May the source be with you, but remember the KISS principle ;-) Skepticism and critical thinking is not panacea, but can help to understand the world better
For most 401K investors Vanguard funds are a better deal as expenses are low. But they have some
annoying quirks. Wire money transfers are ridiculously slow.
They also have that pretty bizarre notion that you should put money into one of their fund for life.
Trading is severely discourages and that's to certain extent OK, but Vanguard goes overboard with this
idea.
If you own them in brokerage account you need to watch your back: they can refuse to allow
to sell the fund you own when you want to do this.
If you sell some funds in Vanguard account they disallow you to add to them for three month
or so (happened in 2010 with TIPs).
Critics often say that Good ole' John Bogle wont be happy till the mutual fund companies earn fees
of 0.1 %. That this man ruined the money mgmt. business. Singlehandedly walmartized it. This is not
completely true. Because 0.5% fee is not 0.5% fee on annual return, it is the fee on the total amount
of money invested. If your after inflation return is 2%, that means that mutual fund company takes
25% of your return for often questionable, second-rate services (as in Merrill Lynch) they perform.
Yes 25% percent.
Moreover Vanguard should be hold responsible for the 2008 financial crash and "Great Recession" that
followed on equal footing with other major Wall street players:
Financial holding companies like the Vanguard Group, State Street Corporation, FMR (Fidelity),
BlackRock, Northern Trust, Capital World Investors, Massachusetts Financial Services, Price (T. Rowe)
Associates Inc., Dodge & Cox Inc., Invesco Ltd., Franklin Resources, Inc., АХА, Capital Group Companies,
Pacific Investment Management Co. (PIMCO) and several others do not just own shares in American banks,
they own mainly voting shares. It these financial companies that exercise the real control over the
US banking system.
Some analysts believe that just four financial companies make up the main body of shareholders of
Wall Street banks. The other shareholder companies either do not fall into the key shareholder category,
or they are controlled by the same ‘big four’ either directly or through a chain of intermediaries.
Table 4 provides a summary of the main shareholders of the leading US banks.
In other words it is important to understand that they are not concerned with your retirement, their
main concern is with their own retirement ;-)
High-yield bond default rates may double as companies struggle with a protracted economic
downturn even as the Federal Reserve props up valuations, said Jeffrey Gundlach.
The investment grade corporate debt market has skewed toward lower quality BBB- rated debt,
but if just 50% of that were to be downgraded it could fuel a near doubling of the high-yield
market, Gundlach said Tuesday on a webcast for his firm's flagship DoubleLine Total Return Bond Fund .
Gundlach's views reflect broad skepticism about the market's connection to economic
realities. He criticized the Fed's emergency actions as buoying asset prices and spurring
unsustainable corporate borrowing binges.
Risk assets such as equities and high yield credit markets are responding to this support,
and government stimulus, disproportionately as the Covid-19 pandemic remains a threat to the
recovery, he said.
"It's foolhardy to believe that one can have this kind of a shock to an economy and it just
gets healed through a one-shot deal" from the Treasury, he said.
Gundlach pointed out that the global GDP forecast is -3.9%, whereas the U.S. lags at -5%
despite the country's response to the Covid-19 crisis being "one of the highest in the
world."
Highlighting the effect of the weekly $600 stimulus checks, he called it a distortion of the
personal-income spending picture akin to the Fed's effect on the markets.
"This is a large incentive to stay on public assistance," Gundlach said, noting that benefit
payments have exceeded many workers' regular income.
Gundlach also snubbed one of the market's favorite trades on a U.S. recovery, saying he's
"betting against" the inflation-linked bond market. TIPS products have seen some of the
strongest monthly inflows in four years, and market-implied expectations for inflation have
touched a 2020 high. Gundlach repeated that the impact of the pandemic is deflationary.
The stock market now is completely disconnected from the economy. Stein's Law, which he expressed in 1976 states: "If
something cannot go on forever, it will stop."
Notable quotes:
"... Junk Bonds play a critical role in highlighted investor sentiment. When junk bonds (lower-rated debt) is performing well, then that means investors are taking more risks. When junk bonds struggle, that means investors are taking on less risk. ..."
"... At the same time, there is a divergence between the stock market (the S&P 500 made new all-time highs) and Junk Bonds (well below all-time highs and 5 percent off 2019 highs). ..."
As investors, we have several tools and indicators at our disposal.
Whether it is technical indicators such as Fibonacci levels, moving averages, or price
supports, or fundamental indicators such as corporate earnings or economic data, we have a lot
of information to use when making decisions.
Today's chart incorporates both. Junk Bonds play a critical role in highlighted investor
sentiment. When junk bonds (lower-rated debt) is performing well, then that means investors are
taking more risks. When junk bonds struggle, that means investors are taking on less risk.
So today, we highlight the Junk Bonds ETF (JNK). Using
technical analysis, we can see that JNK is trading near line (A), a price level that has served
as support and resistance over the past several years. It is currently serving as price
resistance.
At the same time, there is a divergence between the stock market (the S&P 500 made new
all-time highs) and Junk Bonds (well below all-time highs and 5 percent off 2019 highs).
So this is an important resistance test for junk bonds. Will Junk Bonds (JNK) break down
from here (bearish) or break out (bullish).
What happens here will send an important message to stocks (and investors)!
High-yield bonds (avoid the oil patch), emerging-markets bonds and dividend-paying stocks
such as real estate investment trusts and utilities are good places to hunt for yield. Funds to
consider include Vanguard High Yield Corporate ( VWEHX ),
yielding 4.5%, and TCW Emerging Markets Bond ( TGEIX ),
yielding 5.1%. Schwab US Dividend Equity ( SCHD , $56), a
member of the Kiplinger ETF 20 list of our favorite ETFs, invests in high-quality dividend
payers and yields just over 3%. Spath, at Sierra Funds, is bullish on preferred stocks. IShares
Preferred and Income Securities ETF ( PFF , $37)
yields 5.5%. (For more ideas, see Income
Investing .)
Suppose my outlook for the bond market is either wrong, or at best, premature. Bond yields
could fall next year, or just stay relatively flat. That's why it usually makes sense to own
more than one bond fund.
Vanguard Intermediate-Term Tax-Exempt Investor ( VWITX ,
$14.41) should hold up pretty well if rates rise only a small amount in 2020, and it could
trounce the other funds in this article if rates fall.
VWITX's duration is 4.9 years. That means if bond yields rise by one percentage point, the
fund's price should decline by 4.9%. That wouldn't be fun for investors, but it would hardly be
catastrophic, especially when you factor in the yield.
Like most Vanguard bond offerings, Vanguard Intermediate-Term Tax-Exempt Investor is plain
vanilla, and that's OK. It sticks almost entirely to high-quality municipal bonds. Its weighted
average credit quality is a sterling AA.
VWITX also has been a decent performer, at an annualized 3.1% total return over the past
five years.
Price of oil does have problem that will play out over next 6-8 months. Without a trade war
and Brexit hanging over markets. There isn't a whole lot of reason to be holding government
bonds which yield next to nothing or less than nothing in some cases. Fed is buying bills so
Repo market won't implode into another 2008. Only problem is they need to be buying coupons
or treasuries also. They are buying some treasuries but it's not near enough to hold interest
rates down. Yields on debt are going to rise without something like a trade war holding them
down. That is a problem if your long oil.
Keep an eye on 10 year US treasuries. If they become just a little less liquid and yields
rise as i believe they will. These OPEC cuts aren't going to mean as much as some might
think.
An unprecedented frenzy of debt sales around the world is threatening to cool this year's
hot returns on corporate bonds.
Companies have sold a record $2.43 trillion so far this year across currencies, surpassing
previous full-year records. Investors rushed to snap up all this debt because they were
desperate for yield as central banks cut rates. That has pushed up valuations.
Now, some troubling signs for the direction of those valuations are converging. Recent
data suggest that the worst may be over for the global economy, which means many central
banks could have less reason next year to guide down borrowing costs. That will all make it
harder to top the double-digit returns that some investors scored on corporate bonds this
year.
---
Wealthy made some real money betting on our government bailouts, in Europe an the US. Now the
yields are gone, where to? China, the only rational central banker left means, park your
money in China.
What this means now is that things will only get more complicated for Beijing from here on
out. Chinese President Xi Jinping bet on letting the people of Hong Kong decide, and they
did. Only it was against him.
We'll return to the political situation in Hong Kong momentarily, but before we do,
another major development, this time on the business front.
On Tuesday, Alibaba executed a slam-dunk secondary offering in Hong Kong, raising $12.9
billion. That easily surpassed Uber's $8.1 billion IPO in May, making it the biggest public
offering of 2019. For those who were predicting the death of Hong Kong -- and they've been
doing that for decades, (and Kyle Bass and others are still at it) -- that again appears to
be premature.
---
Clueless reporting. Xi came out of this looking great. He has one country three systems, he
now has a sound central banking, investment is flowing in, not out. They are immune from
sanctions, and even the trade tariffs are expanding Chinese influence in Asia, Iran, Russia
and China can look forward to a new global banking system, absent the dollar. Belt and
suspenders is moving forward.
I like it, I have no priors, I can point this fact without contradiction. Go Xi.
What's behind the
ever-increasing need for emergency repos?
A couple of correspondents have an eye on
shadow banking.
Shadow Banking
The shadow banking system consists of lenders, brokers, and other credit intermediaries who
fall outside the realm of traditional regulated banking.
It is generally unregulated and not subject to the same kinds of risk, liquidity, and
capital restrictions as traditional banks are.
The shadow banking system played a major role in the expansion of housing credit in the run
up to the 2008 financial crisis, but has grown in size and largely escaped government oversight
since then.
Let's recap before reviewing excellent comments from a couple of valued sources.
The Fed keeps increasing the size and duration of "overnight" funding. It's now up $120 billion
a day, every day, extended for weeks. That is on top of new additions.
Three Fed Statements
Emergency repos were needed for "
end-of-quarter funding
".
Balance sheet expansion is "
not QE
". Rather, it's "
organic growth
".
This is
"not monetary policy
".
Three Mish Comments
Hmm. A quick check of my calendar says the quarter ended on September 30 and today is
October 23.
Hmm. Historically "organic" growth was about $2 to $3 billion.
Hmm. Somehow it takes an emergency (but let's no longer call it that), $120 billion "
at
least
" in repetitive "
overnight
" repos to control interest rates, but that does
not constitute "monetary policy"
I made this statement:
I claim these "non-emergency", "non-QE", "non-monetary policy"
operations suggest we may already be at the effective lower bound for the Fed's current balance
sheet holding
.
Shadow Banking Suggestion by David Collum
Pater Tenebrarum at the Acting Man blog pinged me with these comments on my article, emphasis
mine.
While there is too much collateral and not enough reserves to fund it,
we don't know
anything about the distribution [or quality] of this collateral
. It could well be that some
market participants do not have sufficient high quality collateral and were told to bugger off
when they tried to repo it in the private markets.
Such market participants would become unable to fund their leveraged positions in CLOs or
whatever else they hold.
Mind, I'm not saying that's the case, but the entire shadow banking system is opaque
and
we usually only find out what's what when someone keels over or is forced to report a huge loss.
