No. of Recommendations: 3
Just now, I put three of my bond positions out for bid, at two different brokers, and got no response. I find this surprising. All were invest-grade, and one position was a marketable five bonds (some of GE 6’s of ’32). Understandably, everyone is nervous about the direction of prices. But I did at least expect to get low-balled. But nothing. No response at all from the network of bond desks. Talk about illiquidity. An bond investor can’t sell at any price even if he wanted to. I’m glad I was able to clean up the nearly 20 positions I did before this most recent hiccup of a much-belated, credit-rating downgrade befell us. (US debt hasn't been worthy of an invest-grade rating since 1914 when the Fed began systematically depreciating the dollar.)

Further explanation on my bond selling: Last Spring, I rewrote my spreadsheet of bond holdings (250 positions or so) and added an additional calculation that enable me to estimate the impact of inflation on total returns. To my surprise (which I shouldn't have been surprised at), some of my positions would lose me money (aka, purchasing-power) if I held them to maturity even though their nominal YTMs were fat. So I decided to do the responsible thing and to fix these mistakes.

E.g., on 01/11/2011, I bought a single of JCP's 7.625's of '97 for 90, for a projected YTM of 8.6%. However, if a 5% inflation-rate were assumed, then the inflation-adjusted yield (aka, effective loss of purchasing-power) became an annoying -3.6% per year. So, obviously, the position had to go, and I was able to get out at 96.750 which converted my YTM over my holding-period to 34.0%, or a decent, short-term gain compared to the -3.6% yearly loss I would have suffered had I held to maturity. Not all of my sales worked out as well. But that was the underlying strategy: grab profits now rather than suffer ongoing losses. I don't have much more I need/want to sell. But until markets settle down again, I'm stuck with holding the rest of my mistakes.

Further comment: Why work with a 5% inflation-rate rather than something higher or lower? Frankly, it's just a number that "feels right" to me, though it isn't very far from what I know to be my personally-experienced rate of inflation. So my strategy/investment objective is this: I demand of what I buy, on average and over the long haul, a real-rate of return after taxes and inflation. That's tough for a bond investor to do, especially in the low-interest, high-inflation environment in which we now find ourselves. The response of most fixed-income investors has been to complain, but to continue buying what they are most comfortable with, short-term, high-quality debt. However, as Gross has been arguing for months, the more rational response is to extend maturities and take on a judicious amount of credit-risk, which is what I started doing years ago as a hedge against inflation-risk. But it is only recently that I actually ran my numbers and calculated just how bad the damage from inflation might be for every position I held. Sooner or later, as I can, I will clean up my portfolio to meet that objective of a real-rate of return (or better).

Further, further comment: As everyone knows, PenFed ran a "special" last year on CD rates and offered 5% for 10-year debt. I'm sure many people who post here grabbed as much as they could for thinking it was a good deal. But was it really, when inflation is considered? Sometime, when you're truly bored, set up a spreadsheet and run the numbers and state your return in terms of retained purchasing-power rather than nominal yield. What you will find is that you are losing money. The purchasing-power returned to you at maturity will only a fraction of the purchasing-power you lent to them, something around half to two-thirds (depending on your tax-rate and assumed inflation-rate). Deliberately choosing to lose money is the exact opposite of investing, and the exact opposite of "safe and prudent", which is why I don't do it.
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