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Article Archive: Bonds

The calm before the storm
06/29/24   Bonds
"In our view, neither private credit nor direct lending have rewritten the rules of credit risk. We'd argue that what passes for innovation in finance is often just repackaging risk in more convenient and higher-fee wrappers"

Comfort has a cost
03/03/24   Bonds
"In the financial markets, you'll typically pay a high price for certainty. That price is paid in lower investment returns, and sometimes also in greater financial hassles. Yet I see investors paying that price again and again."

Yield is not return
02/16/24   Bonds
"Over the history of our internal bond dataset, returns for bonds rated single B have been 3% behind their yields, and returns for bonds rated CCC have been 7% behind their yields. We suspect that the average result for highly levered private credit deals will fall within that range."

Ask what your credit quality pays
01/28/24   Bonds
"So rather than target a 7% yield, or any other yield, perhaps the right question is: "What's the best I can do in the liquid credit market?" The yield on the BB index is a good approximation. Right now, the BB index yields 6.6%. Meanwhile, the single B index yields 7.8% and the high-yield index yields 7.9%. Those are juicy 7% yields, but they are also less likely to be realized."

Today's yield curve steepening
11/26/23   Bonds
"However, today's steepening results from the opposite conditions. 10yUST yields are rising relative to 3mUSTs'. While the investment spread first appears to be increasing (positive), the impact on existing investments can be detrimental. Falling bond prices (produced by higher yields) could affect other assets and lower their returns. As a result, carry trade profits can compress leading to a reduction in borrowing capacity, unwinding of leverage, forced selling of assets, and lower prices. In this framework, rising interest rates can destabilize financial markets, creating less favorable investment conditions."

Consider a bond allocation
11/12/23   Bonds
"Looking ahead, we believe investors should consider the value longer-duration bonds may offer in a future environment marked by federal funds rate cuts beyond what the market has currently priced in. While cash offers limited upside, as previous results indicate, the Aggregate Index could generate an intermediate-term total return in excess of today's yield."

Where are all the defaults
10/19/23   Bonds
"Even if we recast the historical high-yield spread as if today's rating distribution were true throughout the spread's history, it does not change the historical behavior of the high-yield spread much."

The worst bond bear
10/13/23   Bonds
"the crash in long-term bonds is now roughly the same magnitude as the crashes in the stock market during the dot-com bust and the Great Financial Crisis"

If you're not confused, you're not paying attention
10/07/23   Bonds
"bond markets act as if they think inflation can be extrapolated. Long-term interest rates tend to be high when the last decade's inflation was high. US long-term bond yields, such as the ten-year Treasury yield, are highly positively correlated (70% since 1913) with the previous ten years' inflation. But the correlation between the Treasury yield and the inflation rate over the next ten years is only 28%."

Long and short of it
09/24/23   Bonds
"I would lean heavily on short-term bonds. Since interest rates are unpredictable, I see that as the best route to preserving value."

Two per cent real yields
09/24/23   Bonds
"The good news for investors is that the highest yields in ~15 years, either real or nominal, can be locked in with a buy-and-hold strategy. No one knows if current rates are at or near a peak, but this much is clear: the case for a relatively higher allocation to Treasuries vs. recent history hasn.t looked this compelling since George W. Bush was walking the floor in the Oval Office."

The smart debt money
07/09/23   Bonds
"Single B credit has lower returns than BB credit. Our long-standing opinion is that the incremental yield available from lower-rated credit is erased by higher default and down-grade losses. Perhaps the greatest innovation of private credit is that it is not rated. We suspect that if we could get aggregate credit stats for private credit, investors would be concerned by what they found."

Mortgage rate update
04/08/23   Bonds
"With the ten-year yield at 3.3%, and based on an historical relationship, 30-year rates would currently be around 5.0%. So, mortgage rates are higher than expected based on the ten-year yield"

Trading a 2s10s inversion
01/08/23   Bonds
"We have discussed why the yield curve inversion is important to investors while showing that such an event, despite not offering an immediate boon for bond investors, does support both intermediate and long-term forward return outperformance. Further, we have also demonstrated that bond price returns following the peak of a yield curve inversion tend to produce above average forward-looking returns across all time horizons."

Farewell, TINA
10/02/22   Bonds
"but for the first time in several years, bonds are attractive investment options. In addition to providing diversification versus equities, and some ballast to an allocation, you now get paid for owning them."

Losing with bonds
10/01/22   Bonds
"bonds generated a negative return in the 40 years from 1940 to 1980, which includes various market and economic cycles, including World Word II. Holdings bonds in that period would have consistently reduced the purchasing power of such a portfolio, leaving investors poorer."

Mayday from bonds
05/08/22   Bonds
"Year-to-date, long maturity Treasuries have declined in price by almost 20%. Because of their high interest rate duration, long maturity Treasuries have underperformed both investment grade bonds and high yield bonds."

Fed's plan to raise interest rates is wrong
03/21/22   Bonds
"The central principle of anti-inflationary monetary policy is that to reduce inflation it is necessary to raise real rates. Equivalently, it is necessary to raise interest rates by more than the inflation being counteracted and above a neutral level that neither speeds nor slows growth."

AAA for Apple
01/30/22   Bonds
"The triple-A rating typically bestows the lowest borrowing rates and suggests the highest ability to repay bondholders. But the triple-A club has been shrinking over the past four decades. Apple recently became only the third current corporate member of this exclusive club."

How to worry about duration
01/30/22   Bonds
"Rising rates translated to negative returns across the interest rate curve, with bond returns at longer maturities suffering more."

Economists bad at forecasting
10/30/21   Bonds
"I was looking at survey based forecast errors for short term interest rates, when I generated this graph. It's certainly a humbling picture."

Evaluating credit risk
08/29/21   Bonds
"I turned to my favorite measure of credit risk to try to answer this: (Long-term Debt + Short-term Debt) / Market Capitalization. Unless a company is in a very stable industry, I like that figure to be under one."