Reader Comments
Axiom7: Euro banks are starving for dollar funding and if there is a hard Brexit both UK and
German banks are in big trouble. I wonder if this implies that the EU will crack in negotiations
knowing that a DB fail is too-big-to-bail?
Cheesie: How do you do repos with a negative interest rate?
Harry-Ireland: [sarcastically], Of course, it's not QE. How can it be, it's the greatest
economy ever and there's absolutely nobody over-leveraged and the system is as healthy as can
be!
Ian: Taking bad collateral to keep banks solvent is not QE.
In regards to point number four, I commented:
This is not
TARP
2009.
[The Fed is not swapping money for dodgy collateral] Someone or someones is caught in some sort of
borrow-short lend-long scheme and the Fed is giving them reserves for nothing in return. Where's
the collateral?
Pater Tenebrarum partially agrees.
Yes, this is not "TARP" - the Fed is not taking shoddy collateral, only treasury and agency
bonds are accepted. The primary dealers hold a huge inventory of treasuries that needs to be
funded every day in order to provide them with the cash needed for day-to-day operations - they
are one of the main sources of the "collateral surplus".
Guessing Game
We are all guessing here, so I am submitting possible ideas for discussion.
Rehypothecation
I am not convinced the Fed isn't bailing out a US major bank, foreign bank, or some other
financial institution by taking
rehypothecated
,
essentially non-existent, as collateral.
Rehypothecation is the practice by banks and brokers of using, for their own purposes, assets
that have been posted as collateral by their clients.
In a typical example of rehypothecation, securities that have been posted with a prime
brokerage as collateral by a hedge fund are used by the brokerage to back its own transactions
and trades.
Current Primary Dealers
Amherst Pierpont Securities LLC
Bank of Nova Scotia, New York Agency
BMO Capital Markets Corp.
BNP Paribas Securities Corp.
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse AG, New York Branch
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman Sachs & Co. LLC
HSBC Securities (USA) Inc.
Jefferies LLC
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
It's important to note those are not "shadow banking" institutions, while also noting that
derivative messes within those banks would be considered "shadow banking".
Tenebrarum Reply
In this case the problem is specifically that the primary dealers are holding huge
inventories of treasuries and bank reserves are apparently not sufficient to both pre-fund the
daily liquidity requirements of banks and leave them with enough leeway to lend reserves to repo
market participants.
The Fed itself does not accept anything except treasuries and agency MBS in its repo
operations, and only organizations authorized to access the federal funds market can participate
by offering collateral in exchange for Fed liquidity (mainly the primary dealers, banks, money
market funds,...).
Since most of the repo lending is overnight - i.e., is reversed within a 24 hour period
(except for term repos) - I don't think re-hypothecated securities play a big role in this.
But private repo markets are broader and have far more participants, so possibly there is a
problem elsewhere that is propagating into the slice of the market the Fed is connected with.
Note though, since the Treasury is borrowing like crazy and is at the same time rebuilding its
deposits with the Fed (which lowers bank reserves, ceteris paribus), there is a several-pronged
push underway that is making short term funding of treasury collateral more difficult at the
moment.
So I'm not sure a case can really be made that there is anything going on beyond what meets
the eye - which is already bad enough if you ask me.
Preparation for End of LIBOR
What about all the LIBOR-based derivatives with the end of LIBOR coming up?
Libor is a scandal-plagued benchmark that is used to set the price of trillions of dollars of
loans and derivatives globally. A group of banks and regulators in 2017 settled on a replacement
created by the Federal Reserve known as the secured overnight financing rate, or SOFR. Companies
must move away from Libor by the end of 2021, when banks will no longer be required to publish
rates used to calculate it.
"We don't expect that 100% of the Libor-based positions today will migrate 100% to SOFR,"
Jeff Vitali, a partner at Ernst & Young, said this week during a panel at an Association for
Financial Professionals conference in Boston. "It is going to be a scenario where entities are
going to have to prepare and be flexible and build flexibility into their systems and models and
processes that can handle multiple pricing environments in the same jurisdiction."
Repro Quake
I invite readers to consider Tenebrarum's "
Repro
Quake - A Primer
" but caution that it is complicated.
He informs me "a credit analyst at the largest bank in my neck of the woods sent me a mail to
tell me this was by far the best article on the topic he has come across".
Note: That was supposed to be a private comment to me. I placed it in as an endorsement.
Tenebrarum live in Europe. Here are his conclusions.
What Else is the Fed Missing?
Contrary to similar spikes in repo rates in 2008, it was probably not fear of counterparty
risk that led to the recent repo quake. What's more, the Federal Reserve without a doubt knew
that something like this was coming. We say this because even we knew it – it was not a secret.
A number of analysts have warned of just such a situation for months.
It is astonishing that the Fed somehow seemed unprepared and quite surprised by the extent
of the liquidity shortage.
We would submit that this fact alone is a good reason for markets
to be concerned. If the Fed is not even able to properly gauge such a "technical problem" in
advance, what else is there it does not know?
Effective Lower Bound
Finally, Tenebrarum commented: "
I agree on your effective lower bound comment, since
obviously, the 'dearth' of excess reserves was pushing up all overnight rates, including the FF
rate
."
that some of this
money is leaking out to continue to prop up the stock market.
I've been trading for 46 years and current valuations are beyond
ridiculous. for example, Tesla made a buck a share in the last
quarter. woop di do. and the stock zooms to $300++ a share with a
market cap of $58 bil. 60% more than Ford???!!! We
know
that Porsche and BMW and Mercedes and Audi are going to build a
much better EV. another one, Cintas. They rent uniforms. what
a sexy business! valued at a p/e of 32 with a $28 bil. market
cap. Book value of
$29
a share. the stock is at
$270
!!!
the list goes on and on and on Carvana, etc.
personally, I have 5% bitcoin 5% gold and have a nice chunk in
a very high quality diversified commodity mutual fund.
Commodities (relative to stocks) are at multi decade lows. a
deep value trade. very best wishes to you. Argento
On occasion, it is important to revisit issues that have been
swept under the rug or simply overlooked. For most people, the
derivatives market falls into this category, partly because they
don't understand exactly what derivatives are or why this market
is so important.
Anyone paying attention knows that the size
of the derivatives market dwarfs the global economy. Paul Wilmott
who holds a doctorate in applied mathematics from Oxford
University has written several books on derivatives. Wilmott
estimates the derivatives market at $1.2 quadrillion, to put that
in perspective it is about 20 times the size of the world economy.
That is an OLD guess... today it is estimated that derivatives
exceeds $2 quadrillion, and that just commodity derivatives
approaches the old figure. Interest rate based derivatives
still dominate, my guess is much higher.
One of the key U.S. borrowing markets saw a massive surge Monday, a sign the Federal
Reserve is having trouble controlling short-term interest rates.
Amid the settlement of Treasury coupon auctions and the influx of quarterly corporate tax
payments, the rate on overnight repurchase agreements soared by 153 basis points to 3.80%,
the largest daily increase since December, based on ICAP pricing.
---------
The would be Treasury trying to tilt the curve, deposit short borrow long. Finance, in
general, is rescaling to accommodate the next 2 trillion in debt while rolling over trillions
of 'Uncle can do it later' debt. A quick downturn, readjustment, and the 'Uncle do it later'
payments to the wealthy will continue.
This is common, our progressive tribe has moles who suddenly rush off and do a deal with
the wealthy leaving the rest of us in the dark.
Repo Squeeze Threatens to Spill Over Into Funding Markets
By Stephen Spratt
September 17, 2019, 3:19 AM PDT Updated on September 17, 2019, 5:24 AM PDT
Cross-currency basis, FX forwards, eurodollar futures shift
Sale of $78 billion in Treasuries led to sudden cash squeeze
----------------
Treasury is ahead of finance in paying for the 'Uncle do it later' trick. The short rate
has jumped 10 basis points, not much but there was a reading on the overnight market of 7%.
This may mean nothing, but more likely means higher consumer credit charges. W have to pay
for 'Uncles later'.
Sep.04 -- Sean Carney, head of municipal strategy at BlackRock, discusses the municipal bond
market posting its best returns since 2014. He speaks with Bloomberg's Taylor Riggs in this
week's "Muni Moment" on "Bloomberg Markets."
Tariff Tantrums and Recession Risks
Why trade war scares the market so much
By Paul Krugman
If the bond market is any indication, Donald Trump's escalating belligerence on trade is
creating seriously increased risks of recession. But I haven't seen many clear explanations
of why that might be so. The problem isn't just, or even mainly, that he really does seem to
be a Tariff Man. What's more important is that he's a capricious, unpredictable Tariff Man.
And that capriciousness is really bad for business investment.
First things first: why do I emphasize the bond market, not the stock market? Not because
bond investors are cooler and more rational than stock investors, although that may be true.
No, the point is that expected economic growth has a much clearer effect on bonds than on
stocks.
Suppose the market becomes pessimistic about growth over the next year, or even beyond. In
that case, it will expect the Fed to respond by cutting short-term interest rates, and these
expectations will be reflected in falling long-term rates. That's why the inversion of the
yield curve -- the spread between long-term and short-term rates -- is so troubling. In the
past, this has always signaled an imminent recession:
[That scary yield curve]
And the market seems in effect to be predicting that it will happen again.
But what about stocks? Lower growth means lower profits, which is bad for stocks. But it
also, as we've just seen, means lower interest rates, which are good for stocks. In fact,
sometimes bad news is good news: a bad economic number causes stocks to rise, because
investors think it will induce the Fed to cut. So stock prices aren't a good indicator of
growth expectations.
O.K., preliminaries out of the way. Now let's talk about tariffs and recession.
You often see assertions that protectionism causes recessions -- Smoot-Hawley caused the
Great Depression, and all that. But this is far from clear, and often represents a category
error.
Yes, Econ 101 says that protectionism hurts the economy. But it does its damage via the
supply side, making the world economy less efficient. Recessions, however, are usually caused
by inadequate demand, and it's not at all clear that protectionism necessarily has a negative
effect on demand.
Put it this way: a global trade war would induce everyone to switch spending away from
imports toward domestically produced goods and services. This will reduce everyone's exports,
causing job losses in export sectors; but it will simultaneously increase spending on and
employment in import-competing industries. It's not at all obvious which way the net effect
would go.
To give a concrete example, think about the world economy in the 1950s, before the
creation of the Common Market and long before the creation of the World Trade Organization.
There was a lot more protectionism and vastly less international trade then than there would
be later (the containerization revolution was still decades in the future.) But Western
Europe and North America generally had more or less full employment.
So why do Trump's tariff tantrums seem to be having a pronounced negative effect on
near-term economic prospects? The answer, I'd submit, is that he isn't just raising tariffs,
he's doing so in an unpredictable fashion.
People are often sloppy when they talk about the adverse effects of economic uncertainty,
frequently using "uncertainty" to mean "an increased probability of something bad happening."
That's not really about uncertainty: it means that average expectations of what's going to
happen are worse, so it's a fall in the mean, not a rise in the variance.
But uncertainty properly understood can have serious adverse effects, especially on
investment.
Let me offer a hypothetical example. Suppose there are two companies, Cronycorp and
Globalshmobal, that would be affected in opposite ways if Trump imposes a new set of tariffs.
