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No. of Recommendations: 3
Only in the spirit of good debate -

1) - So let me make this challenge to you who seems to advocate avoiding premiums. ??????

Thought what I said was -
<snip> Clearly, understand I am not saying never pay a premium - but only pay a premium if you are ok with buying the problems that come with that end of the price spectrum at that time!! </snip>

2) But you shouldn't infer from my disclaimer that all methods have equal efficacy

Did I infer that??
<snip>In some markets/rate conditions - trading book with rising rates or if you believe in mean reverting spreads - perhaps a premium may not be a bad thing.<snip>

The reason for the "perhaps" is we don't know the future -

So it appears that this old rock is open to times when the "efficacy" varies.. and clearly there are two methods stated right there.

I was very careful, this time, to preface my post with the caveat that "there as many ways of doing bond-investing as there are bond-investors."

Yes - you were and that was a point of agreement.

So a judicious amount of each has to be bought.

This is the point of disagreement! This statement - saying "all" should buy (at least some part of the portfolio) at a premium is in the same box as saying "no one" should buy at a premium.

Post your bond positions, for all the world to see, and I'll do the same, and let others determine for themselves who has achieved:

(1) The better absolute returns.
(2) The better risk-adjusted returns.

LOL - as there are many different investors, there are many different styles and requirements for a portfolio -

The better absolute returns - is the ultimate red herring!

Thought experiment:

Just sold my lifes work of a company - I have $5MM, am 75 years old w/ no kids and required expenses are $40,000 per year (but I may spend $100,000 and do some travel and volunteer work) - my only concern is capital preservation. I just opened a Treasury Direct account and at the next auction I am going to buy $2MM 5 year UST, $2MM 10 year. The rest laddered in the local community bank FDIC insured CD's (got a waitress at the local village inn that thinks I am hot so between the two of us, that is $1MM in insurance)

So there is "my portfolio" bought at par, no discount and no premium using your +/-1%

$2MM 5 yr UST
$2MM 10 yr UST

My risk-adjusted return is exactly where I want it! Absolute returns - who cares!!!

Is that your style - No:
Is that my style - No:
Is that a style - Yes:

A 100% viable contra example to your statement:

So a judicious amount of each has to be bought.

will lose the fight.

Yes - all (I) have to do is park money which is an investing style. Just like if some one does not want to pay a premium, that is an investing style. Their style and a constriant they can live with.

(1) The better absolute returns.
(2) The better risk-adjusted returns.

If we want to look at "absolute" returns - there is an immeasurable amout of absolute return in following your investment style and sleeping at night so if I were to take you up on the "post my portfolio challenge" what exactly would the measure be?? Oh - just the financial numbers....

And - how are we going to measure risk-adjusted return - interest rate risk, credit spread risk, longevity risk, credit/default risk, social risk, shortfall risk, inflation risk, FX risk, geopolitical risk, my waitress at Village Inn risk????

So - again in the spirit of debate:

What are the benefits (and consequences) of never buying at a premium? What are the benefits (and consequences) of rejecting that constraint? That's a theoretical question and nearly unanswerable.

You can only attempt to answer that question for you and give your opinion from/of your view point. Which is exactly what you are saying about folks who say that you should never buy at a premium. So in explaining your view point - don't violate the founding principal of your argument and tell some one else they have to buy at a premium!!!
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