A pragmatic approach to Treasurys
07/04/21   Bonds
"But you should be a Treasury pragmatist. They serve a valuable role in the portfolio, especially in an active portfolio that increases or reduces risk based on the economic cycle. There is no other asset that we can think of that provides portfolio insurance and pays a positive coupon. If I tried to sell you an asset that was likely to trade up during recessions and yet pay you to own it, you'd be trying to figure out how the con worked. But that is how Treasurys act."

A dark age for bonds
05/23/21   Bonds
"There have been many periods in which real yields have been significantly higher or lower than the historical median. This includes times during which real yields have been negative (16% of the time) and other times when real yield have been above 4% (17% of the time)."

Ain't so bad
03/21/21   Bonds
"The 20-year treasury went from a low of 0.87% in March to 2.3% today. This is good for people buying today, relatively speaking, and horrible for people who bought in March. If rates stay where they are, it will take nearly 6 years to get back to break even."

Beyond yield
12/05/20   Bonds
"Credit ratings are to fixed income what valuation multiples are to equities. Most credit analysts focus on yield and duration while most equity analysts focus on growth and discount rates, but in our view, the true drivers of return are changes in rating for bonds and changes in multiple for equities."

Game over
10/11/20   Bonds
"I'd stop thinking of bonds as a source of yield or as a diversifier for stocks. Instead, think of them as way to generate cash if the stock market is in the toilet."

Financial leverage risk
10/03/20   Bonds
"The leverage of US stocks has been increasing over the last four decades. The most leveraged stocks did not generate higher returns than the least leverages ones. However, they were also not riskier."

Stealthy government debt liquidation
10/03/20   Bonds
"Debt is not necessarily a bad thing: it might help governments smooth consumption, finance projects that require lumpy initial cash outflows, or help supplement demand gaps during recessions/depressions, etc. However, overwhelming debt is an issue because you can run into financial distress and bankruptcy predicaments. Governments eventually realize they are going bankrupt and devise schemes and methods to liquidate the government debt."

Government bonds are duds
09/11/20   Bonds
"But while the income side of the equation for bonds was clearly not what it once was, until very recently we have continued to assume that bonds could accomplish their other important task, providing capital gains in the event of an economic disaster. This winter, U.S. Treasuries once again did their hedging job admirably, providing substantial positive returns when riskier assets fell in the early stages of the Covid-19 crisis. But that success has come at a cost. At today's yields, U.S. Treasuries not only fail to provide a useful amount of yield to investors but also have likely lost their ability to hedge in the event of further economic trouble."

Moar Income
08/16/20   Bonds
"You basically need to step out on the risk curve and start taking some stock market like risk or longer duration bond risk if you want some income. The worst part is, if inflation ticks higher the Fed has made it clear they won't raise rates any time soon. So you could get a form of yield curve control here where inflation is rising, demand for government debt is declining and the Fed insists on keeping rates low. Navigating the future of the bond market has probably never been harder than it is today."

Surge in defaults
07/26/20   Bonds
"More than half of companies that defaulted in the second quarter are owned by private equity firms, Moody's said in a report this week."

The twilight of bonds
06/26/20   Bonds
"But with low, nil, or negative yields, how much can bonds still contribute to a portfolio? Has the QE Kryptonite permanently disabled their superhero powers?"

The Bond Offer You Can Refuse
04/12/20   Bonds
"People say that cash has an opportunity cost. But that opportunity cost is a function of what comparable investments can earn. Rarely has cash (without rate risk) had this low of an opportunity cost compared to Treasury bonds (with rate risk)."

Federal Reserve cuts rates on Sunday
03/15/20   Bonds
"The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent."

Investors are hooked
02/01/20   Bonds
"If high-yield bonds were the OxyContin of private equity's debt binge, private credit is its fentanyl."

Bonds, bubbles, and biases
01/24/20   Bonds
"The single best predictor of future bond returns is their starting yield. The lower the starting yield, the lower the future returns."

Beating the index in bonds
09/10/19   Bonds
"Why do investment-grade bond managers seem to consistently beat the index, and why do high-yield managers so consistently fail? And what lessons should investors take away from this data about how to win in bonds?"

Bonds are expensive
09/06/19   Bonds
"Furthermore, the U.S. bond yield might be record low on our combo value/carry metric, but it's still high versus some major parts of the world attempting to discover how negative a government guaranteed bond can yield before savers build private fortresses to store cash."

LBOs go bankrupt more often
08/12/19   Bonds
"Healthy companies acquired by private equity firms through leveraged buyouts see their probability of defaulting on loans increase ten-fold, new research shows."

Sovereign bonds since Waterloo
02/12/19   Bonds
"This paper studies external sovereign bonds as an asset class. We compile a new database of 220,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle of Waterloo) and 2016, covering 91 countries. Our main insight is that, as in equity markets, the returns on external sovereign bonds have been sufficiently high to compensate for risk. Real ex-post returns averaged 7% annually across two centuries, including default episodes, major wars, and global crises. This represents an excess return of around 4% above US or UK government bonds, which is comparable to stocks and outperforms corporate bonds. The observed returns are hard to reconcile with canonical theoretical models and with the degree of credit risk in this market, as measured by historical default and recovery rates. Based on our archive of more than 300 sovereign debt restructurings since 1815, we show that full repudiation is rare; the median haircut is below 50%."

A bad bond idea
01/22/19   Bonds
"The Agenda assesses the value of social impact bonds - a tool used by some governments to raise private capital to pay for social services." [video]

Canada's most boring investment ever
05/14/18   Bonds
"Enter the good old GIC. Not only does the Canada Deposit Insurance Corporation (CDIC) insure GICs within specified limits, many GICs have yields that rival those of your favourite bond ETFs, with a much lower average maturity. In fact, a 1.5 year GIC ladder at RBC Direct Investing currently boasts an identical average yield of 2.34%, with an average maturity of just 3 years"

A 367-year-old water bond
07/09/17   Bonds
"A 1648 Dutch water bond housed at Yale's Beinecke Rare Book & Manuscript Library is unique among the tens of thousands of manuscripts that reside there. While most of the Beinecke's archival holdings are by their nature dead - their original purpose being fulfilled - the water bond lives on. It still pays annual interest more than 367 years after it was issued."

