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Discussion Starter #1 (Edited)

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I've been allocated as high as 30% junk bonds earlier this year (teased by the spectacular yields and low default rates), but I'm slowly selling them back week by week toward a mostly cash position, in anticipation of a rocky September as only god knows where interest rates are going to go.

Now that there's officially nothing safe worth investing in, it's cash and precious metal mining funds until the next crash... let's just get this second dip over with so I can start buying equities again :p
 

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According to the linked column in today's Wall Street Journal, there is a bond bubble forming that could have a greater overall impact on investors than did the tech bubble of a decade ago.
http://online.wsj.com/article/SB10001424052748704407804575425384002846058.html
Financial pornography at its worst! :mad:


The rush into bonds has been so strong that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below 1%, where it remains today. This means that this bond, like its tech counterparts a decade ago, is currently selling at more than 100 times its projected payout.
Conveniently ignoring the fact that the yield is the quoted 1% plus inflation adjustment and nothing at all like the tech stocks of 10 years ago in that the credits are backed up by the full pledge of the US gov't. The mis-information carries on from there....

From our perspective, the safest bet for investors looking for income and inflation protection may not be bonds. Rather, stocks, particularly stocks paying high dividends, may offer investors a more attractive income and inflation protection than bonds over the coming decade.
No mention of sureness of capital preservation here. Sure yields are better, but if capital is eroded, purchasing power will decline none-the-less.

It used to be the university professors prided themselves on dealing with the facts. It would appear today that talking points from consultancy work are more important. As always, don't confuse who is paying the piper to play the tune. :rolleyes:
 

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There's absolutely no indication rates will rise much, soon. Unless you're pretty far out on the yield curve, I don't think there is much risk.
 

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This is a tough one because we are talking about the US dollar decline to nothing causing hyper-inflation at a time when US consumers can't buy very much.

Ok so they buy into the Euro but look where that brings us, again a tough one. Gold is good because it can't be printed up so easily. Then again gold is not a big market the Euro is not great and you must avoid risk. So that leaves us with the US dollar or treasuries or so I think.

In the end this is not such an easy exercise as one might think. As far as tech goes you just don't buy it and buy something else and that is as easy as it gets. You can do that with gold as well but in a time when currencies are in trouble gold shines as money.
 

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The last time I thought bonds were going to tank, they just went higher, yeilds got lower. Now I am seeing gains of 10%. Still better than savings accounts and GICs.
 

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Increasing interest rates sharply suggests the end game is here. At some point it must end so we will see how far this debt overload can get.
 

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I think most bond investors have taken the concerns into consideration by placing a substantial portion of their bonds in either short-term or real-return.
If bonds crash, short-term bonds can simply be rolled into higher yielding products as they reach maturity.
 

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I still believe that interest rates will increase sharply in not too distant future. The interest rates have been suppressed artificially for too long, and sooner or later something's gotta give.
Can you explain how "interest rates have been suppressed artificially"? Yes, the Bank of Canada sets short-term interest rates and hence T-bill rates. But interest rates on bonds are set by the market and BoC's influence on this market is limited. The bond market is clearly signaling that it expects inflation to stay very low:

http://www.bankofcanada.ca/en/rates/bonds.html

My opinion is more often than not, the bond market is right.
 

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Can you explain how "interest rates have been suppressed artificially"? Yes, the Bank of Canada sets short-term interest rates and hence T-bill rates. But interest rates on bonds are set by the market and BoC's influence on this market is limited. The bond market is clearly signaling that it expects inflation to stay very low:

http://www.bankofcanada.ca/en/rates/bonds.html

My opinion is more often than not, the bond market is right.
My understanding is that when the BOC raises the prime rate, this will result in better opportunities for returns. Even a high interest savings account would pay more, proportional to the raise in rate. As a result, the demand for the bonds at the current yield would decrease and would result in bond prices dropping to offer higher yield. Therefore, it is better to own shorter term bonds to reduce the volatility in bond prices.
 

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+1

Under 5 years and roll them.
I prefer the 5 yr. to 10 yr. window as there is a big pick-up in yield for extending term. If you do the math, you will discover that yields on the short end must move up substantially, upon rolling over, just to break even. There was an article published in the spring by Scotia Macleod, IIRC, that went into the details.

It is a curious human foible that even though we are told to ignore volatility when investing in equities because it is to our benefit, that volatility in bonds is seen as such an evil when you have the full knowledge that the bond will mature at par. What it does in the mean time is largely irrelevant as the return on the bond was set when it was purchased. You have no such guarantees with stocks as the past 10 years have clearly demonstrated.
 

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I prefer the 5 yr. to 10 yr. window as there is a big pick-up in yield for extending term. If you do the math, you will discover that yields on the short end must move up substantially, upon rolling over, just to break even. There was an article published in the spring by Scotia Macleod, IIRC, that went into the details.

It is a curious human foible that even though we are told to ignore volatility when investing in equities because it is to our benefit, that volatility in bonds is seen as such an evil when you have the full knowledge that the bond will mature at par. What it does in the mean time is largely irrelevant as the return on the bond was set when it was purchased. You have no such guarantees with stocks as the past 10 years have clearly demonstrated.
If you have a portfolio of 5-10 year bonds, you won't be holding them to maturity. You'll be selling them off at 5 years to maturity at the prevailing yield, in which case the volatility is relevant.
 

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If you have a portfolio of 5-10 year bonds, you won't be holding them to maturity.
Of course I will. I think you miss understand the point I was trying to make. kcowan suggested to roll a 5 year bond ladder. I was arguing in favour of extending the ladder out to 10 years on the grounds that the yield pick-up for term extension was more than adequate for having less of the portfolio exposed to current rates in a rising rate environment. At no point did I advocate selling bonds prior to maturity.
 

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Can you explain how "interest rates have been suppressed artificially"? Yes, the Bank of Canada sets short-term interest rates and hence T-bill rates. But interest rates on bonds are set by the market and BoC's influence on this market is limited. The bond market is clearly signaling that it expects inflation to stay very low:

http://www.bankofcanada.ca/en/rates/bonds.html

My opinion is more often than not, the bond market is right.
Very easy, by buying the long term bonds. US Government start doing that again last week.
 
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