Cronycorp would like to sell stuff we're currently importing, and would build a new factory
to make that stuff if assured that it would be protected by high tariffs. Globalshmobal has
already been considering whether to build a new factory, but it relies heavily on imported
inputs, and wouldn't build that factory if those imports will face high tariffs.
Suppose Trump went ahead and did the deed, imposing high tariffs and making them
permanent. In that case Cronycorp would go ahead, while Globalshmobal would call off its
investment. The overall effect on spending would be more or less a wash.
On the other hand, suppose that Trump were to announce that we've reached a trade deal:
all tariffs on China are called off, permanently, in return for Beijing's purchase of 100
million memberships at Mar-a-Lago. In that case Cronycorp will cancel its investment plans,
but Globalshmobal will go ahead. Again, the overall effect on spending is a wash.
But now introduce a third possibility, in which nobody knows what Trump will do --
probably not even Trump himself, since it will depend on what he sees on Fox News on any
given night. In that case both Cronycorp and Globalshmobal will put their investments on
hold: Cronycorp because it's not sure that Trump will make good on his tariff threats,
Globalshmobal because it's not sure that he won't.
Technically speaking, both companies will see an option value to delaying their
investments until the situation is clearer. That option value is basically a cost to
investment, and the more unpredictable Trump's policy, the higher that cost. And that's why
trade tantrums are exerting a depressing effect on demand.
Furthermore, it's hard to see what can reduce this uncertainty. U.S. trade law gives the
president huge discretionary authority to impose tariffs; the law was never designed to deal
with a chief executive who has poor impulse control. A couple of years ago many analysts
expected Trump to be restrained by his advisers, but he's driven many of the cooler heads
out, many of those who remain are idiots, and in any case he's reportedly paying ever less
attention to other people's advice.
None of this guarantees a recession. The U.S. economy is huge, there are a lot of other
things going on besides trade policy, and other policy areas don't offer as much scope for
presidential capriciousness. But now you understand why Trump's tariff tantrums are having
such a negative effect.
I just assume the 10Y yield is reverting to trend – the trend downward it has had
since 1982. The counter trend move upward in 2018 assumed the fiscal spigots were going to be
turned on, that the deficit was no longer a dirty word and therefore inflation was no longer
a dirty word. It's just taken til now to capitulate that none of that's going to happen.
Seems the Federal Reserve was caught by surprise by this too. Otherwise I don't think they
would have raised their Fed Funds rate to where it is. Because now that the 10Y yield has
capitulated, it's actually lower than the Fed Funds rate, creating an inverted yield curve.
Which is unusual because normally an inverted yield curve is created on purpose by the
Federal Reserve – they raise their rate above the 10Y yield rather than wait for the
10Y yield to drop below their rate. Still, every good trader knows an inverted yield curve is
bad juju. So what's the Fed Reserve to do? Sit on its hands and let the inverted yield curve
work its magic and create a recession?
Seems to me that the Federal Reserve doesn't want the market to crash on Trump's watch. At
least not until after the 2020 election. So the Fed Reserve is signaling to the traders, "we
feel your pain", they'll lower their rate to bring it back below the 10Y yield. They just
need a pretext on why they're doing so, something that doesn't simply smack of the Fed
Reserve propping up the stock market. "It's the PMI, it's the employment report, it's trade,
it's one of those, yeah that's the ticket."
Anyways, even if the fiscal spigots get turned on, I don't see the 10Y yield reversing
trend until spiraling wage inflation is a thing again. I.e. when people aren't worried about
their exposure to inflating prices as long as their wages are increasing / tracking with
inflation. Making it safe for them to take on debt at increasing interest rates – i.e.
generating inflation. And I don't see that happening anytime soon unless there's some kind of
JG program.
Until then, the trend line of the 10Y yield is downwards. Giving the Federal Reserve less
and less room for their Fed Funds rate to operate in without inverting the yield curve. Seems
like that won't be able to continue at some point. Interesting years ahead.
The fourth-quarter stock market rout that wiped out $12 trillion in shareholder value and
sparked a bout of
Christmas Eve panic may have quickly been forgotten by most Americans, but not by the
salespeople and financial engineers of Wall Street.
No, the selloff, it would appear, wound up triggering fears that time was running out on the
longest bull market in history. And so, when early 2019 delivered a miraculous rebound, they
wasted no time in peddling all sorts of deals and arrangements that test the limits of risk
tolerance: from health-food makers fast-tracked into public hands to stretched retailers wrung
for billions by private equity owners in the debt market.
Junk bonds are flying out the door once again. Deeply indebted companies are borrowing even
more to pay
equity holders . And while you can't say the megadeal IPOs got rushed to market, two that
were held up as heralding a return to IPO glory days have been flops. It's quickly turning
Uber and Lyft into poster children for Wall Street eagerness amid an equity-market bounce
that has all but banished memories of the worst fourth quarter in a decade.
"At some point, people are going to get burned," said Marshall Front, the chief investment
officer at Front Barnett Associates and 56-year Wall Street veteran. "People want to take their
companies public because they don't know what the next years hold, and there are people who
think we're close to the end of the cycle. If you're an investment banker, what do you do? You
keep dancing until the music stops."
For more than a decade, income investors have been plagued by paucity wrapped in misery. The bellwether 10-year Treasury note has
doled out an average 2.6% interest since 2008. Although the Federal Reserve has nudged its target interest rate range to 2.25% to
2.50%, it has signaled that it's done raising rates for now. Even worse, the yield on the 10-year T-note briefly sank below the yield
on the three-month T-bill -- an unusual inversion that can sometimes herald a recession and lower yields ahead. The takeaway: Locking
your money up for longer periods is rarely worth the negligible increase in yield. What could increase your yield these days? Being
a little more adventurous when it comes to credit quality. When you're a bond investor, you're also a lender, and borrowers with
questionable credit must pay higher yields. Similarly, stocks with above-average yields probably have some skeletons in their balance
sheets.
You can ameliorate credit risk -- but not eliminate it -- through diversification. Invest in a mutual fund, say, rather than a
single issue. And invest in several different types of high-yielding investments -- for example, investment-grade bonds, preferred
stocks and real estate investment trusts -- rather than just one category. Despite such caveats, income investing is not as bad as
it was in 2015, when it was hard to milk even a penny's interest out of a money market. Now you can get 3.3% or more from no-risk
certificates of deposit at a bank. We'll show you 33 ways to find the best yields for the risk you're willing to take, ranging from
2% all the way up to 12%. Just remember that the higher the payout, the greater the potential for some rough waters.
Short-term interest rates largely follow the Fed's interest rate policy. Most observers in 2018 thought that would mean higher rates
in 2019. But slowing economic growth in the fourth quarter of 2018 and the near-death experience of the bull market in stocks changed
that. The Fed's rate-hiking
campaign is likely on hold for 2019. Still, money markets are good bets for money you can't stand to lose. Money market funds
are mutual funds that invest in very-short-term, interest-bearing securities. They pay out what they earn, less expenses. A bank
money market account's yield depends on the Fed's benchmark rate and the bank's need for deposits.
The risks: Money market mutual funds aren't insured, but they have a solid track record. The funds are designed to maintain a
$1 share value; only two have allowed their shares to slip below $1 since 1994. The biggest risk with a bank money market deposit
account is that your bank won't raise rates quickly when market interest rates rise but will be quick on the draw when rates fall.
MMDAs are insured up to $250,000 by the federal government. How to invest: The best MMDA yields are from online banks, which don't
have to pay to maintain brick-and-mortar branches. Currently, a top-yielding MMDA is from Investors eAccess , which is run by Investors
Bank in New Jersey. The account has no minimum, has an annual percentage yield of 2.5% and allows six withdrawals per month. You'll
get a bump from a short-term CD, provided you can keep your money locked up for a year. Merrick Bank , in Springfield, Mo., offers
a one-year CD yielding 2.9%, with a $25,000 minimum. The early-withdrawal penalty is 2% of the account balance or seven days' interest,
whichever is larger. The top five-year CD yield was recently 3.4%, from First National Bank of America in East Lansing, Mich.
Your primary concern in a money fund should be how much it charges in expenses. Vanguard
Prime Money Market Fund (symbol
VMMXX , yield 2.5%) charges an ultralow 0.16% a year and consistently sports above-average yields. Investors in high tax brackets
might consider a tax-free money fund, whose interest is free from federal (and some state) income taxes, such as Vanguard Municipal
Money Market Fund ( VMSXX 1.6%).
To someone paying the maximum 40.8% federal tax rate, which includes the 3.8% net investment income tax, the fund has the equivalent
of a 2.7% taxable yield. (To compute a muni's taxable-equivalent yield, subtract your tax bracket from 1, and divide the muni's yield
by that. In this case, divide 1.6% by 1 minus 40.8%, or 59.2%). The fund's expense ratio is 0.15%.
Muni bonds are IOUs issued by states, municipalities and counties. At first glance, muni yields look as exciting as a month in
traction. A 10-year, AAA-rated national muni yields 2.0%, on average, compared with 2.6% for a 10-year Treasury note. But the charm
of a muni bond isn't its yield; it's that the interest is free from federal taxes -- and, if the bond is issued by the state where
you live, from state and local taxes as well. As with tax-free money funds, investors should consider a muni fund's taxable equivalent
yield; in the case above, it would be 3.4% for someone paying the top 40.8% federal rate.
Yields get better as you go down in credit quality. An A-rated 10-year muni -- two notches down from AAA but still good -- yields
2.3%, on average, or 3.9% for someone paying the top rate. The risks: Munis are remarkably safe from a credit perspective, even considering
that defaults have inched up in recent years. But like all bonds, munis are subject to interest rate risk. If rates rise, your bond's
value will drop (and vice versa), because interest rates and bond prices typically move in opposite directions. If you own an individual
bond and hold it until it matures, you'll most likely get your full principal and interest. The value of muni funds, however, will
vary every day.
How to invest: Most investors should use a mutual fund or ETF, rather than pick their own individual bonds. Look for funds with
rock-bottom expenses, such as Vanguard Limited-Term Tax-Exempt (
VMLTX , 1.8%). The fund charges
just 0.17%, and yields the equivalent of 3% for someone paying the highest federal tax rate. It's a short-term fund, which means
it's less sensitive to interest rate swings. That means its share price would fall less than longer-term funds' prices if rates were
to rise. The average credit quality of the fund's holdings is a solid AA–. Fidelity Intermediate Municipal Income (
FLTMX , 2.0%), a member of
the
Kiplinger 25 , the list of our favorite no-load funds, gains a bit of yield (a taxable equivalent of 3.4% for those at the top
rate) by investing in slightly longer-term bonds. The fund's expense ratio is 0.37%; the largest percentage of assets, 39%, is in
AA bonds. Vanguard High-Yield Tax-Exempt Fund Investor Shares (
VWAHX , 2.9%) also charges
just 0.17% in fees and yields 4.9% on a taxable-equivalent basis for someone at the highest rate. The extra yield comes from investing
in a sampling of riskier bonds. But the fund's average BBB+ credit rating is still pretty good, and its return has beaten 96% of
high-yield muni funds over the past 15 years.
