Bonds, Muni's and BAB's
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BondGuy, as always, you’re a pimp.
shantom1, good post. I'm on board with most of your post, but I don't know if the dollar will weaken much more. There's not much that will strenthen the dollar more than rising interest rates. Also, when I get a Euro question every day, behavioral finince experience tells me that goose is cooked. Therefore, I'm not sure soveriegn debt is the best place to be, and templeton foreign bond is almost all foreign "government" debt, if I am correct, which could get slammed if the recovery forces foreign rates to rise as well. TIPS, by the way, are so overbought right now that I have been selling them like hotcakes (picked up a ton of 5-10 years a couple years back at 3% coupon). I think there are some compelling buys in absolute return funds with good Sharpe ratios, and in the offchance there is hyper-inflation, most tend not to be interest rate sensitive.[quote=rankstocks]BondGuy, as always, you’re a pimp.
shantom1, good post. I'm on board with most of your post, but I don't know if the dollar will weaken much more. There's not much that will strenthen the dollar more than rising interest rates. Also, when I get a Euro question every day, behavioral finince experience tells me that goose is cooked. Therefore, I'm not sure soveriegn debt is the best place to be, and templeton foreign bond is almost all foreign "government" debt, if I am correct, which could get slammed if the recovery forces foreign rates to rise as well. TIPS, by the way, are so overbought right now that I have been selling them like hotcakes (picked up a ton of 5-10 years a couple years back at 3% coupon). I think there are some compelling buys in absolute return funds with good Sharpe ratios, and in the offchance there is hyper-inflation, most tend not to be interest rate sensitive.[/quote] As a discussion I have to ask how has the dollar weakened? Right now the dollar is fairly strong mainly due to continuing demand for tbills. Sooner or later that trade is going to reverse, and reverse hard. When we publically say we as a nation will have a trillion dollar deficit for the forseable future that can only translate to currency decline. Once the tulip craze is over the door will not be big enough. I know that foreign govy debt will drop on local markets as they start raising their rates too, but the currency moves will far outweight any decline due to rates. I am least comfortable with Euro based debt, they will probably be in parody with the US.rankstocks:
Not quite sure what you mean by that. Generally, i agree with the rest of your post. Our thinking is shared on looking for fixed income opportunities across many markets and product types.BondGuy, as always, you’re a pimp.
Can you guys elaborate on moving to funds versus individual munis. Also, I don’t follow the concern on short-term munis. I have a lot of cash in short term muni funds right now. That comment concerned me.
BondGuy:
BG - it means "you're the man".
Not quite sure what you mean by that. Generally, i agree with the rest of your post. Our thinking is shared on looking for fixed income opportunities across many markets and product types. [/quote][quote=rankstocks]BondGuy, as always, you’re a pimp.
BG - it means "you're the man".
B24:
If you look at the yield curve the short end is the part out of whack the most. With 2-3 yr munis yielding less than 1% there is quite a bit of movement possible. Since these funds are general sold as safety plays a client will not be too happy to see his fund drop 3,4,5 or more % in a short period of time. The biggest problem is they are not being compansated for that risk. The ultrashorts are getting 1-2% at best. If you move them a little furthur out the curve you still have rate risk but the client is being paid for that risk. For the reasons I outlined earlier I don't think there will be a major drop on these bonds (they will correct a little, but muni buyers should be used to seeing the ups and downs). I am moving from individuals as a diversification play. Local govts are in tough shape and my day is busy enough- I'd rather rely on an experienced manager to make the calls for me on this one....Can you guys elaborate on moving to funds versus individual munis. Also, I don’t follow the concern on short-term munis. I have a lot of cash in short term muni funds right now. That comment concerned me.
Shantom1 your post is well thought out as is Ranks, and both serve as examples of having an opinion and acting on it. Something lacking in many offices across the country. Regardless of how right or wrong those opinions turn out to be is less important than having them. It takes a lot of work to have an informed opinion. Clients with advisors putting in that work are in good hands.
That said, my fixed income business is much simpler than either of theirs. I'm simply looking for the highest income i can get today for the risk taken without regard for the future. I know how crazy that sounds. And how reckless that must seem to the sell it from the chart crowd, but really it's not.