High yield becomes low yield
06/04/17   Bonds
"Fast forward to today and we have reached the opposite extreme, with European junk bonds at an all-time low yield of 2.67%."

Be wary of junk bonds
01/15/17   Bonds
"Junk bonds have defaulted historically at an average rate of 4.2% a year, according to data from Standard & Poor's. That is more than the current spread, meaning the extra yield investors hope to capture by owning junk could easily evaporate. Investors tend to forget this, especially during periods of low defaults. Defaults don't always wipe out investors - typically they will recover 40% (of the par value of the bond) from a default. Still, when one accounts for both defaults and recoveries, the loss rate on junk bonds has averaged about 2.5% a year."

What 2 years of negative rates tell us
08/21/16   Bonds
"It hasn't worked very well. As many experts predicted at the time, the policy has had only a modest impact on growth. It is also increasingly clear that pushing rates down further wouldn't help much and could, in fact, increase risks to the global financial system."

Do the hard thing
07/24/16   Bonds
"The reach for yield is becoming a reckless lunge. While high-quality bonds still have their place, too many investors are buying high-risk bonds instead."

Bonds aren't wretched
07/17/16   Bonds
"Why do so many bond investors feel nostalgic for the days when yields were negative (after inflation)?"

Bond challenge
04/30/16   Bonds
"The challenges of investing in a negative interest rate world. Guggenheim Partners Scott Minerd discusses strategy for his firm and its top-rated bond funds." [video]

The wrong kind of savings
04/24/16   Bonds
"Negative interest rates are surely a sign that something is wrong with an economy. Normally, people have to be rewarded if they are to be induced to postpone consumption. Penalising them for doing so seems perverse."

Bond returns imperilled
03/19/16   Bonds
"As bond yields have relentlessly fallen towards - and even beyond - zero over the past few years, investor returns are very vulnerable to small movements in prices and yields."

Bizarro world of negative interest
03/06/16   Bonds
"Negative interest is hard to even think about. Our whole financial system is built the other way, on positive interest rates. This is mind-boggling."

Yield in a low yield world
02/14/16   Bonds
"Much like value investing in stocks, one can apply a value methodology to global bonds."

Ignore the Fed
07/30/15   Bonds
"Instead of hanging on every Fed utterance, let me suggest you take a different approach. Take one phrase from the Fed as your mantra: data-dependent."

Crisis in Illinois
05/27/15   Bonds
"Illinois has one of the worst-funded pension systems in the nation. Chicago also has a pension crisis, leading Moody's Investors Service to downgrade its credit rating to junk status on May 12, potentially threatening the city's ability to borrow. And the state faces an expected budget deficit of $6 billion, which it needs to address quickly. With just days before a legislative deadline, the new Republican governor, who ran on cutting costs and holding down taxes, is at odds with Democrats who hold a veto-proof supermajority in the legislature."

Nestle is getting paid to borrow money
02/14/15   Bonds
"Once upon a time, you actually had to pay lenders to borrow money. It was an archaic ritual called 'interest'"

High yield market is out of control
01/20/13   Bonds
"I find it interesting: Many many people realize the market is heavily overvalued in terms of compensation of return versus risk, but they still are buying."

Howard Marks on Bonds
01/12/13   Bonds
"These are unhappy times for bond investors according to Howard Marks."

Garbage for brains?
11/17/12   Bonds
"Corporate bonds, still carrying all the idiosyncratic risks of single companies, are priced as if they were safer than Treasurys."

Last refuge of scoundrels
11/03/12   Bonds
"Governments involved in financial repression (keeping savings rates below the inflation rate) encourage their citizens to do stupid things by reaching for yield. Remember, most people think of yield as a magic chicken that lays eggs on schedule, and never gets sick or dies. Those who truly understand markets know that yield is an allocation of free cash flow, and that many businesses can.t control their free cash flow, so dividends are less than fully certain."

One for the ages
11/03/12   Bonds
"The next bankruptcy cycle, whether in 2 or 3 or 4 years, is going to be one for the ages."

All time low yields
09/11/12   Bonds
"According to both the Barclays high-yield index and the CS HY index, yields in high yield have reached an all time low of 6.6%. Further, over the last few weeks, traders and syndicate desks have been whispering of a simply gargantuan amount of high yield and leveraged loans coming this month. Certain desks have been advocating a move to CCC assets as they still yield approximately 100 bps over their all time low seen on...wait for it...May 2007."

We live in remarkable times
09/08/12   Bonds
"As Deutsche Bank points out in its long-term asset return study, the longest series of bond yield data is for the Netherlands dating back all the way to 1517. In June, those yields reached a record low. Not just any old record, then, but a 500-year nadir. In America, yields go back only to 1790 but they too have been at all-time lows. The Bank of England was founded in 1694 but never felt the need to push base rates down so low; not in two world wars or a Great Depression. Nor did the Bank ever feel the need to expand its balance sheet to such a great extent (although Deutsche only has data back to 1830); currently it is around 25% of GDP."

The allure of long-term treasuries
06/18/12   Bonds
"Financial advisers continue to profess that US treasuries should be a large part of a balanced portfolio. With the 10-year treasury yielding around 1.6%, the advice is hardly based on return expectations. It is also not due to expectations of mark to market gains. The up-side case in being long the 10-year treasury would be if the rate were to drop to the level of Japan's - just over half (a fairly unlikely outcome). The mark to market gain would be 7.5%. The downside case on the other hand would be if the 10-year yield rose to what it was just a year ago (or higher) - say around 3%. The mark to market loss would be around 11.5%. So the instrument effectively has an asymmetric payout profile and terrible current yield. What gives?"

Cutting back on bonds
04/28/12   Bonds
"The strongest consensus I could find relates to interest rates. There are few managers who aren't running light on bonds and/or keeping their maturities short (including holding cash) to protect against rising rates. Carl Hoyt at Seymour Investment Management used Warren Buffett's words to make the point. "Current rates ... do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.""