You get higher yields from corporate bonds than you do from government bonds because corporations are more likely to default. But
that risk is slim. The one-year average default rate for investment-grade bonds (those rated BBB– or higher), is just 0.09%, going
back to 1981, says Standard & Poor's. And corporate bonds rated AAA and maturing in 20 or more years recently yielded 3.7%, on average,
while 20-year Treasury bonds yielded 2.8% and 30-year T-bonds, 3.0%. You can earn even more with bonds from firms with lightly dinged
credit ratings. Bonds rated BBB yield an average 4.0%. The risks: The longer-term bond market moves independently of the Fed and
could nudge yields higher (and prices lower) if inflation worries pick up. Though corporate defaults are rare, they can be devastating.
Lehman Brothers, the brokerage firm whose bankruptcy helped fuel the Great Recession, once boasted an investment-grade credit rating.
How to invest: Active managers select the bonds at Dodge & Cox Income (
DODIX , 3.5%). This fund
has beaten 84% of its peers over the past 15 years, using a value-oriented approach. It holds relatively short-term bonds, giving
its portfolio a duration of 4.4 years, which means its share price would fall roughly 4.4% if interest rates rose by one percentage
point over 12 months. The fund's average credit quality is A, and it charges 0.42% in expenses. If you prefer to own a sampling of
the corporate bond market for a super-low fee, Vanguard Intermediate-Term Corporate Bond Index Fund Admiral Shares (
VICSX , 3.6%) is a good choice.
Vanguard recently lowered the minimum investment to $3,000, and the fund charges just 0.07%. Interest-rate risk is high with Vanguard
Long-Term Bond ETF ( BLV , $91,
3.8%). The exchange-traded fund has a duration of 15, which means fund shares would fall 15% if interest rates moved up by one percentage
point in a year's time. Still, the yield on this long-term bond offering is enticing, and the fund's expense ratio is just 0.07%.
SEE ALSO:
The 7 Best Bond Funds for Retirement Savers in 2019//www.dianomi.com/smartads.epl?id=4908
Dividend stocks have one advantage that bonds don't: They can, and often do, raise their payout. For example, Procter & Gamble (
PG , $106, 2.7%), a member of
the
Kiplinger Dividend 15 , the list of our favorite dividend-paying stocks, raised its dividend from $2.53 a share in 2014 to $2.84
in 2018, a 2.3% annualized increase. Preferred stocks, like bonds, pay a fixed dividend and typically offer higher yields than common
stocks. Banks and other financial services firms are the typical issuers, and, like most high-dividend investments, they are sensitive
to changes in interest rates. Yields for preferreds are in the 6% range, and a generous crop of new issues offers plenty of choices.
The risks: Dividend stocks are still stocks, and they will fall when the stock market does. Furthermore, Wall Street clobbers
companies that cut their dividend. General Electric slashed its dividend to a penny per share on December 7, 2018, and the stock
fell 4.7% that day. How to invest: Some slower-growing industries, such as utilities or telecommunications firms, tend to pay above-average
dividends. Verizon Communications (
VZ , $58, 4.2%), a Kip 15 dividend
stock, is the largest wireless carrier in the U.S. Its investment in Fios fiber-optic cable should pay off in coming years. SPDR
Portfolio S&P 500 High Dividend ETF (
SPYD , $39, 4.3%) tracks the
highest-yielding stocks in the S&P 500 index. The fund has 80 holdings and is sufficiently diversified to handle a clunker or two.
Utility PPL Corp. ( PPL , $31,
5.3%) derives more than 50% of its earnings from the United Kingdom. Worries that the U.K.'s departure from the European Union will
pressure PPL's earnings have weighed on the stock's price, boosting its yield. Nevertheless, PPL's U.S. operations provide strong
support for the company's generous payout. Ma Bell is a
Dividend Aristocrat , meaning that AT&T (
T , $32, 6.4%) has raised its dividend
for at least 25 consecutive years (35 straight years, in AT&T's case). The company has plenty of free cash flow to keep raising its
payout. SEE ALSO:
9 High-Yield Dividend Stocks That Deserve Your Attention//www.dianomi.com/smartads.epl?id=4908
You can invest in two types of REITs: those that invest in property and those that invest in mortgages. Both types must pass on at
least 90% of their revenue to investors, which is partly why they have such excellent yields. Typically, REITs that invest in income-producing
real estate have lower yields than those that invest in mortgages. The average property REIT yields 4.1%, compared with the average
mortgage REIT yield of 10.6%, according to the National Association of Real Estate Investment Trusts. Why the big difference? Property
REITs rack up expenses when they buy and sell income properties or lease them out as landlords. Mortgage REITs either buy mortgages
or originate them, using borrowed money or money raised through selling shares as their capital.
The risks: When the economy slows down, so does the real estate market, and most REITs will take a hit in a recession. Mortgage
REITs are exceptionally sensitive to interest rate increases, which squeeze their profit margins, and to recessions, which increase
the likelihood of loan defaults. REIT dividends are not qualified dividends for tax purposes and are taxed at your ordinary income
tax rate. How to invest: Realty Income Corp. (
O , $69, 4.0%) invests in property
and rents it to large, dependable corporations, such as Walgreens, 7-Eleven and Fed-Ex. It's a
Kiplinger 15 dividend stalwart and pays dividends monthly. Fidelity Real Estate Income (
FRIFX , 4.0%) isn't a REIT,
although it invests in them (among other things). The fund puts income first. It has 43% of its assets in bonds, most of them issued
by REITs. The fund lost 0.6% in 2018, compared with a 6% loss for other real estate funds. Investors will forgive a lot in exchange
for a high yield. In the case of iShares Mortgage Real Estate Capped ETF (
REM , $44, 8.2%), they're choosing
to accept a high degree of concentration: The top four holdings account for 44% of the ETF's portfolio. Although concentration can
increase risk, in this instance the fund's huge position in mortgage REITs has helped returns. Falling interest rates late in 2018
pushed up mortgage REITs, limiting the fund's losses to just 3% in 2018. Annaly Capital Management (
NLY , $10, 12%) is a REIT that
borrows cheaply to buy government-guaranteed mortgage securities. Most of those holdings are rated AA+ or better. Annaly boosts its
yield by investing in and originating commercial real estate loans and by making loans to private equity firms. Its 2018 purchase
of MTGE Investment, a mortgage REIT that specializes in skilled nursing and senior living facilities, will help diversify the firm's
portfolio. Annaly is the largest holding of iShares Mortgage Real Estate Capped ETF.
If you think interest rates are low in the U.S., note that most developed foreign countries have even lower rates because their economies
are growing slowly and inflation is low. The U.K.'s 10-year bond pays just 1.2%; Germany's 10-year bond yields 0.1%; Japan's yields
–0.03%. There's no reason to accept those yields for a day, much less a decade. You can, by contrast, find decent yields in some
emerging countries. Emerging-markets bonds typically yield roughly four to five percentage points more than comparable U.S. Treasury
bonds, which would put yields on some 10-year EM debt at about 7%, says Pramol Dhawan, emerging-markets portfolio manager at bond
fund giant Pimco.
The risks: You need a healthy tolerance for risk to invest in emerging-markets bonds. U.S. investors tend to be leery of them
because they remember massive defaults and currency devaluations, such as those that occurred in Asia in the late 1990s. But in the
wake of such debacles, many emerging countries have learned to manage their debt and their currencies better than in the past. But
currency is still a key consideration. When the U.S. dollar rises in value, overseas gains translate into fewer greenbacks. When
the dollar falls, however, you'll get a boost in your return. A higher dollar can also put pressure on foreign debt denominated in
dollars -- because as the dollar rises, so do interest payments. How to invest: Dodge & Cox Global Bond (
DODLX , 4.5%) can invest anywhere,
but lately it has favored U.S. bonds, which were recently 48% of the portfolio. The fund's major international holdings show that
it isn't afraid to invest in dicey areas -- it has 11% of its assets in Mexican bonds and 7% in United Kingdom bonds. Fidelity New
Markets Income ( FNMIX , 5.6%),
a
Kip 25 fund, has been run by John Carlson since 1995. That makes him one of the few emerging-markets debt managers who ran a
portfolio during the currency-triggered meltdown in 1997-98. He prefers debt denominated in dollars, which accounts for 94% of the
portfolio. But he can be adventurous: About 6.5% of the fund's assets are in Turkey, which is currently struggling with a 19% inflation
rate and a 14.7% unemployment rate. IShares Emerging Markets High Yield Bond ETF (
EMHY , $46, 6.2%) tracks emerging-markets
corporate and government bonds with above-average yields. The holdings are denominated in dollars, so there's less currency risk.
But this is not a low-risk holding. It's more than twice as volatile as the U.S. bond market, although still only half as volatile
as emerging-markets stocks. SEE ALSO:
39
European Dividend Aristocrats for International Income Growth
Junk bonds -- or high-yield bonds, in Wall Street parlance -- aren't trash to income investors. Such bonds, which are rated BB+ or
below, yield, on average, about 4.7 percentage points more than the 10-year T-note, says John Lonski, managing director for Moody's
Capital Markets Research Group. What makes a junk bond junky? Typical high-yield bond issuers are companies that have fallen on hard
times, or newer companies with problematic balance sheets. In good times, these companies can often make their payments in full and
on time and can even see their credit ratings improve. The risks: You're taking an above-average risk that your bond's issuer will
default. The median annual default rate for junk bonds since 1984 is 3.8%, according to Lonksi. In a recession, you could take a
big hit. In 2008, the average junk bond fund fell 26%, even with reinvested interest.
How to invest: RiverPark Strategic Income (
RSIVX , 4.8%) is a mix of cash
and short-term high-yield and investment-grade bonds. Managers choose bonds with a very low duration, to cut interest rate risk,
and a relatively low chance of default. Vanguard High-Yield Corporate (
VWEHX , 5.5%), a
Kip 25 fund, charges just 0.23% in expenses and invests mainly in the just-below-investment-grade arena, in issues from companies
such as Sprint and Univision Communications. SPDR Bloomberg Barclays High Yield Bond ETF (
JNK , $36, 5.8%) charges 0.40%
in expenses and tracks the Barclays High Yield Very Liquid index -- meaning that it invests only in easily traded bonds. That's a
comfort in a down market because when the junk market turns down, buyers tend to dry up. The fund may lag its peers in a hot market,
however, as some of the highest-yielding issues can also be the least liquid. Investors who are bullish on the economy might consider
Northern High Yield Fixed Income Fund (
NHFIX , 7.0%). The fund owns
a significant slice of the junkier corner of the bond market, with about 23% of its holdings rated below B by Standard & Poor's.
These bonds are especially vulnerable to economic downturns but compensate investors willing to take that risk with a generous yield.
You might be surprised to learn how much income you can generate from moving hydrocarbons from one place to another. Most MLPs are
spin-offs from energy firms and typically operate gas or oil pipelines. MLPs pay out most of their income to investors and don't
pay corporate income taxes on that income. Those who buy individual MLPs will receive a K-1 tax form, which spells out the income,
losses, deductions and credits that the business earned and your share of each. Most MLP ETFs and mutual funds don't have to issue
a K-1; you'll get a 1099 form reporting the income you received from the fund.
