Bond Mutual Funds are getting Killed
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I have clients holding funds that are down 10-15% from last week
what do I tell clients(besides that I was wrong)?
What bond funds are you in? High Yield? Emerging Market? Mortgage backed?
My boy Dan Fuss at Loomis Sayles is down a little bit the past couple weeks- just convey to your clients that you have conviction in your strategy, are confident in your managers ability, and that this short term volatility is not only normal but has been expected...
Ther where several articles out over the last couple of months about the high yield bubble! Low spread warnings!
So I switched all the high yield funds into Loomis Sayles no later then last month!
That bond funds, just like individual bonds, fluctuate inversely with interest rates. When rates go up the value of the bonds goes down. The bonds still pay the same coupon rate.
In a bond fund, the fund manager will be able to add newer higher coupon bonds in the future which will help the overall portfolio. Unlike an individually held bond where the client either bites the bullet and holds to call, maturity or hopes for a reverse in interest rate trend.
If your clients are not using the income and they are reinvesting, they are buying more shares per dollar than when the share prices were higher. Dollar cost averaging is a good thing when prices periodically (not permanently) decline.
That's really simplistic and there are a lot more factors, as BondGuy can surely tell us, depending on the duration of the bond portfolio, credit quality, leverage in the fund etc.
Don't say you were wrong. No one can predict the market and hopefully you explained that bond funds can fluctuate just as much as stock fund so your clients are prepared for this.
[quote=Vin Diesel]
im in muni’s
[/quote]Tell them that a lower coupon rate leads to higher duration, and thus more interest rate sensitivity, given equal maturities. So if you reach for yield by going to the long end of the muni curve, expect some bounce.
I do hope that given the inverted Y/C (a highly unstable situation) you had clients mostly in very short duration instruments.
http://finance.yahoo.com/q/bc?t=3m&s=TLT&l=on&z= m&q=l&c=SHY%2CTLH%2CIEF
So here we see what happens to 1-3, 7-10, 10-20, and 20+ Tbonds as the yield curve steepen via long rates rising.
I’d tell clients, that the bond funds are currently bouncey as a result of the yield curve instability. Over time the funds should recover as bond portfolio’s roll over.
Tax free + tax Loss make Vin Diesel look like a investment GENIUS!
"Mr. Jones, let's sell this open end fund that is trading at it's nav and buy that closed end fund that is trading at a discount to it's nav! This way we can replace the income and when the pressure comes off the bonds this fund will revert back to trading a a premium. Meanwhile we've been able to stick uncle with our loss against all those gains I've made for you and $3,000 against ordinary income for as long as it lasts!"
Huh? What's that? You bought them in an IRA? (just kidding)
"But Vin, if I sell the bond fund now at a loss and I buy discounted CEFs that I'll sell later at a gain...Won't I be paying tax on those gains?"
"EYYYYYY! Mr Jones! Whattmatterforyou? I'm Vin Diesel! I'll have losses for you by the time we take dose profits! Bet on it!"
[quote=Dust Bunny]
Don’t say you were wrong. No one can predict the market and hopefully you explained that bond funds can fluctuate just as much as stock fund so your clients are prepared for this.
[/quote]For our company, we are basicly positioned with a core TIPS allocation, and remainder is in very Short treasury
Right now I am avoiding latent credit risk in bond portfolios, and in positioned for higher rates. I see two sources for this, organic steepening of the Y/C at the long end and widening credit spreads.
http://www.bmonesbittburns.com/economics/focus/20070608/feat ure.pdf
Ther where several articles out over the last couple of months about the high yield bubble! Low spread warnings!
So I switched all the high yield funds into Loomis Sayles no later then last month!
I would take my boy Fuss Face over any bond manager out there....
For our company, we are basicly positioned with a core TIPS allocation, and remainder is in very Short treasury
Me too. I also like some of the CPI linked bonds with shorter durations and the death put.