The constancy of safe asset demand
01/23/12   Bonds
"The findings are preliminary, but the authors calculate that the safe asset share - the percentage of safe assets to total assets in the US economy - has been roughly the same since 1952, at about 33 per cent."

The rally that wouldn't die
01/17/12   Bonds
"Last year's surge came in the 30th year of a historic rally. Since 1981, long-term Treasury bonds have returned 11.03% annually, 0.05 percentage point better than the Standard and Poor's 500-stock index."

What zero bound?
01/13/12   Bonds
"Negative interest rates are a big puzzle. Easy stories miss the point: 'flight to quality,' 'need for collateral,' etc. Those stories don't explain why bonds are worth more than money."

No money for sauerkraut
11/23/11   Bonds
"Germany failed to get bids for 35 percent of the 10-year bonds offered for sale today, propelling borrowing costs in Europe higher and the euro lower on concern the region's debt crisis is driving away investors."

The difference between AAA and AA+
08/08/11   Bonds
"We simply don't have enough AAA and AA rated data to be statistically confident in these distinctions ex ante, which is why AA+ and AAA rated securities differ very little in their yields, usually by only 10 basis points (0.1%) on average. Here's the data from Moody's, that excludes Munis and ABS"

S&P cuts U.S. rating
08/06/11   Bonds
"The U.S. had its AAA credit rating downgraded for the first time by Standard and Poor's, which slammed the nation's political process and said lawmakers failed to cut spending enough to reduce record deficits."

Negative nominal interest rates
08/04/11   Bonds
"Bank of New York Mellon Corp. on Thursday took the extraordinary step of telling large clients it will charge them to hold cash."

AAA rating is a rarity
08/03/11   Bonds
"But the truth is, even as the government maintained its AAA grade, the markets suggested long ago that the United States was no longer deserving of such a high rating. The credit-default swap market provided one clue. During the financial crisis in early 2009, the price of insurance that would pay off if the United States government defaulted on its debt was similar to that offered for companies ranked just above junk. Even today, the price of insurance on a government default has been higher than that for Colgate Palmolive, the global toothpaste giant, which has a rating two notches below AAA."

The AAA bubble
07/16/11   Bonds
"The AAA bubble re-inflates and suddenly sovereign debt becomes the major force driving the world's triple-A supply. The turmoil of 2008 shunted some investors from ABS into safer sovereign debt, it's true. But you also had a plethora of incoming bank regulation to purposefully herd investors towards holding more government bonds, plus a glut of central bank liquidity facilities accepting government IOUs as collateral. Where ABS dissipated, sovereign debt stood in to fill the gap. And more. It's one reason why the sovereign crisis is well and truly painful."

Only millionaires should invest in bonds
07/06/11   Bonds
"A Bond ETF will have a management expense ratio of 25-35bp. The bid-offer spread on seven year bonds purchased in amount of $5,000 will almost certainly exceed this. Additionally, there will be costs associated with further trading, unless you spend amounts exactly equal to your coupon income."

Inevitability of a Default in Greece
05/06/11   Bonds
"Sooner or later there will be a Greek default, even if it is officially described as a "voluntary restructuring" approved by most bondholders. Europe wants to delay that at least until 2013, when new rules are supposed to kick in that would let official creditors - such as Europe's bailout fund - do better in a deal than private creditors. But it seems less and less likely that the inevitable can be delayed that long."

Negative Outlook on U.S. AAA Rating
04/18/11   Bonds
"Standard and Poor's put a "negative" outlook on the U.S. AAA credit rating, citing rising budget deficits and debt."

Trouble Lurks in Junk Bonds
03/21/11   Bonds
"Risky bonds have been on a tear since 2009. But as the events in Japan and elsewhere fuel demand for safer assets, investors would be wise to exercise caution."

The Bond Bubble
10/03/10   Bonds
"If anybody is to blame for a bond bubble, it isn't Joe Schmo it's Uncle Sam, with some help from overseas.'The Fed has effectively been taxing money-market funds by cutting short-term interest rates to recapitalize the financial system and to make things easier on borrowers,' says Dan Dektar, chief investment officer at Smith Breeden Associates."

The muni-bond debt bomb
07/26/10   Bonds
"Like homeowners before the housing bubble burst, states and cities have gorged on debt, extended repayment times, and used devious means to avoid limits on borrowing - all in order to finance risky projects and kick fiscal problems down the road. Though the country's economic troubles have helped expose some of these unwise practices, the downturn has brought not reform but yet more abuse. Even as Tea Party protesters and taxpayer groups revolt against excessive government spending and taxes, they are paying too little attention to the gigantic state and local debt bomb. If it can't be defused, we're all at risk."

Bond default
07/21/10   Bonds
"When Arkansas defaulted on its bonds in 1933, the politicians and investors talked about the same things we would talk about today. The state blamed underwriters for allowing it to sell too many bonds. Investors compared the willingness to repay debt with the ability to pay, and weighed the advantages of bonds backed by a pledge of taxing powers to those secured by specific revenue. Unlike today, nobody thought the federal government should come to the rescue."

The bond return puzzle
05/11/10   Bonds
"High Yield bonds highlight the most fundamental problem in finance: that risk is not positively related to expected returns, and this fact is not empirically obvious. This strikes at the heart of finance, because 'risk' is a rationalization for many things, but after 50 years, remains like dark matter, a convenient assumption for an empirical 'anomaly'."

Obama pays more than Buffett
03/22/10   Bonds
"Berkshire Hathaway's 1.4 percent notes due February 2012 yielded 0.89 percent on March 18, 3.5 basis points, or 0.035 percentage point, less than Treasuries, composite prices compiled by Bloomberg show. The Omaha, Nebraska-based company, which is rated Aa2 by Moody's and AA+ by S&P, has about $157 billion of cash and equivalents and about $52 billion of debt. P&G, the world's largest consumer-products maker, saw the yield on its 1.375 percent notes due August 2012 fall to 1.12 percent on March 18, 6 basis points below government debt. The Cincinnati-based company, rated Aa3 by Moody's and AA- by S&P, makes everything from Tide detergent to Swiffer dusters."