The risks: In theory, energy MLPs should be somewhat immune to changes in oil prices; they collect fees on the amount they move,
no matter what the price. In practice, when oil gets clobbered, so do MLPs -- as investors learned in 2015, when the price of West
Texas intermediate crude fell from $53 a barrel to a low of $35 and MLPs slid an average 35%. Oil prices should be relatively stable
this year, and high production levels should mean a good year for pipeline firms. How to invest: Magellan Midstream Partners (
MMP , $62, 6.5%) has a 9,700-mile
pipeline system for refined products, such as gasoline, and 2,200 miles of oil pipelines. The MLP has a solid history of raising
its payout (called a distribution) and expects a 5% annual increase in 2019. The giant of MLP ETFs, Alerian MLP ETF (
AMLP , $10, 7.2%), boasts $9
billion in assets and delivers a high yield with reasonable expenses of 0.85% a year. Structured as a C corporation, the fund must
pay taxes on its income and gains. That can be a drag on yields compared with MLPs that operate under the traditional partnership
structure. EQM Midstream Partners (
EQM , $46, 10.1%) is active in
the Appalachian Basin and has about 950 miles of interstate pipelines. The firm paid $4.40 in distributions per unit last year and
expects to boost that to $4.58 in 2019.
Closed-end funds (CEFs) are the forebears of mutual funds and ETFs. A closed-end fund raises money through an initial stock offering
and invests that money in stocks, bonds and other types of securities, says John Cole Scott, chief investment officer, Closed-End
Fund Advisors. The fund's share price depends on investors' opinion of how its picks will fare. Typically, the fund's share price
is less than the current, per-share value of its holdings -- meaning that the fund trades at a discount. In the best outcome, investors
will drive the price up to or beyond the market value of the fund's holdings. In the worst case, the fund's discount will steepen.
The risks: Many closed-end income funds borrow to invest, which can amplify their yields but increase their price sensitivity
to changes in interest rates. Most CEFs have higher expense ratios than mutual funds or ETFs, too.
How to invest: Ares Dynamic Credit Allocation Fund (
ARDC , $15, 8.5%) invests in
a mix of senior bank loans and corporate bonds, almost all of which are rated below investment grade. Borrowed money as a percentage
of assets -- an important indicator for closed-end funds known as the leverage ratio -- is 29.6%, which is a tad lower than the average
of 33% for closed-end funds overall. The fund's discount to the value of its holdings has been narrowing of late but still stands
at 12.1%, compared with 11.2%, on average, for the past three years.
Advent Claymore Convertible Securities and Income Fund (
AVK , $15, 9.4%), run by Guggenheim
Investments, specializes in convertible bonds, which can be exchanged for common stock under some conditions. The fund also holds
some high-yield bonds. Currently, it's goosing returns with 40% leverage, which means there's above-average risk if rates rise. For
intrepid investors, the fund is a bargain, selling at a discount of 10.6%, about average for the past three years.
Clearbridge Energy Midstream Opportunity (
EMO , $9, 9.7%) invests in energy
master limited partnerships. It sells at a 12.1% discount, compared with a 6.6% average discount for the past three years. Its leverage
ratio is 33% -- about average for similar closed-end funds.
The global bond market's soaring performance has left investors queasy about the ride
ahead.
The Bloomberg Barclays Global Aggregate index has earned 2.3 percent through March 28, its
best quarter since mid-2017. But with yields sinking across major sovereign markets, investors
now face a dilemma. Buying government bonds at these levels is perilous because economic data
may improve, while taking more risk could leave investors nastily exposed to a global
downturn.
"... In the ongoing desire on their part to be transparent they have, until Wed., projected their expectations for increases to short-term rates over the next two years to be 4 increases this year and 4 next year. ..."
"... As of Wednesday, that's all gone. The new dot chart says zero increases this year and at most 1 next year. The 10-year treasury immediately cratered its yield to 2.5something percent. ..."
Re shale financing . . . Folks should go and read financial articles from Wednesday afternoon
of this week.
The Fed basically took a sledgehammer to their dot charts. In the ongoing desire on their
part to be transparent they have, until Wed., projected their expectations for increases to
short-term rates over the next two years to be 4 increases this year and 4 next year.
As of Wednesday, that's all gone. The new dot chart says zero increases this year and at
most 1 next year. The 10-year treasury immediately cratered its yield to 2.5something
percent. Still falling. Overseas we see Germany tracking, and Japan, and more and more
maturities on their yield curves return to negative. Not just real negative. Outright nominal
negative.
This is something that Financial media does not talk about. Negative nominal interest
rates from major country government bonds. How could they talk about it? It is utterly
obvious that this specific reality demonstrates that the entirety of all analyses has no
meaning. Their only defense is silence. Shale would prefer that it stay that way.
The Fed also announced an end to balance sheet normalization, which is euphemism for
trying to get rid of all of those bonds and MBS that were purchased as part of QE. They are
ending their purchases late this year. They dare not continue the move towards normal. I
believe that leaves their balance sheet still holding in excess of 3 trillion. That's not
normalization, sports fans. And it has been TEN YEARS.They havent been able to get to
"normal" in ten years, and as of Wed, they will stop trying.
The Treasury notes are the underlying basis for what shale companies have to pay to borrow
money. Thoughts by folks here that the monetary gravy train will shut off shale drilling need
rethinking. Bernanke changed everything. Forever.
These Fed actions are indistinguishable from whimsy. Imagining that Powell is Peak Oil
cognizant and is focused on shale is a tad extreme, but only a tad.
I recall a Bernanke quote during the crisis that made clear he knew what Peak would mean
-- at any price.
"Bond markets globally, along with dovish central banks, have been telling us a slowdown is
on the way," said Jeffrey Halley, senior market analyst at Oanda Corp. in Singapore. "Some
parts of the world will be better equipped than others to handle this. The U.S. can at least
cut rates and apply monetary tools, while things could be worse for Europe and Japan, where
they cannot."
It does feel like in 2017. But that does not means much as economy changed substantially and probably nor in the right
direction... Purchasing power of population probably was eroded despite growth of absolute numbers of customers because of
decimation of well paying jobs. Also the market now is dominated by HFT which serves as an amplifier of pre-existing
trend and can by itself course a crash or mini crash. Another factor is oil prices.
But the idea of disconnect if a very useful idea and many other analysts predicted negative year for S&P500. I see dot-com
bubble No.2 here, not so much subprime mortgages problem of 2008. Subprime exists now in junk bond produced by shale oil players,
but it is much less in size.
He said
the stock market, for now,
"likes the fact that they (the Fed) aren't going to give them any problems."
But things could change quickly and dramatically, he said, with his final comment, the most
ominous:
"It feels eerily like '07,"
he said.
"
The stock market is near its high and the economy is noticeably weaker
- and yet everyone is saying 'Everything is Great!
'"
And just in case you wondered how bad the underlying is - despite equity market's enthusiasm -
Citi's Economic Data Change index as its worst level since 2009...
Today at 4:15pm EDT, DoubleLine founder Jeff Gundlach is holding his latest live webcast
open to investors and casual listeners, titled enticingly 'Highway to Hell', and which we
assume will discuss either Brexit, the US-China trade deal, the long-term US debt picture or
how this, latest asset bubble finally ends.
Readers can register and follow it live at
this address
,
or clicking on the image below
As usual, we will grab and highlight the most interesting charts from Gundlach's
presentation as they come in.
* * *
Gundlach, as usual, starts with one of his favorite charts, the one showing the global
central bank balance sheet level juxtaposed to the global market, as the background for the
Fed's "180 degree turn" in the stock market's recent rebound, which is understandable since the
"S&P was and is in a bear market."
... ... ...
If that wasn't bad enough, Gundlach also said that
stocks will take out the December low
during the course of 2019 and markets will roll over earlier than they did last year.
Shifting from the market to the economy, Gundlach shows that global economic momentum is getting
worse across the globe...
Gundlach then highlights the sudden collapse in global trade, which would suggest the world is in
a global recession.
And yet at the same time, US economic data, at least in the labor market,
has never been stronger as Gundlach shows:
Of course, another big red flag is the collapse in December retail sales, and despite the sharp rebound in the January print
as we saw yesterday, Gundlach highlights the sharp drop in the 6 month average and highlights it as another potential
recessionary risk factor.
Going back to one of his favorite topics, the relentless growth of US debt, Gundlach shows the following chart of debt by
sector. Needless to say, it is troubling, and as Gundlach said.
And tied to that, the following new warning on the US interest expense: "The US interest expense is projected by the CBO to
explode higher starting yesterday"
Gundlach then went on a rant against MMT, calling it a "crackpot" theory, which is based on a "completely fallacious
argument", and adds that "People who have PhDs in economics actually are buying the complete nonsense of MMT which is used to
justify a massive socialist program."
Gundlach also discusses the US trade deficit, which recently soared, saying that "the trade deficit is not shrinking but
expanding," and the goods deficit is at "an all-time record", which according to Gundlach may hurt Trump's re-election chances.
Having predicted president Trump early, when everyone else was still mocking him, Gundlach admits that he is "not really sure
what's going to happen,'' when it comes to the next election. "If you ran on promising a lesser trade deficit'' and elimination
of national debt, and both have "exploded" higher, Gundlach thinks it's hard to say that you're winning.
And speaking of the next president, Gundlach suggests that if the economy falls into recession and Trump gets thrown out, we
might get the chance to see how MMT, i.e. helicopter money, really works with the next, socialist, president.
Perhaps this is also why to Gundlach "the next big move for the dollar is lower."
Looking ahead, Gundlach also touches on the future of monetary policy, and once again highlights the discrepancy between the
bond market, which expects half a rate cut, and the Fed's dot plot which expects three hikes in 2019-2020.
What happens? To Gundlach, "Fed expectations are likely to show capitulation to the Fed this time...the bond market is having
none of the Fed's two dots that they revealed in December." He then adds that the Fed "will absolutely drop the 2019 dot,"
suggesting it may be dropped to 1/2 a hike.
Optimism that a new trade deal will occur between America and
China has driven stock markets higher even as data continues to
emerge confirming economies across the world continue to slow. It
seems much of the current market fervor is based on optimism and
hope falls into the category of "irrational exuberance" a term
that Allen Greenspan has in the past used to describe unbridled
enthusiasm. More on the realities being ignored in the following
article.
Hmm....Kinda strange call there Jeffy Jeff on those higher
interest rates.
Especially considering just today where the 1yr
yield is higher than...get this, the 2yr, the 3yr, the 5yr
aaaaand the 7year bond. Kinda strange setup for rates exploding
higher isn't it? Or if you like to think of it as a belly that
sumbuck is getting one BIG pot gut.
Politicians are imbeciles and have no remedies. The US is the
least ugly pig of the bunch. The EU needs major structural tax
and regulatory reform; open borders with a pervasive social
welfare state has proven a recipe for disaster. The US is in
similar circumstances, but its tax and regulatory environment are
at least rational. It requires massive entitlement and spending
reforms with some minor tax hikes on the top end marginal income
and capital gains brackets.
Today at 4:15pm EDT, DoubleLine founder Jeff Gundlach is holding his latest live webcast
open to investors and casual listeners, titled enticingly 'Highway to Hell', and which we
assume will discuss either Brexit, the US-China trade deal, the long-term US debt picture or
how this, latest asset bubble finally ends.