**in case you guys wonder why I'm posting so much during biz hours, I'm home sick
[quote=Dust Bunny]
For our company, we are basicly positioned with a core TIPS allocation, and remainder is in very Short treasury
Me too. I also like some of the CPI linked bonds with shorter durations and the death put.
**in case you guys wonder why I'm posting so much during biz hours, I'm home sick
[/quote]If you don't mind the bounce, then TIPS are the place to be.
When I build portfolios I tend to go along the lines of
TIPS --> REITs --> Dividend Stocks --> General Market.
A risk spectrum of investments that benefit from inflation. Long muni's are damn near the worst place to be in an environment of increasing inflation and interest rates.
I’m sorry, my clients don’t buy long term muni’s or bonds to sell on the market later on. If you are in the top 2 tax brackets, this is a great time to buy and own long term muni’s IF they are part of your ladder. I would encourage high net worth clients to start buying last weeks issues that are still outstanding. For them, it means getting a discount on some nice AAA rated, 7% TEY muni’s that are LESS likely to be called early. I don’t want to sell 8% to people because the people you sell munis to are not going to want them to be called nor are they going to want to sell them on the market. Who do you people sell muni’s to anyway? I also find much less value in bond funds because this type of panic that occurs. If you are worried about losing value on fixed investments, then buy CMO’s. You can at least get your principal back when rates change.
[quote=AllREIT]
If you don't mind the bounce, then TIPS are the place to be.
When I build portfolios I tend to go along the lines of
TIPS --> REITs --> Dividend Stocks --> General Market.
[/quote]
Call me a "unsophisticated" adviser if you want, but you are building portfolios around TIPS??? With yields less than 3% (not including the management fee), who on earth is dumb enough to invest their money with you? I can use the freaking MONEY MARKET within our brokerage accounts and earn 4.39% for the clients and not charge them a fee to do so.
By the way, I have been using the ING Senior Income Fund for awhile now, and it has not been “killed” at all.
Yeah, damn near it... Unless they need to raise tax rate to pay for the higher interest costs and inflated cost of running a government. How do higher tax rates figure into your limited universe?
Short term treasuries are damn near the worst place to be in an environment of increasing inflation (at least in this cycle of increased inflation) STTs were paying less than 2% pre tax (so call it 1.33 after tax) meanwhile commodity prices more than doubled in the past 5 years. At 1.33% it'll take 54 years for your money to double.
Keep in mind that we had increased inflation for far longer then we've had increased interest rates. meanwhile, the true rate of inflation has been dramatically higher than the CPI, we all know that to be true. You're getting royally screwed on the TIPS when it comes to actual, real world purchasing power.
So maybe yours isn't the advice anybody ought to take for serious.
The only bubble you should be worried about is the one you live in.
Those floating rate funds scare me and for some reason I think they’re a time bomb.
[quote=Mike Damone]Those floating rate funds scare me and for some reason I think they're a time bomb.[/quote]
Probably because they were at the heart of the derivative disaster of the mid '90s.
Franklin came out with the Adjustable Rate Mortgage fund and it was bank qualified so it sucked up huge money. Then Louie Ranieri came out with his Adjustable Rate Mortuary fund and crammed it chock full of IO's and PO's and inverse floaters and all of the other subatomic particles that come out when you split a mortgage.
Who Knew? Ka......... BOOM!
[quote=BankFC]By the way, I have been using the ING Senior Income Fund for awhile now, and it has not been “killed” at all.[/quote]
That would be because it’s not terribly interest-rate sensitive by nature of the adjustable rate loans. The NAV should hold up relatively well when rates are moving up. Of course, it won’t appreciate(much) when rates move down, either.
Your primary vulnerability in that fund is credit risk. Unfortunately those sorts of problems tend to happen pretty quickly and are driven by unexpected events. So, if something does happen the damage will already likely be done by the time you read about it in the newspaper.