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Bond Mutual Funds are getting Killed

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Jun 13, 2007 6:34 pm

[quote=AllREIT]

Why should the fixed income portion of a portfolio be the main source of yeild?  [/quote]

Sorry, the idiot alarms going off as a result of that statement make continuing this with you more trouble than it's worth. That comment is suitable for framing....

Clearly you're out of your depths here. You regurgitate the doctrine fed to you well, but where that doctrine fades you make a habit of saying absolutely foolish this that expose you as a neophyte in this business. The three ETF complete portfolio theory of your was just the first hint, many, many have followed. I think the forum members who have exchanged emails with me guessing that you’re some sort of a minor league academic that fancies himself an investment advisor and has less than 10MM in AUM have the story right.

Jun 13, 2007 11:08 pm

[quote=joedabrkr] [quote=BondGuy][quote=Vin Diesel]

I have clients holding funds that are down 10-15% from last week

what do I tell clients(besides that I was wrong)?

[/quote]

Wrong about what?

Umm, what funds are off by that amount? We have major positions in 4 high yield funds. The worst is off by about 2% from it's yearly high and about 1.8% from a week or so ago, and it's still trading above where it started the year. The others down less than 1%. Hardly a burst bubble and nothing to worry about. Especially considering their near term performance.

[/quote]

Hey BG....how much you want to bet this guy is loaded up on relatively new high yield CLOSED END funds....?
[/quote]

Maybe. Are they down big? I'm still trying to figure it out.

Anyway, staying to course.

Don't predict anything. Just buy bonds.

Jun 14, 2007 2:16 am

[quote=BankFC]Risk free rate?  The risk free rate is far above what your sorry TIPS are generating.  One year and less CD's are paying north of 5%. Agencies, which are IMPLICITLY backed by the fed gov't are also in the mid 5%, and as I said before, even our FDIC INSURED MONEY MARKET is paying 4.39%.[QUOTE]


Which is all jim dandy, except for the question of what is real risk free rate?

5.14 (10y CMT) - 2.72 (10y CMT TIPS) == 2.42% BIR<br>

That's the current market expectation for annualised CPI inflation over the next ten years. That spread (break even inflation) has to be applied against the treasury real curve to get the treasury nominal curve.

So after you take that 2.42% out, how much are those bank CD's etc really paying? That's the real question.

After you knock out expected inflation, the short end of the Y/C is the place to be. Hence I've positioned portfolio's to have both TIPS and short treasuries. This is what pretty much every TIPS manager is doing, since the value was in the short end of the curve.  E.g same real rate, lower duration.

Either way your not going to get huge real returns from fixed income unless you make big bets on duration or credit risk. So as I've explained elsewhere that's why recomend owning lots of NNN real estate and other hard assets whose value/income can grow with inflation.

The rent roll/escalation clauses provide real return, and there is built in arbitrage between fixed rate debt and the floating rents/tolls .

My goal is to match clients CPI-linked liabilities (e.g living expenses) with CPI-linked assets (TIPS/REITs/MLPs/Dividend Stocks etc). Now some people, myself included , think this is a sound way to invest for the long term.

Jun 14, 2007 2:29 am

[quote=BondGuy] [quote=joedabrkr] [quote=BondGuy][quote=Vin

Diesel]

I have clients holding funds that are down 10-15% from last week[/

P]

what do I tell clients(besides that I was wrong)?



[/quote]



Wrong about what?



Umm, what funds are off by that amount? We have major positions in 4

high yield funds. The worst is off by about 2% from it’s yearly high and

about 1.8% from a week or so ago, and it’s still trading above where it

started the year. The others down less than 1%. Hardly a burst bubble and

nothing to worry about. Especially considering their near term

performance.









[/quote]Hey BG…how much you want to bet this guy is loaded up on

relatively new high yield CLOSED END funds…?[/quote]



Maybe. Are they down big? I’m still trying to figure it out.



Anyway, staying to course.



Don’t predict anything. Just buy bonds.

[/quote]



Buy bonds, huh?



Well, today was a good day for it. We picked up some bargains.



Oh and by the way…you’re quite right. Don’t predict anything. Is te Fed

going to raise? Will China dump Treasuries on the markets? Who knows?

Who cares? Iff that’s the driving force for your clients, tell them to just go

to Atlantic City.
Jun 14, 2007 1:36 pm

[quote=AllREIT]

[quote=BankFC]Risk free rate?  The risk free rate is far above what your sorry TIPS are generating.  One year and less CD's are paying north of 5%. Agencies, which are IMPLICITLY backed by the fed gov't are also in the mid 5%, and as I said before, even our FDIC INSURED MONEY MARKET is paying 4.39%.[QUOTE]


Which is all jim dandy, except for the question of what is real risk free rate?