Readers can register and follow it live at this address ,
or clicking on the image below
As usual, we will grab and highlight the most interesting charts from Gundlach's
presentation as they come in.
* * *
Gundlach, as usual, starts with one of his favorite charts, the one showing the global
central bank balance sheet level juxtaposed to the global market, as the background for the
Fed's "180 degree turn" in the stock market's recent rebound, which is understandable since the
"S&P was and is in a bear market."
"At this point in the cycle, a pickup in inflation will generally lead to corporate margin
compression, which is potentially more supportive of maintaining a long duration stance,"
Bartolini, lead portfolio manager for U.S. core bond strategies, said after the jobs figures.
He sees annual CPI remaining around this report's consensus of 1.6 percent -- the slowest since
2016 -- for a while.
Benchmark 10-year yields enter the week at 2.63 percent, close to the lowest level in two
months. In the interest-rate options market, traders have been ramping up positions that target
lower yields in five- and 10-year notes.
DougDoug,
The Fed is pretty much DONE with rate hikes, as paying the INTEREST on, 22 Trillion in
Debt will get,.. UGLIER and UGLIER ! Especially with, all the new,.. Tax and SPEND Demo'Rat
Liberals, coming into, Congress ! "We the People", will be,.. TOAST !!
I'm HOLDING, my "Floating Rate" senior secured, Bond CEF's and my Utility and Tech, CEF's,
too ! Drawing NICE Dividends,.. Monthly !
The World is NOT ending for, the USA,.. THANKS,.. to Trump !
NEW YORK, Jan 17 (Reuters) - U.S. fund investors charged into high-yield "junk" bonds during
the latest week, pouring in $3.3 billion, the most cash flowing into that market since late
2016, Lipper said on Thursday, boosted by soothing words by Federal Reserve Chairman Jerome
Powell.
Underscoring investors' appetite for some risk-taking, investors pulled $15 billion net cash
from U.S.-based money market funds, according to the Refinitiv research service. For their
part, U.S.-based equity mutual funds - which exclude exchange-traded funds - posted inflows of
$4.8 billion, Lipper data showed.
Does William Cohan's New York Times Tirade Against Low Interest Rates Make Any Sense?
By Dean Baker
It doesn't as far as I can tell. Cohan has been on a rant * for years about how high risk
corporate bonds are going to default in large numbers and then ... something. It's not clear
why most of us should care if some greedy investors get burned as a result of not properly
evaluating the risk of corporate bonds. No, there is not a plausible story of a chain of
defaults leading to a collapse of the financial system.
But even the basic proposition is largely incoherent. Cohan is upset that the Federal
Reserve has maintained relatively low, by historical standards,interest rates through the
recovery. He seems to want the Fed to raise interest rates. But then he tells readers:
"After the fifth straight quarterly rate increase, Mr. Trump, worried that the hikes might
slow growth or even tip the economy into recession, complained that Mr. Powell would 'turn me
into Hoover.' On January 3, the president of the Federal Reserve Bank of Dallas said the Fed
should assess the economic outlook before raising short-term interest rates again, a signal
that the Fed has hit pause on the rate hikes. Even Mr. Powell has signaled he may be turning
more cautious."
It's not clear whether Cohan is disagreeing with the assessment of the impact of higher
interest rates, not only by Donald Trump, but also the president of the Dallas Fed, Jerome
Powell, and dozens of other economists.
Higher interest rates will slow growth and keep people from getting jobs. The people who
would be excluded from jobs are disproportionately African American, Hispanic, and other
disadvantaged groups in the labor market. Higher unemployment will also reduce the bargaining
power of tens of millions of workers who are currently in a situation to secure real wage
increases for the first time since the recession in 2001.
If Cohan had some story of how bad things would happen to the economy if the Fed doesn't
raise rates then perhaps it would be worth the harm done by raising rates, but investors
losing money on corporate bonds doesn't fit the bill.
"Goldman cuts 10-year Treasury yield target for 2019 to 3%"
By Sunny Oh...Jan 8, 2019...10:45 a.m. ET
"Goldman Sachs has rolled back its call for much higher rates in U.S. government bonds in
the U.S., though it still expects a gradual climb from the current muted levels in the
Treasury market.
In a Tuesday note, Goldman Sachs said they expect the 10-year yield TMUBMUSD10Y, +0.06% to
hit 3% by year-end, a 50 basis point cut from their forecast of 3.5%. Since last week, the
benchmark bond yield has steadily risen to 2.710% Tuesday, after hitting an 11-month low of
2.553% last Thursday, according to Tradeweb data.
"... However, despite the signs, Goldman Sachs assumes the indicators are wrong and that "recession risk remains fairly low, in the neighborhood of 15% over the next year." The bank has predicted that the S&P 500 will finish 2019 at 3,000, up from the current value just below 2,600. ..."
Confidence in continued economic growth has been waning. A huge majority of chief financial officers
around the world say a recession will happen by the end of 2020. Most voters think one will hit by the end
of this year.
Now the Goldman
Sachs economic research team says that the
market shows a roughly 50% chance of a recession over the next year, according to
Axios.
Goldman Sachs looked at two different measures: the yield curve slope and credit spreads.
The former refers to a graph of government bond interest rates versus the years attaining
maturity requires. In a growing economy, interest rates are higher the longer the investment
because investors have confidence in the future. A frequent sign of a recession is the
inversion of the slope, when investors are uncertain about the future, so are less willing to
bet on it.
Credit spreads compare the interest paid by government bonds, which are considered the
safest. Corporate bonds, which are riskier, of the same maturity have to offer higher interest
rates. As a recession approaches, credit spreads tend to expand, as investors are more worried
about companies defaulting on their debt.
However, despite the signs, Goldman Sachs assumes the indicators are wrong and that
"recession risk remains fairly low, in the neighborhood of 15% over the next year." The bank
has predicted that the S&P 500 will finish 2019 at 3,000, up from the current value just
below 2,600.
(Bloomberg) -- Jeffrey Gundlach said yet again that the U.S. economy is gorging on debt.
Echoing many of the themes from his annual "Just Markets" webcast on Tuesday, Gundlach took
part in a round-table of 10 of Wall Street's smartest investors for Barron's. He highlighted
the dangers especially posed by the U.S. corporate bond market.
Prolific sales of junk bonds and significant growth in investment grade corporate debt,
coupled with the Federal Reserve weaning the market off quantitative easing, have resulted in
what the DoubleLine Capital LP boss called "an ocean of debt."
The investment manager countered President Donald Trump's claim that he's presiding over the
strongest economy ever. The growth is debt-based, he said.
Gundlach's forecast for real GDP expansion this year is just 0.5 percent. Citing numbers
spinning out of the USDebtClock.org website, he pointed out that the U.S.'s unfunded
liabilities are $122 trillion -- or six times GDP.
"I'm not looking for a terrible economy, but an artificially strong one, due to stimulus
spending," Gundlach told the panel. "We have floated incremental debt when we should be doing
the opposite if the economy is so strong."
Stock Bear
Gundlach is coming off another year in which his Total Return Bond Fund outperformed its
fixed-income peers. It returned 1.8 percent in 2018, the best performance among the 10 largest
actively managed U.S. bond funds, according to data compiled by Bloomberg.
Gundlach expects further declines in the U.S. stock market, which recently have steadied
after reeling for most of December since the Great Depression. Equities will be weak early in
the year and strengthen later in 2019, effectively a reversal of what happened last year, he
said.
"So now we are in a bear market, which isn't defined by me as stocks being down 20 percent.
A bear market is determined by the way stocks are acting," he said.
Rupal Bhansali, chief investment officer of International & Global Equities at Ariel
Investments, picked up on Gundlach's debt theme in the Barron's cover story. Citing General
Electric's woes, she urged investors to focus more on balance-sheet risk rather than whether a
company could beat or miss earnings. Companies with net cash are worth looking at, she
said.
To contact the reporters on this story: James Ludden in New York at
jludden@bloomberg.net;Hailey Waller in New York at hwaller@bloomberg.net
To contact the editors responsible for this story: Matthew G. Miller at
mmiller144@bloomberg.net, Ros Krasny
For more articles like this, please visit us at bloomberg.com
"... In what is still a low-interest-rate environment globally, the perpetual search for yield has found a comparatively new and attractive source in the guise of collateralized loan obligations (CLOs) within the USEM world. According to the Securities Industry and Financial Markets Association, new issues of "conventional" high-yield corporate bonds peaked in 2017 ..."
"... These CLOs share many similarities with the mortgage-backed securities that set the stage for the subprime crisis a decade ago. During that boom, banks bundled together loans and shed risk from their balance sheets. Over time, this fueled a surge in low-quality lending, as banks did not have to live with the consequences. ..."
"... A world economy geared toward increasing the supply of financial assets has hooked us into a global game of waiting for the next bubble to emerge somewhere. ..."
A decade after the subprime bubble burst, a new one seems to be taking its
place in the market for corporate collateralized loan obligations. A world economy geared toward increasing the supply of financial
assets has hooked market participants and policymakers alike into a global game of Whac-A-Mole.
A recurrent topic in the financial press for much of 2018 has been the rising
risks in the emerging market (EM) asset class. Emerging economies are, of course, a very diverse group. But the yields on their
sovereign bonds have climbed markedly, as capital inflows to these markets have dwindled amid a general perception of
deteriorating conditions
.
1
Historically, there has been a tight positive relationship between
high-yield US corporate debt instruments and high-yield EM sovereigns. In effect, high-yield US corporate debt is the
emerging market that exists within the US economy (let's call it USEM debt). In the course of this year, however, their
paths have diverged (see Figure 1). Notably, US corporate yields have failed to rise in tandem with their EM counterparts.
What's driving this divergence? Are financial markets overestimating the
risks in EM fixed income (EM yields are "too high")? Or are they underestimating risks in lower-grade US corporates (USEM
yields are too low)?
Taking together the current trends and cycles in global factors (US
interest rates, the US dollar's strength, and world commodity prices) plus a variety of adverse country-specific economic
and political developments that have recently plagued some of the larger EMs, I am inclined to the second interpretation.
In what is still a low-interest-rate environment globally, the perpetual search for yield has found a comparatively new
and attractive source in the guise of collateralized loan obligations (CLOs) within the USEM world. According to the
Securities Industry and Financial Markets Association, new issues of "conventional" high-yield corporate bonds peaked in
2017
and are off significantly this year (about 35% through November). New issuance activity has shifted to the CLO
market, where the amounts outstanding have soared, hitting new peaks almost daily. The
S&P/LSTA US
Leveraged Loan 100 Index
shows an increase of about 70% in early December from its 2012 lows (see Figure 2), with
issuance hitting record highs in 2018. In the language of emerging markets, the USEM is attracting large capital inflows.
These CLOs share many similarities with the mortgage-backed
securities that set the stage for the subprime crisis a decade ago. During that boom, banks bundled together loans and shed
risk from their balance sheets. Over time, this fueled a surge in low-quality lending, as banks did not have to live with
the consequences.