Bondholders extract revenge
11/06/09   Bonds
"Companies in dire straits often roll the dice in a bid to stave off bankruptcy. The problem is that last-ditch efforts to raise new funds or restructure often come at the expense of bondholders."

Yield hogs out-stampede stock bulls
10/16/09   Bonds
"In 1993, there was a headlong rush into bond funds as investors fled what then was unimaginably low money-market rates of 3%. In 1994, they learned an expensive lesson in bond-market math: when yields go up, prices go down. When the Federal Reserve hiked short-term rates that year, there was a frightful bear market, which featured the first rout in exotic mortgage-backed securities."

Arithmetic returns for junk biased
09/03/09   Bonds
"junk bonds have not outperformed investment grade bonds since data on junk bonds really became available, around 1987. This is the real corporate bond puzzle, in direct contrast to the corporate bond puzzle most acaddemics address, which is the anomalously high return premium between BBB and AAA bonds (around 100 basis points annually)."

Don't count on TIPS
06/17/09   Bonds
"TIPS protect you from inflation with one hand, but they punish you with interest-rate hikes with the other."

Swensen recommends TIPS
05/25/09   Bonds
"David Swensen, the top-ranked college endowment manager in the past decade, said individual investors should own inflation-protected Treasuries because U.S. economic recovery efforts may lead to an increase in consumer prices."

A great year in just five months
05/25/09   Bonds
"The market for risky high-yield, or junk, bonds has gone from ridiculously cheap to just cheap with remarkable speed. The Merrill Lynch U.S. High Yield Master II index has narrowed from a wide yield margin of 2,100-plus basis points over Treasuries with comparable maturities in February to 1,232 basis points through Thursday. Back in June 2007, the yield margin was a mere 241 basis points. (A basis point is one-hundredth of a percentage point.)"

Zombie loans give life
05/11/09   Bonds
"Citigroup Inc. and Bank of America Corp. are also amending revolving loans to zombie borrowers on the brink of default and others with debt ratings that are among the worst. Lenders are betting the economy will improve enough to keep companies from adding to the $1.4 trillion of writedowns and losses by the world's largest financial institutions since the start of 2007."

GM bondholder says offer isn't reasonable
04/27/09   Bonds
"General Motors Corp. bondholders find the automaker.s offer to exchange their $27 billion in debt for equity unreasonable and said they should be treated more equitably with labor unions."

The rise of the "empty creditor"
04/22/09   Bonds
"One key economic assumption is that people act to preserve their economic interests. Those who have lent money to troubled companies, for example, generally prefer the company remain solvent; otherwise, they can't get paid back. Similarly, lenders to troubled firms frequently favor swift, out-of-court restructuring deals, in which they swap debt for stock, instead of pushing companies into Chapter 11 bankruptcy. That's because companies in Chapter 11 can languish there for years and waste scarce company assets on huge fees to lawyers, consultants, and accountants. But if a lender or creditor believes it can profit more from a complete failure.i.e., if it has an insurance policy that pays off only in the event of utter devastation - that creditor might be more inclined to push a company toward bankruptcy."

Move over, subprime
02/07/09   Bonds
"Rotten as Alt-A loans are, worse may be to come. As unemployment in America heads towards 8%, even strongly underwritten loans will go bad. Bankers are growing increasingly anxious about the $1.1 trillion of prime mortgage loans and securities, much of which they held on to themselves, assuming it to be bombproof."

Worldwide Weimar
02/01/09   Bonds
"Imagine a country so ravaged by inflation that $1 will buy you 630 billion in the local currency, where a loaf of bread costs tens of billions, and where wheelbarrows are the new wallets. That was the Weimar Republic in November 1923. A similar prospect may now await the world economy, says French economist Jacques Attali in 'La Crise, et Apres?' ('The Crisis, and Then?'), a stinging new critique of the financial meltdown."

Cost of borrowing zooms up
01/19/09   Bonds
"Like consumers and homeowners, America.s corporations binged on easy credit when times were flush, racking up huge debts. Now the bills are due, and paying them back will not be easy, or cheap."

BOE cuts rate to lowest since 1694
01/08/09   Bonds
"The Bank of England cut the benchmark interest rate to the lowest since the central bank was founded in 1694 as policy makers tried to prevent the credit squeeze from deepening Britain.s recession. The bank rate was reduced a half-point to 1.5 percent, bringing policy makers closer to the point at which they will run out of options to fight the financial crisis with conventional tools. The pound rose against the euro and the dollar because some investors had bet on a larger reduction."

Yielding to none
01/08/09   Bonds
"In the medium term, a sharp rise in inflation is a distinct possibility. Government bonds may be offering 'return-free risk', in the neat phrase of Jim Grant"

Muni-bond funds face record losses
12/13/08   Bonds
"With the stock market down more than 40% and Treasury bond yields at 50-year lows, municipal bonds can seem an attractive option. And while some managers see once-in-a-lifetime bargains in the muni market, several funds have cratered."

The case for bonds
12/13/08   Bonds
"Boring is beautiful - or so it feels in this time of wild and crazy stock market swings. In this case we're talking about investment-grade corporate bonds, which are dirt-cheap right now for the same reason that stocks are: The market turmoil has pounded down their prices. The result is historic opportunities in bonds issued by blue-chip companies."

Want to lend money to Uncle Sam?
12/09/08   Bonds
"What would your reaction be if you had a friend who had reached the limit on 20 different credit cards and then came to you to borrow $100? Then imagine that you actually said yes, and when you went to give your friend the $100, he or she actually asked for $101 just for the privilege of loaning the money. Well, that is exactly what is happening (to a lesser degree) in the US T-bill market. As just another example of the crazy times we are living in, the yield on 3-Month Treasuries went negative today."

High yield credit spreads out of control
12/04/08   Bonds
"With the 10-Year Treasury currently yielding about 2.65%, high-yield borrowers currently have to pay nearly 23% per year to borrow money for a ten-year period. It's going to take pretty high margins to maintain profitability in this kind of environment."