5.14 (10y CMT) - 2.72 (10y CMT TIPS) == 2.42% BIR

That's the current market expectation for annualised CPI inflation over the next ten years. That spread (break even inflation) has to be applied against the treasury real curve to get the treasury nominal curve.

So after you take that 2.42% out, how much are those bank CD's etc really paying? That's the real question.

After you knock out expected inflation, the short end of the Y/C is the place to be. Hence I've positioned portfolio's to have both TIPS and short treasuries. This is what pretty much every TIPS manager is doing, since the value was in the short end of the curve.  E.g same real rate, lower duration.

Either way your not going to get huge real returns from fixed income unless you make big bets on duration or credit risk. So as I've explained elsewhere that's why recomend owning lots of NNN real estate and other hard assets whose value/income can grow with inflation.

The rent roll/escalation clauses provide real return, and there is built in arbitrage between fixed rate debt and the floating rents/tolls .

My goal is to match clients CPI-linked liabilities (e.g living expenses) with CPI-linked assets (TIPS/REITs/MLPs/Dividend Stocks etc). Now some people, myself included , think this is a sound way to invest for the long term.

[/quote]

Is this the language you use to present this to clients?

Jun 14, 2007 1:56 pm

[quote=AllREIT]

[quote=BankFC]Risk free rate?  The risk free rate is far above what your sorry TIPS are generating.  One year and less CD's are paying north of 5%. Agencies, which are IMPLICITLY backed by the fed gov't are also in the mid 5%, and as I said before, even our FDIC INSURED MONEY MARKET is paying 4.39%.[QUOTE]


Which is all jim dandy, except for the question of what is real risk free rate?

5.14 (10y CMT) - 2.72 (10y CMT TIPS) == 2.42% BIR

That's the current market expectation for annualised CPI inflation over the next ten years. That spread (break even inflation) has to be applied against the treasury real curve to get the treasury nominal curve.

So after you take that 2.42% out, how much are those bank CD's etc really paying? That's the real question.

After you knock out expected inflation, the short end of the Y/C is the place to be. Hence I've positioned portfolio's to have both TIPS and short treasuries. This is what pretty much every TIPS manager is doing, since the value was in the short end of the curve.  E.g same real rate, lower duration.

Either way your not going to get huge real returns from fixed income unless you make big bets on duration or credit risk. So as I've explained elsewhere that's why recomend owning lots of NNN real estate and other hard assets whose value/income can grow with inflation.

The rent roll/escalation clauses provide real return, and there is built in arbitrage between fixed rate debt and the floating rents/tolls .

My goal is to match clients CPI-linked liabilities (e.g living expenses) with CPI-linked assets (TIPS/REITs/MLPs/Dividend Stocks etc). Now some people, myself included , think this is a sound way to invest for the long term.

[/quote]

You are ridiculous.  I agree with Mike, I am certain now that you are not an adviser, but rather an academic with an inflated ego from bullying college feshmen around and no real productivity other than your useless drivel.

I don't care what equations you use, but you'll never convince me or one of my million dollar clients why, for their short term fixed income investing, they are better off making 3% than 5%.

Jun 14, 2007 2:02 pm

You are ridiculous.  I agree with Mike, I am certain now that you are not an adviser, but rather an academic with an inflated ego from bullying college feshmen around and no real productivity other than your useless drivel.

I don't care what equations you use, but you'll never convince me or one of my million dollar clients why, for their short term fixed income investing, they are better off making 3% than 5%.

I had decided he didn't know how to sell to clients and was a money manager with no contact with the public.  All theory and no personal skills, but now I believe you guys are correct.

Jun 14, 2007 3:13 pm

[quote=BankFC][quote=AllREIT]

[quote=BankFC]Risk free rate?  The risk free rate is far above what your sorry TIPS are generating.  One year and less CD's are paying north of 5%. Agencies, which are IMPLICITLY backed by the fed gov't are also in the mid 5%, and as I said before, even our FDIC INSURED MONEY MARKET is paying 4.39%.[QUOTE]


Which is all jim dandy, except for the question of what is real risk free rate?

5.14 (10y CMT) - 2.72 (10y CMT TIPS) == 2.42% BIR

That's the current market expectation for annualised CPI inflation over the next ten years. That spread (break even inflation) has to be applied against the treasury real curve to get the treasury nominal curve.