Likewise, for those procuring corporate borrowers and bundling corporate
CLOs, volume is its own reward, even if this means lowering standards for borrowers' creditworthiness. The share of
"Weakest Links"
– corporates rated B-
or lower (with a negative outlook) – in overall activity has risen markedly since 2013-2015. Furthermore, not only are the
newer issues coming from a lower-quality borrower, the covenants on these instruments – provisions designed to ensure
compliance with their terms and thus minimize default risk – have also become lax.
Covenant-lite
issues are on the rise and
now account for about 80% of the outstanding volume.
As was the case during the heyday of mortgage-backed securities, there
is great investor demand for this debt, reminiscent of the "capital inflow problem" or the "
bonanza
"
phase of the capital flow cycle. A recurring pattern across time and place is that the seeds of financial crises are sown
during good times (when bad loans are made). These are good times, as the US economy is at or near full employment.
The record shows that capital-inflow surges often end badly. Any number
of factors can shift the cycle from boom to bust. In the case of corporates, the odds of default rise with mounting debt
levels, erosion in the value of collateral (for example, oil prices in the case of the US shale industry), and falling
equity prices. All three sources of default risk are now salient, and, lacking credible guarantees, the CLO market (like
many others) is vulnerable to runs, because the main players are lightly regulated shadow banking institutions.
And then there are the old and well-known concerns about shadow banking
in general, which stress both its growing importance and the opaqueness of its links with other parts of the financial
sector. Of course, we also hear that a virtue of financing debt through capital markets rather than banks is that the shock
of an abrupt re-pricing or write-off will not impair the credit channel to the real economy to the degree that it did in
2008-2009. Moreover, compared to mortgage-backed securities (and the housing market in general), the scale of household
balance sheets' exposure to the corporate-debt market is a different order of magnitude.
A decade after the subprime bubble burst, a new one seems to be taking
its place – a phenomenon aptly characterized by Ricardo Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas as "
Financial
'Whac-a-Mole
.'"
A world economy geared toward increasing the supply of financial assets has hooked us into a global
game of waiting for the next bubble to emerge somewhere.
Like the synchronous boom in residential housing prior to 2007 across
several advanced markets, CLOs have also gained in popularity in Europe. Higher investor appetite for European CLOs has
predictably led to a
surge in issuance
(up almost 40% in 2018). Japanese banks, desperately seeking higher yields, have swelled the ranks of
buyers. The networks for financial contagion, should things turn ugly, are already in place.
1
Carmen M. Reinhart is Professor of the International Financial System at Harvard University's Kennedy School of
Government.
Douglas
Leyendecker
Dec 23, 2018
The most important questions isn't when or why this bubble will burst but how we got here in the first place. It all
starts with BAD economic and social policies. Now we require more and more "money" to keep the wheels on. Bubble to
bubble...this is where we are in the developed world today. When the reboot finally hits there won't be any
cryptocurrency because there won't be any internet. This is what happens in a fiat currency system.
Read More
MARCO
TEAMNEURS
Dec 23, 2018
Certain deterministic outcome such as the one presented by Professor Carmen M. Reinhart fits with the Idols refereed by
Francis Bacon in Novum Organum. We will be using financialization until it will be not relevant because something else
had emerged or most of us de-merged. This time might be that we are on those moments where something relevant is moving
under our feet.
What seems to be making the difference is strength of soft/hard power the CCP (Communist Chinese Party) has to leverage
decisions over the world. What happened when in the Subprime Crises Russia called China to together attack capital
markets of USA and China refused (according to Mr. Henry Paulson) might have not the same reply this time.
Read less
Paul Daley
Dec 23, 2018
Good article. But -- do I dare say it -- this time may be different. As Reinhart points out, CLOs do not have heavily
engaged public institutions, as was the case with mortgage backed securities and sovereign debt. A collapse in CLO prices
would fall largely on private shoulders. And, after their first experiments with QE, central banks should have a better
grip on the risks and consequences of asset price support programs in encouraging and sustaining asset price bubbles, and
be prepared this time to employ income support measures to sustain real economic activity, if necessary.
nigel southway
Dec 22, 2018
The best course of action is stop the easy movement of capital across borders that way it stops the phoney wealth
transactions caused by a foolish focus on the global economy start more national centered wealth funds
Jacob Alhadeff
Dec 20, 2018
I had no idea any of this was going on. This was very informative, but I don't know yet exactly what to do with this
information. I'm cynical about our ability to avoid such bubbles, but we can prepare for them. In terms of how low/middle
income Americans can prepare what would anyone suggest? Also, I'm not looking for advice on investing decisions
Read less
nigel
southway
Dec 24, 2018
We need to come to terms with who owns capital. It's mostly the nation that created it. The capitalists should only rent
it and the traders and globalists have zero rights to it hence the justification for stricter controls
"... The 30-year U.S. yield fell to 2.91 percent on Thursday, the lowest since January 2018 ..."
"... The other interpretation is that the company chose to refinance with long-term fixed-rate debt because it sees the big drop in 30-year yields as unsustainable ..."
Berkshire, with the third-highest credit rating from both Moody's Investors Service and
S&P Global Ratings, is expected to price the debt on Thursday with a spread of 150 to 155
basis points above benchmark Treasuries. The 30-year U.S. yield fell to 2.91 percent on
Thursday, the lowest since January 2018.
The other interpretation is that the company chose to refinance with long-term fixed-rate
debt because it sees the big drop in 30-year yields as unsustainable. After all, if a borrower
expects interest rates to rise in the future, it would prefer to lock in a fixed rate now
rather than face higher payments down the road.
Contra Tim Duy, The Lack of Federal Reserve Maneuvering Room Is Very
Worrisome...
This , by the every sharp Tim Duy, strikes me as simply wrong: Contrary to what he says,
the Fed has room to combat the next crisis only if the next crisis is not really a crisis, but
only a small liquidity hiccup in the financial markets. Anything bigger, and the Federal
Reserve will be helpless, and hapless.
Look at the track of the interest rate the Federal Reserve controls -- the short safe
nominal interest rate:
In the past third of a century, by my count the Federal Reserve has decided six times that
it needs to reduce interest rates in order to raise asset prices and try to lift contractionary
pressure off of the economy -- that is, once every five and a half years. Call these: 1985,
1987, 1991, 1998, 2000, and 2007.
Three things are certain: death, taxes, and that the already thin gap between human trader
and algo is narrowing ever further.
AllianceBernstein's new virtual assistant can now suggest to fixed income portfolio managers
what the best bonds may be to purchase using parameters such as pricing, liquidity and risk,
according to
Bloomberg . The machine has numerous advantages to humans: "she" can scan millions of data
points and identify potential trades in seconds. Plus she never needs to take a cigarette or a
bathroom break.
The new virtual assistant, dubbed Skynet 2.0 "Abbie 2.0", specializes in identifying bonds
that human portfolio managers have missed. She can also help spot human errors and communicate
with similar bots like herself at other firms to arrange trades, making humans redundant. This
is the second iteration of AllianceBernstein's electronic assistant which debuted in January of
this year, but could only build orders for bonds following precise input from humans.
Sourcing bonds that are easy to trade is done by Abbie 2.0 reaching out to another AB system
called ALFA, which stands for Automated Liquidity Filtering and Analytics. The AFLA system
gathers bids and asks from dealers and electronic trading venues to work out the best possible
trades.
For now, humans are still required: Jeff Skoglund, chief operating officer of fixed income
at AB told Bloomberg that "humans and machines will need to work closer than ever to find
liquidity, trade faster and handle risks. Our hope is that we grow and use people in ways that
are more efficient and better leverage their skills."
What he really means is that his hope is to fire as many expensive traders and PMs as
possible to fatten the company's profit margins. Which is why the virtual assistant already
helps support a majority, or more than 60 percent of AllianceBernstein's fixed income trades.
The "upgrades" that are coming for the new assistant will help it include high-yielding
investment grade bonds, before expanding to other more complex markets in the coming months. AB
says that they will still rely on humans to make the final decisions on trades. For now.
Related: IBM Launchs Global Payments System With New Stablecoin
While the original version of the assistant had to be told how much a portfolio manager
wanted of a specific bond, the new version now mines data pools to be proactive, making sizing
suggestions to portfolio managers. Among other things, the assistant looks at ratings of
companies, capital structure and macro data such as social and geopolitical risks.
This is just another step in the industry becoming machine oriented in order to help cut
costs, save time and avoid errors, especially in relatively illiquid bond markets. Liquidity
could become even more of a factor if the economy slips into recession over the next couple of
years.
Electronic trading in general is becoming more pronounced in fixed income as banks act more
like exchanges instead of holding bonds on their balance sheet. All the while, regulations have
encouraged the shifting of bond trading to exchanges. More than 80 percent of investors in
high-grade bonds use electronic platforms, accounting for 20 percent of volume, according to
Bloomberg.
Skoglund concluded, "We expect to be faster to market and capture opportunities we otherwise
would not have caught by using this system. There's a liquidity problem right now that could
become significantly more challenging in a risk-off environment."
We're introducing a new active bond fund that allows you to take advantage of Vanguard's
extensive global investment management capabilities and expertise. Vanguard Global Credit Bond
Fund ( Admiral™ Shares: VGCAX ;
Investor
Shares: VGCIX ) gives you unique access to the global credit market, which includes both
U.S. and international investments. The fund will be managed by the Vanguard Fixed Income
Group, which has more than 35 years of experience managing active bond portfolios.
Key potential benefits of the fund include:
Lower volatility. The fund's global diversification reduces the impact of
country-specific risks. This can help lower volatility relative to a U.S.-only credit
fund.
Higher returns. Rather than government-guaranteed bonds, the fund will hold mostly
investment-grade credit bonds. These corporate and noncorporate obligations typically offer
higher yields than their government-guaranteed counterparts. In addition, the fund has a
global -- rather than a U.S.-only -- scope. This creates greater opportunity for value-added
investments.
Competitive value through active management. The fund will seek to deliver consistent
outperformance with a goal of beating its benchmark, the Bloomberg Barclays Global Aggregate
Credit Index (USD Hedged). It will do this at a lower cost than most competing funds, with
expense ratios of 0.25% for Admiral Shares and 0.35% for Investor Shares. For comparison, the
asset-weighted average expense ratio of its active peer funds in the world bond category is
0.65%.*
Which bond fund is right for you?
We've recently expanded our bond offerings to provide more options for diversification and
income. While more choices can help you build a better portfolio, they can also make it tricky
to decide which funds are right for you.
Here's a chart that shows, at a glance, the main differences between 3 similar bond
funds:
Investment-grade corporate and government-related entities
An actively managed bond fund that focuses on U.S., nongovernment
exposure.
Making the most of Vanguard's management resources
Vanguard Global Credit Bond Fund will complement Vanguard's existing suite of 25 actively
managed fixed income funds, not including Vanguard's actively managed money market funds.
Vanguard launched its first internally managed active fixed income fund in 1982 and the
world's first bond index fund in 1986. Vanguard is one of the world's largest fixed income fund
managers with approximately $1.3 trillion in assets under management.** Over $600 billion of
those assets are in actively managed fixed income funds (including money markets).
The Vanguard Fixed Income Group has more than 175 global fixed income professionals, 90 of
whom are part of the active taxable fixed income team, including over 30 global credit research
analysts around the world.