There are two reasons it's not the design for catastrophe one might be led to believe. First is a rule I live by : The future is unknowable. No one knows what will happen. Correct me if i'm wrong but we were supposed to have higher interest rates by now. Well, that is, if you listened to the analyst from a year ago. And, I'm still looking for someone, anyone, who predicted the crash-credit freeze up- near collapse of our economic system in 2008. It's one thing if Joe Lunchbox gets crushed by the bear, it's quite another when it's hedge fund managers, mutual fund managers, and the rest of the pros who are getting run over. No one knew it was coming. I'd still like to find the analysts who predicted the bond market meltdowns of 94 and 98. Or the guys who saw 2001-2003 coming? I can't find them because these people don't exist. Secondly: it takes an opinion based on vast market experience and knowledge to be able to say the future is unknowable. The point being I'm not acting in a void. Just as the sell it from the chart guys have an opinion, so do I, that is, the future is unknowable. Let's take it out of the equation. We can either hedge against all possibilities or not. That's up to the client. It's that simple. And for income buyers it's even easier. Because there is no way to know if the cost of waiting will be less than the cost of acting today what do you think we should do? Buy the income needed today. If rates go up what do we do? OMG! Ah, we just buy more. Or, very worst case- the client holds tight and gets exactly the income they signed up for. What if rates go down? For some we trade and lock profits. For others- we hold tight, get exactly the income signed up for, and admire the good looking statements. Low IQ and very simple! For those who doubt that the future is unknowable I will offer more proof. Right here on this thread two very well informed advisors have divergent opinions on what the future will bring. Both advisors are acting on those opinions. Yet one will be right and one will be wrong. The problem for both and anyone who thinks like them is we don't know which one of them will be right. Why? Repeat after me; because the future is unknowable! Lastly, i disagree on shantom's opinion of Ron Fielding. To fault Fielding for the performance of his fund in a credit lock-up is like faulting an architect for not designing a building that could withstand a 500mph hit from a fuel ladened jetliner. Some things are just outside the design parameters of the buildings we inhabit and the funds we invest in. I commend Fielding for sticking to his prime objective of delivering the highest income possible and not selling out share holders by changing that objective in moving to short term less volatile instruments. As spread market continues to recover, so will the fund. Will it ever recover to its former value? Will XOM ever hit 90 again? I don't know, the future is unknowable.I hear what you are saying about not knowing the future, I’m just trying to plan for it. I do not make wild swings with portfolios. My ideas shift focus not total direction of a portfolio.
I do however fault Ron Felding. I for one have not bought RMUNX or ORNAX for a client since the early 2000's and I have had 0 on my books for the better part of the decade. As you say here is where opinions differ. I fault him for going from #1 to dead last in one year returning the worst one year performance in the history of muni fund performance. You trust a muni manager to make good calls. The fund's objective was to provide a high income "while using our significant experience researching issuers, creditworthiness and security structures in search of good values to provide a high level of income and to minimize the threats of default and principal decline" They failed their own objective. Franklin NY tax free on the other hand was only a tick behing in total return in the 90's and early 2000's, but it held up REALLY well in the last two years....[quote=shantom1]
I do however fault Ron Felding. I for one have not bought RMUNX or ORNAX for a client since the early 2000's and I have had 0 on my books for the better part of the decade. As you say here is where opinions differ. I fault him for going from #1 to dead last in one year returning the worst one year performance in the history of muni fund performance. Our opinions do differ. The markets collapsed. Even the treasury market was in danger of rolling over and slipping under. Nothing was trading, nothing! Tarp got the ball rolling again and bids started to return to the short term high grade markets. However, as you know, the further away you got from triple A and extreme short term the wider the spreads became. Some markets just weren't trading. And still are far from normal. One of those markets was/is the spead muni market. Tell me, how is that Fielding's fault? You trust a muni manager to make good calls. And you trust them to stick with the fund's investment objective. Which they did. Many other fund mangers did not. Fielding, who by the way was not running the fund on a day to day basis when all this took place, is to be commended for sticking to his high income objective. The fund's objective was to provide a high income "while using our significant experience researching issuers, creditworthiness and security structures in search of good values to provide a high level of income and to minimize the threats of default and principal decline" They failed their own objective. Today the non accrual rate (bonds in default or headed there) on the ORNAX fund is lower than it was when Morning Star and Lipper had the fund rated #1. So what failure in defaults are you talking about? As for principal decline , as you said "using our signifcant experience." What experience would that be? There is no experience to cover what happened. What happened was a first. And we're not done yet. Who knows what the future holds. The only losers are those who have sold. And why would they sell? Fear? Bad advice from the total return sell by the chart crowd telling them they need to lock in their losses and take a lot less income?? Shareholders in these funds, in particular the ORNAX fund signed up for high income. Today that fund returns the highest income of any muni fund. Again, what failure? Franklin NY tax free on the other hand was only a tick behing in total return in the 90's and early 2000's, but it held up REALLY well in the last two years.... I note the term total return in your post. Not even close to what Fielding was doing. The ORNAX fund's performance can be directly tied to Fielding's refusal to cave into pressure to shorten up and upgrade the fund's portfolio in the face of total collapse of the fund's primary market place. Few managers would have stuck it out. To me the guy's a hero. he didn't sell out the shareholders. As we agree, our opinions differ. [/quote]SometimesNowhere:
Yes, i see opportunity in California bonds. I rely on our research and the fact that our trading desks are pretty careful. There are issues they won't touch. That's a primary filter. If it's in inventory it passed the first test. From there, i can call our desks and talk to the trading heads or the traders and get more info.What a great thread!