The Treasury once again can borrow for free
11/21/08   Bonds
"Ok, the Treasury can not borrow for free. Three month Treasury bills, according to Bloomberg, yield something like 2 basis points."

Treasury yields drop to record lows
11/20/08   Bonds
"Treasury yields declined to record lows, with two-year notes dropping below 1 percent for the first time, as global stocks slumped and a deepening recession drove investors to the safest assets. Yields on two- and five-year notes and 30-year bonds dropped to the least since the Treasury began regular issuance of the securities. Ten-year note yields touched the lowest since 2003 after yesterday's release of the minutes of last month's Federal Reserve meeting showed policy makers expect the economy to contract through the middle of 2009 and more interest-rate cuts may be needed to counter deflation."

The new order
11/20/08   Bonds
"That marginal buyer is gone, and isn't likely to come back any time in the foreseeable future. Admittedly, it isn't as though leverage is being pushed to zero in the fixed income markets, but haircuts (i.e., the amount of margin that must be posted) are now such that levered buyers cannot force efficiency. Take something simple like Fannie Mae 5-year bullet bonds. Should have a very small spread versus Treasuries given the government backing of the GSEs, but instead the spread is currently around 1.45%. It seems like an arbitrage. But in order for an actual arbitrager to realize a decent IRR on the trade, it probably needs to be leveraged 20x or so. Now maybe one can actually get that amount of leverage versus Agency collateral, but what happens if the trade initially goes against you? The potential margin calls would kill you. Its a difficult arbitrage to actually realize."

Junk-bond yields bode ill for stocks
10/22/08   Bonds
"Unsurprisingly, yields in the corporate bond market have recently risen to nine-year highs and high yield, or junk bonds, are trading at record levels as well. Usually junk bonds yield 4.5 to 5 percentage points more than the 10-year Treasury, but now that spread is about 14 points."

Is junk a bargain?
10/06/08   Bonds
"The recent selloff has shocked junk investors, who had grown used to monthly returns in a range of negative 1% to positive 2%. Based on some statistical measures, September's 8% drop should have occurred only once in 27,777 years, according to Leverage World, a weekly publication of Garman Research."

Corporate bonds worse than equities
09/29/08   Bonds
"Even though equity markets are down nearly 7% today, the corporate bond market is even worse. Below we highlight a price chart of an ETF that tracks an index of investment grade corporate bonds (LQD). As shown, the ETF is down nearly 10% today!"

Lehman's '100% principal protection' means pennies
09/29/08   Bonds
"A brochure pitching $1.84 million of notes sold by Lehman Brothers Holdings Inc. in August, a month before the firm filed for bankruptcy, promised '100 percent principal protection.' Buyers had 'uncapped appreciation potential' pegged to gains in the Standard & Poor's 500 Index, the brochure said. In the worst case, they would get back their $1,000-per-note investment in three years. Only the last in a list of 15 risk factors mentioned the biggest danger: 'An investment in the notes will be subject to the credit risk of Lehman Brothers.' Lehman's Sept. 15 bankruptcy leaves holders of the notes waiting in line with other unsecured creditors for what's left of their money."

Bye bye AAA
04/07/08   Bonds
"The six remaining borrowers with the highest rating from both S&P and Moody's are: Automatic Data Processing Inc., Berkshire Hathaway Inc., Exxon Mobil Corp., General Electric Co., Johnson & Johnson and Toyota Motor Corp., according to data compiled by Bloomberg."

Student lenders stifled
04/04/08   Bonds
"The collapse of the $330 billion auction-rate securities market has brought debt sales by U.S. public student-loan agencies to a halt. No municipal bonds backed by student loans were sold in the first quarter, the first time that happened in almost 40 years, according to Thomson Financial. The inability to obtain financing differs from states, cities, schools and hospitals, which sold $82 billion of bonds to fund public works and replace failed auction debt that stuck them with penalty rates as high as 20 percent."

Moody's, S&P defer cuts on AAA subprime
03/11/08   Bonds
"Even after downgrading almost 10,000 subprime-mortgage bonds, Standard & Poor's and Moody's Investors Service haven't cut the ones that matter most: AAA securities that are the mainstays of bank and insurance company investments. None of the 80 AAA securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February, according to data compiled by Bloomberg."

Foreclosures hit a snag for lenders
11/15/07   Bonds
"A federal judge in Ohio has ruled against a longstanding foreclosure practice, potentially creating an obstacle for lenders trying to reclaim properties from troubled borrowers and raising questions about the legal standing of investors in mortgage securities pools."

ABCP hits main street
11/07/07   Bonds
"The turmoil in asset-backed commercial paper knocked Bay Street on its ear in August and now, three months later, it has re-emerged on Main Street as pensioners and individual investors start to feel the pain. Because of holdings of illiquid ABCP, the pension fund for employees of the University of Western Ontario has restricted redemptions on some of its funds while the pension fund for 35,000 current and former employees of co-ops and credit unions may be forced to take similar steps."

Junk mortgages under the microscope
10/18/07   Bonds
"It's getting hard to wrap your brain around subprime mortgages, Wall Street's fancy name for junk home loans. There's so much subprime stuff floating around - more than $1.5 trillion of loans, maybe $200 billion of losses, thousands of families facing foreclosure, umpteen politicians yapping - that it's like the federal budget: It's just too big to be understandable. So let's reduce this macro story to human scale. Meet GSAMP Trust 2006-S3, a $494 million drop in the junk-mortgage bucket, part of the more than half-a-trillion dollars of mortgage-backed securities issued last year. We found this issue by asking mortgage mavens to pick the worst deal they knew of that had been floated by a top-tier firm - and this one's pretty bad."