So after you take that 2.42% out, how much are those bank CD's etc really paying? That's the real question.

After you knock out expected inflation, the short end of the Y/C is the place to be. Hence I've positioned portfolio's to have both TIPS and short treasuries. This is what pretty much every TIPS manager is doing, since the value was in the short end of the curve.  E.g same real rate, lower duration.

Either way your not going to get huge real returns from fixed income unless you make big bets on duration or credit risk. So as I've explained elsewhere that's why recomend owning lots of NNN real estate and other hard assets whose value/income can grow with inflation.

The rent roll/escalation clauses provide real return, and there is built in arbitrage between fixed rate debt and the floating rents/tolls .

My goal is to match clients CPI-linked liabilities (e.g living expenses) with CPI-linked assets (TIPS/REITs/MLPs/Dividend Stocks etc). Now some people, myself included , think this is a sound way to invest for the long term.

[/quote]

You are ridiculous.  I agree with Mike, I am certain now that you are not an adviser, but rather an academic with an inflated ego from bullying college feshmen around and no real productivity other than your useless drivel.

I don't care what equations you use, but you'll never convince me or one of my million dollar clients why, for their short term fixed income investing, they are better off making 3% than 5%.

[/quote]

They get 3% COUPON PLUS adjustments for inflation.

Frankly some of what ALLREIT is saying about funding cost of living expenses with growing income streams makes some sense to me.

But you can't talk to clients with that kind of language or they'll never get it.
Jun 14, 2007 5:09 pm

I take no issue with allocating X amount of dollars to risk free investments to cover someone's monthly nut.  That would be a prudent decision.

However, I've looked into TIPS in the past as well as recently, and I must say, I'd rather get a 5.25% coupon and my money back 9 months later to reinvest (ala a CD) than buy TIPS with a 2.85% to 3% coupon and some type of adjustment.

And again, you can't work for free selling TIPS, so there has to be an adjustment for management fees.  Often times, I'll have the customer open up a bankside CD (especially recently during this inverted yield curve) for the fixed portion of their money.  I don't particularly like dealing with bonds, although I do sell them periodically.

The point is ALLREIT is obviously not a retail adviser.  So I would urge all of you to take that in consideration and not get awed by his silly equations like he would have you do.

Jun 14, 2007 5:34 pm

http://www.bls.gov/news.release/cpi.t01.htm

"My goal is to match clients CPI-linked liabilities (e.g living expenses) with CPI-linked assets" AllReit

Allreit,

The above link is to the CPI data.

The point that i"d make to you from it is that the everyday living expenses have gone up dramatically higher than the overall CPI rate.

Water and sewer and trash collection        &n bsp;         &n bsp;         &n bsp;         &n bsp;         &n bsp;         &n bsp;         &n bsp;         &n bsp;
        services (2)..........................     & nbsp; .897    141.806    142.184     5.0     0.3     0.5     0.3     0.3
 {bolded is rate of increase YOY) 5% while overall CPI grew at 2.6%

Look at food, only Other and Dairy are below the overall rate of inflation.

Does it really help anyone that the drop in the prices of used cars (down 4.3%) is curbing the inflation index?

Pegging return to inflation as judged by the CPI is a sure path to the cat food aisle!, if this isn't true then how can it be that Seniors depending on SS with a CPI based COLA are the ones getting less and less by  on less and less?

Jun 14, 2007 6:17 pm

[quote=BondGuy][quote=Vin Diesel]

I have clients holding funds that are down 10-15% from last week

what do I tell clients(besides that I was wrong)?

[/quote]

Wrong about what?

Umm, what funds are off by that amount? We have major positions in 4 high yield funds. The worst is off by about 2% from it's yearly high and about 1.8% from a week or so ago, and it's still trading above where it started the year. The others down less than 1%. Hardly a burst bubble and nothing to worry about. Especially considering their near term performance.

[/quote]
Jun 14, 2007 6:22 pm

Oops, sorry about blank post above. 

My intended comment was that I had a "holy crap" moment when I saw the initial post about bond funds being down 10-15%, and immediately logged off of here to check how my badly my bond funds had dropped the past few weeks.  I knew they would be off some, but I had no idea it had gotten that bad without me realizing it. 

Bottom line:  my top bond fund holdings were down about 1%.

By the way, if we are in a theatre and you ever shout "fire", don't expect me to be running for the door.

Jun 14, 2007 6:27 pm

[quote=Whomitmayconcer]

http://www.bls.gov/news.release/cpi.t01.htm

"My goal is to match clients CPI-linked liabilities (e.g living expenses) with CPI-linked assets" AllReit

Allreit,

The above link is to the CPI data.