BG, are you selling CA bonds to clients?
Or maybe I should ask it this way…are you avoiding CA bonds? Why or why not?
(Anyone else can answer, I just have a mancrush on BG)
[quote=BondGuy]
Individual bonds come with a maturity date. Regardless of what happens in the market the client gets their money back on that date.
Individual bonds are pure income instruments. No muss no fuss, just income generating machines unencumbered by fees. you get exactly what you sign up for.
Individual bonds are not subject to change. There are no surprise notices that the manager, to accomodate new shareholders, or through some other market blunder, has to cut the dividend.
Individual bonds are not subject to management f*** ups. Ok, the managers guess wrong on that big position and now the fund is down 10% with no way to get that money back.
Individual bonds aren’t sold at the whim of an investment manager who sees his career passing before his eyes. The manager was long, lost money, and now needs to get short, he does so locking the loss and killing the income. This has happened more times than i can count.
Most bond funds are now managed for total return. This is done because most funds are sold as part of a fee driven asset allocation program. Because income generation is a secondary consideration for the fund’s managers income projection for retirement planning is impossible.
UIts charge managment fees for putting together a ready made portfolio of bonds. The fees can negate most of the price advantages, if any, the managers may have received through their buying power or expertise. As well, one must carefully and fully understand all the call features of every bond in the portfolio, the relationship those calls have to the purchase price of the bonds, and that relationship to the current price of the UIT. It’s possible to lose a lot of money through any misunderstanding of those relationships.
All that said, do i use bond funds? Yes, mostly for high yield bonds where it’s safer to buy a fund than an individual bond. Also, for clients lesser amounts to invest and finally where there is a clear price/yield advantage. [/quote]
amen brother.
and…
like everything in our biz…no free lunch
If you look on bond screen for highest yield or you see a bond that “looks really great” …your gonna get fukced.
traders, bond desk, institutions etc hold the cards in this game. We (retail) dont know crap.
we are bottom of food chain.
call features, real terms on bond etc are tricky
(school of hard knocks)
keep it simple and remember what your after. there are trade offs. if you think your tricking someone with a incredible bond…you aint
I’m humble in this game.
(unless your name is bond guy and this is your main gig. you can get the expertise and know the research if thats your deal)
our team manages portfolios and we look at the fix income part as a necessary evil.
we buy govies, safe boring simple munis. keep it between the ditches.
BondGuy, you continue to amaze me with your threads of wisdom. I feel like I’m playing catch-up here.
That being said, I admit I had too much ORNAX on the books, stretching for yield when spreads dictated I shouldn't have, lesson learned. However, I did double down for most of my clients after the disasterous 2008 year, and those clients that listened are nearly made whole. Trust me, when spreads for high yield muni's dip below around 250-280 BP's from AAA's, I'm pulling the trigger and moving up the quality spectrum and shortening my maturities a smidge. (high yield muni's still a great buy in my opinion). I think CA bonds are a great buy. In the BAB's as well. Sick yields on school district, sewer, water, and other GO's. You can't open new accounts with them easily, in fact I only recommend them to seasoned clients that trust me, because too many people have been watching CNBC. ST, I would suggest that the last 2 years has shown us the retail investor has much more clout what you might think. You may not get the best pricing, but there was a period of many months that hedge funds/mutual funds were dumping some of the tastiest muni's at the most rediculous yields I have ever seen. The only thing proping up the muni market at the time was retail, as the ARS were frozen and institutions were dumping bonds as redemptions skyrocketed. As a side note, Bill Gross has been a great manager, but he also is a propegandist. Every other year he is calling Dow 3k or 5k or something similar. I guess scaring money into you fund is another way to garner assets. I suppose to run the largest bond fund in the world you have to be a perma-bear.....[quote=rankstocks]
However, I did double down for most of my clients after the disasterous 2008 year, and those clients that listened are nearly made whole.
