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http://online.wsj.com/article/SB118894713615417430.html?mod=mkts_main_featured_stories_hs


Income Investors Rediscover Bonds
Market Rout of Recent Weeks Has Boosted Yields to Levels
That Are Irresistible to Some; Locking In at 9.03%
By JANE J. KIM
Wall Street Journal, September 5, 2007; Page D1

A flood of selling by hedge funds and institutional investors has depressed the prices of a wide variety of bonds in recent weeks. Now, individual investors are being lured by the attractive yields on many of these income-generating investments.

As prices have declined on many bonds, ranging from investment-grade corporate issues to high-yield, or junk-rated, municipal bonds, their yields have gone up. Some bonds with good credit quality are offering yields as much as half a percentage point above where they were just a few weeks ago, while yields on junk-rated issues are up as much as two or three percentage points....

There are risks, of course, to stepping back into the bond market when prospects for the economy remain uncertain.
[end quote]

Exactly.

I have been considering a low-cost investment grade bond fund, such as Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX), which currently yields 6.06%.
http://stockcharts.com/charts/gallery.html?VWESX

Thoughts?

Wendy
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Hi Wendy,

I've never really looked at corporate bonds, restricting myself to Muni's/Muni-CEF's. Even Muni's went down as the brokers were swamped with sells from the Hedge-funds selling quality to cover redemptions.

I added heavily to Nuveen's (NIO) a AAA Nat'l Muni- CEF. I think it's an excellent time to look into/nibble at them, as the fund managers would have bought heavily for their funds. I'm sure VWESX added some nicely priced bonds.

rk
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I have been considering a low-cost investment grade bond fund, such as Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX), which currently yields 6.06%.

Investment grade bonds pretty much follow Treasuries. On the low investment grade end, there has been an increase in risk premium, but you are still looking at investing in a long term fund at a time interest rates have come down.

The place to look, if you want a fund, is Vanguard's junk fund. But that means guessing, at least over the long term, junk will recover to at least current trading valuations, (I am tempted in my 403(b).)
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<But that means guessing, at least over the long term, junk will recover to at least current trading valuations, (I am tempted in my 403(b).)>

Loki, I wouldn't do that. Everything written about the "covenant-lite" junk bonds that were issued over the past 3 years makes me shudder.

Like the subprime mortgage bonds, which defaulted in higher-than-modeled percentages, I strongly believe that the next recession will cause a higher-than-modeled percentage of junk bonds to default. Even now, I don't think the risk is fully priced in.

Wendy
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Loki, I wouldn't do that. Everything written about the "covenant-lite" junk bonds that were issued over the past 3 years makes me shudder.

Like the subprime mortgage bonds, which defaulted in higher-than-modeled percentages, I strongly believe that the next recession will cause a higher-than-modeled percentage of junk bonds to default. Even now, I don't think the risk is fully priced in.


Wendy,

The piece you posted was certainly suggesting junk. I'd still like to see junk drop some more before thinking about jumping, but in my 403(b) options are limited and I don't want to be stuck with declining short term interest rates. I'm still counting on interest rates staying higher than Wall Street wants, but the economy may be in real trouble for reasons that have nothing to do with the big legue day traders having gotten in over their heads and now wanting to be bailed out. The real economy is seeing a declining standard of living because laissez faire magic has failed to produce new and better jobs to replace lost good jobs (which is because magic and mythology do not produce new and better jobs). Borrowing has substituted for better jobs, but it is not a lack of money for borrowing that is the issue. It is the underlying loss of middle class jobs.
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I don;t know, but I'm not in long bonds now. To me, I'm happy with an insured return of 5.65 with money tied up for just one year, vs 6.06% for bonds at higher risk to price fluctuations. And i think there is more room for bond prices to go down than up. But, just my opinion. I got out of long bonds on the early side, could have made more money if I stayed 3 or 4 months longer.
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Hi Wendy,
This is just a comment for the future. Vanguard's High Yield Fund (junk) takes a conservative approach and yields over 8 percent now. I wouldn't recommend it now. I think this whole mess we are in is going to take a very long time to settle out as these mortgages reset and the system tries to get better visibility on all these new investment products. It could take years. Hopefully, on the other side, risk premiums will be more appropriate. Vanguard's High Yield fund might be an idea to just put away for awhile and take it out later.
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This is just a comment for the future. Vanguard's High Yield Fund (junk) takes a conservative approach and yields over 8 percent now. I wouldn't recommend it now. I think this whole mess we are in is going to take a very long time to settle out as these mortgages reset and the system tries to get better visibility on all these new investment products. It could take years. Hopefully, on the other side, risk premiums will be more appropriate. Vanguard's High Yield fund might be an idea to just put away for awhile and take it out later.

For me the issue is in my 403(b) where my choices (excluding stock funds) are Money Market, TIAA Traditional (supplemental, which has a lower yield than money market), a bond fund that tracks the total bond market, a TIPS fund (not sure if Dan's caution applies), or the junk fund, which I believe takes a similar approach to Vanguard (with a higher expense ratio).

The Bond fund, which I don't like for many reasons, has a lower yield than the money market, and even if interest rates go down for a while, I doubt they will stay down for more than a few months to a year. The junk fund yields more than 300 basis points above the money market. I do expect the money market will lower its yield at some point, if the economy slows down or goes into recession.

So, with the junk fund, we're looking at 3% per year to play with compared to the money market.

I would agree it is probably worth waiting a while to see how things play out (and if money market goes down). But I am definitely not a true believer that the lack of free money for banks and hedge funds will devastate the real economy, and slowing down a bit or a mild recession isn't going to drive a whole lot of moderate junk under.
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