonds. My questionable positions were sold as much as two years previously when it become obvious that troubles lay ahead. What I did keep has since recovered in price from the panic selling in March by the institutionals. Arindam
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