The point that i"d make to you from it is that the everyday living expenses have gone up dramatically higher than the overall CPI rate.

[/quote]

CPI is our best guess as to what inflation really is. However the food/energy component of it are very bouncy. Eventually higher costs for food/fuel get reflected elsewhere in CPI.

Right now the food cost index is getting fluffed by higher fuel costs (it takes alot of energy to move food around) and the effects of corn being diverted away from food use into fuel. There is also some talk that the food companies are using this as an excuse to ratchet prices.

So, thats one reason why you seek a margin of safety by investing in companies who's dividend CAGR is higher than CPI.

Jun 14, 2007 6:34 pm

So ALLREIT, are you an associate professor of finance at a top tier community college or a mid tier state university...

Inquiring minds want to know.

Jun 14, 2007 6:42 pm

Community college finance teacher is my guess.

Jun 14, 2007 6:45 pm

[quote=BondGuy]

Is this the language you use to present this to clients?

[/quote]

Depends which clients.

Everyone gets the basic idea of inflation erodding purchasing power.

I like to tell a story of Rip van Winkle who fell asleep in 1975 with enough  bonds to buy a new caddilac and but then couldn't buy new caddilac in 2005 when he woke up.

Now had he fallen asleep with enough TIPS to buy a new caddilac, he'd have been in good shape, since the value of capital was preserved via the inflation accretions.

And then you explain who you can substitue a peice of real estate, an oil pipeline, etc for the TIPS.

When selling TIPS, the main thing you have to do is bridge the preception gap between the equal real yield of nominal vs real bonds and the unequal nominal yeild.

So for BankFC's argument about CD rates.

A one year TIPS @ 2.5% + 2.5% CPI and one year CD @ 5% have the same total return, since the TIP's par value goes from 1000 to 1025, and it pays $25, while the CD's par is constant and it pays 5%.

But if there is high inflation, the TIP accretions preserve the real value of the original investment/interest payments while the CD is hopelessly erroded.


Jun 14, 2007 7:09 pm

I like to tell a story of Rip van Winkle who fell asleep in 1975 with enough  bonds to buy a new caddilac and but then couldn't buy new caddilac in 2005 when he woke up.

Rip should have bought a 1970 Hemi Cuda which sold for a cool 715,000 at the 2006 Barrett Jackson 2006 auction.  He could have bought several Cadillacs when he woke up.

http://www.barrett-jackson.com/appstest2/carlist/CarListFilt er.aspx?AuctionId=53

Or actually any of these Plymouths would have been a fine investment.

It just goes to show that you cannot predict the future.

Jun 14, 2007 7:12 pm

Hopelessly erroded.  Ahh, if only I could go back to undergrad and listen to more guys like you drone on and on about hypotheticals...

Bottom line is TIPS are a MEDIOCRE fixed income instrument at best. 

Jun 14, 2007 7:29 pm

All,

You don't have to explain to me why there are higher prices. From what I've seen of your reasoning, you only barely scratch the surface of where higher prices come from. It show that you understand the broad theory but not the practical application.

To use one of Mikebutler222's terms, you are moving the goal posts.

This is your very favorite of rhetorical devices. You talk for example of how long term munis are so bad as opposed to TIPs and when that comparison is deconstructed you then say 'well that's why you have these other investments to balance it off'. You say you're managing for CPI but then when it is shown to you that CPI is an inadequate comp, you say 'well that's why I manage to beat CPI'.

That's what "moving the goal posts" means.

Whatever, just so long as you know that I know that that's what you are doing.

I don't bother doubting your success in the business (mostly because it doen't make or cost me a peeeny for you to be whatever) and I do know that in the land of the blind, the man with one eye is king. I'm sure that clients that hear your rap are duely impressed. And then there are those who never take you phone call again (just like the rest of us). 

Jun 14, 2007 8:02 pm

[quote=Dust Bunny]

I like to tell a story of Rip van Winkle who fell asleep in 1975 with enough  bonds to buy a new caddilac and but then couldn't buy new caddilac in 2005 when he woke up.

Rip should have bought a 1970 Hemi Cuda which sold for a cool 715,000 at the 2006 Barrett Jackson 2006 auction.  He could have bought several Cadillacs when he woke up.

http://www.barrett-jackson.com/appstest2/carlist/CarListFilt er.aspx?AuctionId=53

Or actually any of these Plymouths would have been a fine investment.

It just goes to show that you cannot predict the future.

[/quote]

Exactly right!

Don't predict. Let the talking heads, and gurus predict.