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great call. that’s adding value
[quote=mlgone] [quote=BondGuy] [quote=SometimesNowhere]What a great thread!BG, are you selling CA bonds to clients?Or maybe I should ask it this way…are you avoiding CA bonds? Why or why not?(Anyone else can answer, I just have a mancrush on BG)[/quote]
Yes, i see opportunity in California bonds. I rely on our research and the fact that our trading desks are pretty careful. There are issues they won't touch. That's a primary filter. If it's in inventory it passed the first test. From there, i can call our desks and talk to the trading heads or the traders and get more info. [/quote]
If your buying CA bonds.............your buying high yield.......that's a fact. Between you an Dan Fuss........I pick Fuss. I trust his credit work a lot more than I do your desk. I would buy NEZYX anyday over your individual CA bonds. BTW you said you use a fund for high yield....CA is high yield........[/quote] Fuss is a good guy, but his fund- total return. Not where you want to stick someone counting on a monthly check. Ultimately you should trust his credit work a lot more than my desk or anything you read on the internet. You've got to put your faith in people you believe in.
[quote=rankstocks]
I think CA bonds are a great buy. In the BAB's as well. Sick yields on school district, sewer, water, and other GO's. You can't open new accounts with them easily, in fact I only recommend them to seasoned clients that trust me, because too many people have been watching CNBC. ST, I would suggest that the last 2 years has shown us the retail investor has much more clout what you might think. You may not get the best pricing, but there was a period of many months that hedge funds/mutual funds were dumping some of the tastiest muni's at the most rediculous yields I have ever seen. The only thing proping up the muni market at the time was retail, as the ARS were frozen and institutions were dumping bonds as redemptions skyrocketed. [/quote] +1 It was a beautiful thing! As for owning too much ORNAX, that was the case for me in August 2008. And unlike you i didn't double down as much as i should have. Nor did i sell. The yields on the regular everyday munis were just too good to pass up. I look at ORNAX as I would look at any long term muni bought for income. It's paying its dividend (coupon) and we'll just hold it. It was never intended to be a trading vehicle or to fill an allocation space. Income will drive the total return into positive territory and eventually it will become a top holding once again. It's already positive for many of my clients. And that income is whew!!!!!!!![quote=BondGuy][quote=mlgone] [quote=BondGuy] [quote=SometimesNowhere]What a great thread!BG, are you selling CA bonds to clients?Or maybe I should ask it this way…are you avoiding CA bonds? Why or why not?(Anyone else can answer, I just have a mancrush on BG)[/quote]
Yes, i see opportunity in California bonds. I rely on our research and the fact that our trading desks are pretty careful. There are issues they won't touch. That's a primary filter. If it's in inventory it passed the first test. From there, i can call our desks and talk to the trading heads or the traders and get more info. [/quote]
If your buying CA bonds.............your buying high yield.......that's a fact. Between you an Dan Fuss........I pick Fuss. I trust his credit work a lot more than I do your desk. I would buy NEZYX anyday over your individual CA bonds. BTW you said you use a fund for high yield....CA is high yield........[/quote] Fuss is a good guy, but his fund- total return. Not where you want to stick someone counting on a monthly check. Ultimately you should trust his credit work a lot more than my desk or anything you read on the internet. You've got to put your faith in people you believe in. [/quote] Fuss gives you equity-like returns with a little less risk than equities. But the returns are highly correlated with equities, so I would not use it as part of a bond allocation. It's really more of a high-yield equity.
[/quote]
isnt’ that the nature of buying “bonds”? Safety? [/quote]
BondGuy:
Only if purchased as part of an asset allocation program. Bonds can be purchased across the risk spectrum. Most asset allocators look at the FI component as a necessary evil, which someone posted, and just want a smooth ride without problems. Essentially, the bonds are purchased less for what they can add to the return and more for getting money off the equity tracks. In that sense the nature of the bonds purchased is safety. For the dedicated bond buyer it can be anything but safety. It can be high income or high total return or short term trading. For example buying Chrysler bonds in the early nineties for 40 to 70 cents on the dollar, collecting a 12% coupon, which was a 17% to 30% current return, holding five years and collecting par when the bonds matured. Home run, nothing safe about it, but not nearly as reckless as it sounds. The same opportunity presented itself last year in Ford and GMAC bonds. And opportunity still exists. So, if you want to give it a try go for it. Only appropriate for certain types of investors. [/quote] what happened in sept-dec 2008 in fixed income will NEVER happen again.
[/quote]
isnt’ that the nature of buying “bonds”? Safety?
good thread
For the jonesies out there, any ideas on how we can play the floating rate market? Unless things have changed in the last few years, we are unable to buy a pure play floating rate fund.