Profiting from mortality
07/24/07   Bonds
"Death bonds may be the most macabre investment scheme ever devised by Wall Street"

Bear's big loss arouses SEC interest
06/25/07   Bonds
"Bear Stearns told investors May 15 that the Enhanced Leveraged fund - which raised $642 million last summer - had lost 6.5% in April. But three weeks after that estimate, the investment firm shocked investors on June 7, telling them that the fund's actual April loss was 18.97%, or 23% for the year"

Bear Stearns' hunt for big cash
06/14/07   Bonds
"The rise in mortgage defaults - particularly in the subprime market - ultimately will impair the value of many bonds that are backed by those risky home loans. But up until now, most bondholders have not have had to readjust their valuations for those mortgage-backed securities. Bond investors are not required to reduce the value of a bond unless it's either downgraded by a credit rating agency or sold for a reduced price in the secondary market. But traders are speculating that the big bond sale by Bear Stearns may set the stage for a second sale, this one involving a batch of poor performing mortgage bonds. If that were to occur, other hedge fund managers might be forced to mark down the value of some of their mortgage-related investments. That's clearly something bond bears are rooting for."

Why subprime lenders are in trouble
03/02/07   Bonds
"As the subprime mortgage market goes into steep decline, threatening to drag the whole economy along with it, many people are wondering what could have gone so wrong so quickly. Until recently, after all, delinquency and foreclosure rates on subprime loans were reassuringly low. The answer may lie in how the quality of these mortgages has changed over the years. While subprime is the term used for loans issued to people with poor credit, not all subprime loans are created equal. And the subprime loans that were originated in 2006 that are turning out to be shockingly weak."

Debt-market bomb could hurt us all
02/23/07   Bonds
"The greatest economic threat today isn't deflation in the housing market. A bigger worry is that a meltdown in the debt markets could force the global economy into a credit squeeze and recession."

Repo men
11/04/06   Bonds
"Mr Clouse said there could now be a "strong sense of history repeating itself" - a reference to the scandal at Salomon Brothers in the early 1990s, in which the investment bank was caught dodging rules on treasury auctions in order to gain control over certain issues."

Death of the bond salesmen
10/25/06   Bonds
"Mr. Levitt said the corporate bond market used to work like an "Oriental bazaar." "Transparency was at the core of all of its problems," he said. "Our intent was to make the market fairer. The result was that it was also less expensive." Now that fixed-income prices are available on NASD's website, bond salesmen have lost their advantage. "You're lifting the veil of ignorance," said Peter Campfield, head of taxable fixed-income trading at San Francisco-based Charles Schwab Corp., which trades an average of 500 corporate bonds a day. "Pre-Trace? It wasn't pretty. Price discovery was a challenge. You had to hunt and peck and dial numerous dealers to ascertain what a real market looked like.""

Yield curve inversion
12/28/05   Bonds
"As shown in the chart below, each of the past six recessions (shaded areas) was preceded by an inversion in the spread between the Treasury 10-year yield and the fed funds rate. But there were two other instances of inversion - 1966:Q2 through 1967:1 and 1998:Q3 through 1998:Q4 - immediately after which no recession occurred. It would appear, then, that an inverted yield curve is more of a necessary condition for a recession to occur, but not a sufficient condition. That is, if the spread goes from +25 basis points and to -25 basis points, a recession is not automatically triggered. Rather, whether an inversion results in a recession would seem to depend on the magnitude of the inversion and, to a lesser extent, the duration of it. Recession-signaling aside, the yield curve remains a reliable leading indicator of economic activity. Although the spread going from +25 basis points to -25 basis points might not result in a recession, it does indicate that monetary policy has become more restrictive."

Riding the yield curve
12/28/05   Bonds
"According to a 2003 analysis by the Federal Reserve Bank of San Francisco, each of the six recessions since 1970 was preceded by a yield curve inversion -- an unnerving precedence."

A hole in the middle
10/20/05   Bonds
"At the end of the day, the sharpest shock may come from the bankruptcy courts after all. Delphi was known to be a vulnerable firm in a troubled industry. Refco, America's biggest independent-commission futures broker, caught the markets by surprise when it filed for protection this week. If the next couple of such surprises lead to a reduction in the supply of capital - either because investors take fright and bond spreads balloon or because banks turn stingy - that will make the cycle turn faster. Until then, all one can say is that credit quality, like Krispy Kreme's finest product, has a hole in it."

Canada Savings Bonds buyers are selling themselves short
10/16/05   Bonds
"Old habits die hard -- that's the polite explanation of why people waste their time and money buying Canada Savings Bonds."

Soft and flat? Danger!
06/06/05   Bonds
"Not too fast and not too steep would normally be a good path to follow. Unless, of course, you are hiking in today's land of economics. Then that path, to some, looks pretty scary."

Stalling again
03/20/05   Bonds
"General Motors' latest profits warning is terrible news for the giant carmaker. Is it also terrible news for the credit markets?"

Down at the dog pound
11/11/04   Bonds
"Just how unlikely investors are to get their money back can be gauged by the default statistics that the rating agencies produce. According to Standard & Poor's, another big rating agency, a bit more than 13% of issuers with a rating of B- or less will default within a year, and 39% of them within five years. For those with a rating of CCC (roughly, its equivalent of Caa1, Moody's rating for Mueller) the figures are 30% and 53%. According to Standard & Poor's, 85% of junk bonds issued so far this year have a maturity of more than seven years. Chances are, in other words, that anyone hanging on to such bonds until maturity will not get their money back."

Global bond default rate rises slightly
11/08/04   Bonds
"The four corporate bond defaults in October totaled US$2.3 billion, and all were by companies based in the U.S. The largest default last month also was the largest thus far in 2004: US$1.30 billion by Trump Atlantic City Associates. "

Global credit quality getting better
07/09/04   Bonds
"The rating agency says in a new report that the global speculative-grade default rate slipped to 3.3% in June, down from 3.4% in May and 4.2% at the end of the first quarter 2004. This marks the ninth consecutive quarterly decline in the global speculative-grade default rate since its January 2002 peak. Moody's default rate forecasting model indicates that credit quality is expected to improve into the second quarter 2005."

Bonds vs. psychics
05/30/04   Bonds
"Bond transactions don't have to be reported publicly, ever. And the fact that the dealer's profit is embedded in the price makes it impossible to figure out if you got a good deal. So I've concluded that the market for psychic advice is more efficient than the one for savings products."

Perpetual debt
01/27/04   Bonds
"In a 1789 letter to his friend James Madison, Thomas Jefferson raised the philosophical and moral question of whether "one generation of men has a right to bind another." He believed the answer was no, "that the earth belongs in usufruct to the living." He believed it a principle of "very extensive application and consequence, in every country." Applying it to government borrowing, he argued that it was unjust and unrepublican for one generation of a nation to encumber the next with the obligation to discharge the debts of the first. After all, the following generation cannot have given their consent to decisions made by their fathers, nor will have they have necessarily benefited from the deficit expenditures."

Repudiating the national debt
01/16/04   Bonds
"Before the Reagan era, conservatives were clear about how they felt about deficits and the public debt: a balanced budget was good, and deficits and the public debt were bad, piled up by free-spending Keynesians and socialists, who absurdly proclaimed that there was nothing wrong or onerous about the public debt. In the famous words of the left-Keynesian apostle of "functional finance," Professor Abba Lernr, there is nothing wrong with the public debt because "we owe it to ourselves." In those days, at least, conservatives were astute enough to realize that it made an enormous amount of difference whetherslicing through the obfuscatory collective nounsone is a member of the "we" (the burdened taxpayer) or of the "ourselves" (those living off the proceeds of taxation)."

The invention of inflation-indexed bonds
11/25/03   Bonds
"The world's first known inflation-indexed bonds were issued by the Commonwealth of Massachusetts in 1780 during the Revolutionary War. These bonds were invented to deal with severe wartime inflation and with angry discontent among soldiers in the U.S. Army with the decline in purchasing power of their pay. Although the bonds were successful, the concept of indexed bonds was abandoned after the immediate extreme inflationary environment passed, and largely forgotten until the twentieth century. In 1780, the bonds were viewed as at best only an irregular expedient, since there was no formulated economic theory to justify indexation."

In the long run we are all broke
11/22/03   Bonds
"Investors have good reason to worry about states defaulting on their loans: Argentina and Russia provide chastening recent reminders. But both were dysfunctional economies with troubled political pasts. Surely, there is no need to worry about the indebtedness of the governments of stable, advanced countries?"

Bonds' thrills and spills
08/17/03   Bonds
"It's summer, the stock markets are thriving and the most recent statements for your investment account show you're finally making money again. With all that good karma in the air, do you really need to worry about that shocking rout in the bond market in the past month?"

Short memories, deep pockets
06/15/03   Bonds
"If the American economy falls back into recession, corporate spreads and defaults will obviously rise. The really troubling question for investors is whether they will do so if the economy picks up and interest rates rise to more normal levels. Either way, corporate bonds at current spreads look expensive. And so does Russia."

You still need bonds, but they've had a good run
06/08/03   Bonds
"This "bond bubble" thing is very confusing. You know you're supposed to have fixed income in your portfolio, and yet you keep reading about how bonds are dangerously overvalued."

US states face long-term budget shortfalls
05/29/03   Bonds
"Concern over the worsening cash crunch and growing unease over the long-term outlook has driven the spread between yields on state and local municipal bonds and US Treasuries to seven-year highs and helped to put downward pressure on most state credit ratings. But another finding of the analysis is that credit ratings bear little or no statistical relationship with long-term imbalances."

WorldCom's bankrupt argument
05/05/03   Bonds
"Moravus, 29, who bought 1,000 shares at face value after the WorldCom acquisition, noted that WorldCom repeatedly said that the MCI QUIPS had a prior claim on MCI assets relative to other WorldCom debt. Because much of what is valuable at WorldCom appears to be at MCI, that promise would seem to indicate that the MCI debtors would be relatively secure even in a bankruptcy reorganization. But that isn't how it worked out after WorldCom collapsed in a wave of accounting fraud."

The 'safe investments' that backfired
04/21/03   Bonds
"Some savers are about to lose all of their original investment because of an apparently safe saving scheme - the so-called high income bonds."

New view says 'debt deflation' to delay recovery
02/24/03   Bonds
"He pointed out that all three periods had great excesses, corruption and misinvestment, and that all had ended with excess capacity, enormous debt and financial strain."

Pension threat to blue chip credit ratings
02/07/03   Bonds
"Ten of Europe's biggest companies have been threatened with credit rating downgrades because of shortfalls in their pension funds"

Ontario Savings Bonds new variable rate
12/17/02   Bonds
"The new interest rate for Variable-Rate Ontario Savings Bonds (OSBs), series 1997 through 2002, for the next six months will be 2.5%."

Doors now closing
10/24/02   Bonds
"Yet evidence continues to grow that the supply of capital is being shut off, too. It is a process that started with the riskiest securities-that is, junk bonds and new issues of shares-but is now spreading to the safer parts of the credit markets, including those for bank loans and for high-grade corporate bonds."

Canada Savings Bonds on sale
10/02/02   Bonds
"Series 78 CSB's, which are on sale for the remainder of the month, will carry a 2% rate as of November 1, 2002. A release from the Department of Finance said the interest rate will be increased "if market conditions warrant." CSB's can be cashed anytime, but pay no interest if cashed in the first 90 days. Even though the Bank of Canada has raised interest rates three times this year, they remain near 40-year lows following nine cuts in 2001." -- ING's bank account pays 2.75% ...

Bill on Character
07/13/02   Bonds
"Lending is not based primarily upon money or property. No sir. The first thing is character."

After the binge
04/20/02   Bonds
"The financial condition of US business at the start of the economic recovery was probably worse than at any such juncture since the second world war, says the veteran Wall Street economist Henry Kaufman. From 1995 to 2001, he adds, the equity of non-financial corporations contracted by $423bn (#294bn) while net debt increased by $2,300bn."

Real return bonds for Canadian dummies
12/18/01   Bonds
"RRBs can be difficult to understand, particularly because of the ongoing inflation-adjustments to their interest payments and market price, but also because of the way in which they are taxed."

Income bonds face collapse
09/30/01   Bonds
The world of high finance hits some bond investors hard as derivative contracts devour capital.

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