Vanguard
Global Credit Bond Fund is the first Vanguard fund of its kind. This globally diversified,
actively managed bond product capitalizes on Vanguard's extensive global investment
capabilities and global credit expertise.
*Source: Morningstar, Inc., as of September 30, 2018.
**Data as of September 30, 2018.
Yields to maturity on 10-year U.S. Treasury notes are now at their highest level since April
2011. The current yield to maturity is 3.21%, a significant rise from 1.387% which the market
touched on July 7, 2016 in the immediate aftermath of Brexit and a flight to quality in U.S.
dollars and U.S. Treasury notes.
The Treasury market is volatile with lots of rallies and reversals, but the overall trend
since 2016 has been higher yields and lower prices.
The consensus of opinion is that the bull market that began in 1981 is finally over and a
new bear market with higher yields and losses for bondholders has begun. Everyone from bond
guru Bill Gross to bond king Jeff Gundlach is warning that the bear has finally arrived.
I disagree.
It's true that bond yields have backed up sharply and prices have come down in recent
months. Yet, we've seen this movie before. Yields went from 2.4% to 3.6% between October 2010
and February 2011 before falling to 1.5% in June 2012.
Yields also rose from 1.67% in April 2013 to 3.0% in December 2013 before falling again to
1.67% by January 2015. In short, numerous bond market routs have been followed by major bond
market rallies in the past ten years.
To paraphrase Mark Twain, reports of the death of the bond market rally have been "greatly
exaggerated." The bull market still has legs. The key is to spot the inflection points in each
bear move and buy the bonds in time to reap huge gains in the next rally.
That's where the market is now, at an inflection point. Investors who ignore the bear market
mantra and buy bonds at these levels stand to make enormous gains in the coming rally.
The opportunity is illustrated in the chart below. This chart shows relative long and short
positions in ten major trading instruments based on futures trading data. The 10-year U.S.
Treasury note is listed as "10Y US."
As is shown, this is the most extreme short position in markets today. It is even more short
than gold and soybeans, which are heavily out of favor. It takes a brave investor to go long
when the rest of the market is so heavily short.
From comments "Tough to ween an entire community off its generational addiction to financial
heroin"
Notable quotes:
"... The Feds behaviour over the last decade has demonstrated institutional capture in its' purest form. Everything for the financial sector and nothing for the "Main Street" sector. ..."
So this has become a popular recession indicator that has cropped up a lot in the
discussions of various Fed governors since last year. Today, the two-year yield closed at 2.55%
and the 10-year yield at 2.84%. The spread between them was just 29 basis points, the lowest
since before the Financial Crisis.
The chart below shows the yield curves on December 14, 2016, when the Fed got serious about
raising rates (black line); and today (red line). Note how the red line has "flattened" between
the two-year and the 10-year markers, and how the spread has narrowed to just 29 basis
points:
... ... ...
So just in the nick of time, with the spread between the two-year and the
10-year yields approaching zero, the Fed begins the process of throwing out that indicator and
replacing it with a new indicator it came up with that doesn't suffer from these distortions.
And I have to agree that the Fed's gyrations over the past 10 years have distorted the
markets, have muddled the calculations, have surgically removed "fundamentals" as a
consideration for the markets, and have brainwashed the markets into believing that the Fed
will always bail them out at the smallest dip. And the yield curve, reflecting all those
distortions to some extent, might have become worthless as an indicator of anything other than
those distortions.
Isn't the Fed theoretically independent? Why then should they take cognizance of what the
President, or, for that matter, any politician wants? The Feds behaviour over the last
decade has demonstrated institutional capture in its' purest form. Everything for the
financial sector and nothing for the "Main Street" sector.
The Fed is carrying out a grand experiment. Do these 'Quaint Quant Quotients' have a
measurable relationship to the 'Real World' or do they not? My criteria for how well this
'realignment' amongst the 'Financial Stars' works out is going to be the severity of the next
"Recession."
I guess a possibility is the Fed let's the economy get really bad (not that we haven't
seen that recently even but it could be worse) in order to punish Trump. Yea but people are
going to suffer and die in the next recession, they not only already do in recessions anyway,
but there is literally no economic slack in most people's lives anymore. Yea this whole
economic system is screwy as can be, but if they produce mass unemployment we need a
guaranteed income at that point just to keep people from dying.
"(Don't Fear) the Yield Curve" is the title of the staff paper, riffing on "(Don't Fear)
the Reaper" by Blue Oyster Cult which evidently still exerts a powerful sway on the Fed's
balding eggheads 42 years on.
What distinguishes this model is its use of an interest rate dear to the hearts of
economists but absent from bond market quotes: the forward rate . Or as the Blue
Oyster Cult fanboys explain:
The current level of the forward rate 6 quarters ahead is inferred from the yields to
maturity on Treasury notes maturing 6 quarters from now and 7 quarters from now. In
particular, it is the rate that would have to be earned on a 3-month Treasury bill
purchased six quarters from now that would equate the results from two investment
strategies: simply investing in a Treasury note that matures 7 quarters from now versus
investing in a Treasury note that matures 6 quarters from now and reinvesting proceeds in
that 3-month Treasury bill.
Not a big deal to calculate -- so voracious is Big Gov's appetite for borrowing as we
approach the promised land of "trillion dollar deficits forever" that 2-year T-notes are
auctioned monthly, meaning there's always a handy pair of notes with maturities 18 and 21
months ahead whose yields can be used to derive the 6q7q forward rate for the long end of the
spread.
The joke is likely to be on the Fed, though. As their chart shows, the 0-6q forward spread
is volatile, and could well lurch down to meet the 2y10y spread any time. Moreover, despite
the June 28th date on the staff paper, the chart is stale, showing a 0.5%-plus value for the
2y10y spread which last existed several months ago.
In other words, prepare to hoist the Fedsters on their own forward-rate petard.
And they ran to us
Then they started to fly
They looked backward and said goodbye
They had become like we are
From the WSJ's Treasury page, the yield on a note due 12/31/2019 is 2.470%, while the
3/31/2020 note yields 2.511%. Yield on the current 3mo T-bill is 1.951%.
Doing a little exponential maff, we can derive a 6q7q forward rate of 2.76%, for a spread
of 0.81% over the current 3mo T-bill. This compares to a 2y10y spread of only 0.28%.
So according to the Fed's shiny new moved goalpost, there's room for three more rate
hikes, whereas the old goalpost would've allowed just one.
It is well within the Fed's capabilities to sell Treasury and Agency bonds with maturities
concentrated in the long end of the yield curve. Were the Fed to do that, particularly
against a backdrop of deep corporate tax cuts and the resultant increased supply of Treasury
debt, what is likely to happen to mortgage rates, real estate and collateral values?
I suspect the people complaining loudest about this emergent Fed policy are those who have
benefited most from both longtime negative real interest rates and a positively sloping yield
curve. Those were lucrative monetary policy features for them over the past nine years.
I have long been annoyed by the way Fed staff / hobbyists blithely treat the yield curve
as just another "indicator", as if they were forecasting the weather from changes in
barometric pressure or temperature.
Seeking a forecasting crystal in a calculated "forward" rate, supposedly mirroring
"expectations" of (a representative?) investors reflects a world view that imagines economic
actors confidently act on expectations that they believe will be fulfilled. It is not taking
uncertainty seriously.
The yield curve has worked not thru magic, but because it reflects a fundamental mechanism
of sorts that drives credit and the transformation of maturities: that some key institutions
borrow short and lend long, to coin a phrase, in the creation of credit that typically drives
the expansion of business activity. Inverting the yield curve forces the contraction of
credit by institutions that hedge a borrow short, lend long strategy with Treasuries.
It probably is not lost on those with a memory of past cycles that speculation about
whether things will be different this time with regard to the yield curve qua indicator
emerges regularly from Fed hobbyshops near the end of very long expansions. If memory serves
the Cleveland Fed research shop circulated such speculation in the 2005-7 period.
Admittedly, I haven't had my coffee yet, but I think I may have reached a conclusion: a
country whose economic system can't be understood in an hour is doomed to failure.
Citigroup analysts led by Anindya Basu point out that spreads on the
CDX HY, as the index is known, are currently pricing in an expected loss of 21.2 percent, which
translates into something like 22 defaults over the next five years if one assumes zero recovery
for investors. That is a pretty big number once you consider that a total of 41 CDX HY constituents
have defaulted since the index really began trading in 2005, equating to about 3.72 defaults per
year. A big chunk of those defaults (17) occurred in 2009 in the aftermath of the financial crisis.
What to make of it all? Actual recoveries during corporate default cycles tend to be higher than
the worst-case scenario of zero percent. In fact, they average somewhere in the 26 percent range,
which would imply 29 defaults over the next five years instead of 41.
So what? you might say. The CDX HY includes but one default cycle, and those types of
analyses tend to underestimate the peril of tail risk scenarios (hello,
subprime crisis). Citi has an answer for that, too. Using spreads from the cash bond market going
back to 1991, they forecast the default rate over the next 12 months to be something more like 5
percent to 5.5 percent. (For comparison, the rating agency Moody's is currently forecasting a 3.77
percent default rate.)
,,,,The
Vanguard Core Bond Fund, unveiled in a filing with regulators on Monday, is
being
billed as an actively managed alternative to index funds like the
Total Bond Market fund (VBMFX,
VBTLX,
BND). Its launch, slated
for the first three months of 2016, would coincide with a period of great
uncertainty in the bond markets. The Fed could mull its next interest-rate hike
as soon as March.
... ... ...
Daniel Wiener, editor of the Independent Adviser for
Vanguard Investors newsletter and a close watcher of all things Vanguard, was
quick to note that the fund could invest in bonds of "any quality." The new
fund's fine print shows leeway for Vanguard's portfolio managers to plunk up to
5% of the portfolio in junk bonds. Some 30% of the fund could fall into
"medium-quality" bonds.
Vanguard's existing offering in junk debt, the Vanguard High-Yield
Corporate Fund (VWEHX,
VWEAX), is
managed by Wellington Management Company.
Says Wiener: "Vanguard has never offered lesser-quality bond funds run by
its internal group. The junk portion of the Core Bond product will be a first."
For the last several year buying "junkest junk" was a profitable strategy. Now it came to abrupt
end.
Notable quotes:
"... The rest of the industry has been quick to say that while redemptions are elevated, particularly in high-yield bond funds, there doesn't seem to be a rush to for the exits. ..."
"... Goldman Sachs, for one, put out a note Friday warning Franklin Resources "is most at risk" given the large high-yield holdings of its funds, poor performance and large outflows. On Friday, its shares fell sharply. Meanwhile, there were unusually large declines Friday in the value of exchange-traded funds that track high-yield debt. ..."
"... The idea of a "run" on mutual funds might sound strange. Typically, runs are associated with highly leveraged banks engaged in maturity transformation, funding long-term loans with short-term debt. Nearly all the programs designed to avoid destabilizing runs-from deposit insurance to the Fed's discount window to liquidity requirements-are built for banks. But unleveraged investors, including mutual funds, can also give rise to runs. That is because there is a liquidity mismatch in mutual funds that hold relatively illiquid assets funded by investors entitled to daily redemptions. ..."
Interesting WSJ article (do a Google Search for the title, for access). Last week, the Journal
noted that Chesapeake bonds that traded at 80¢ on the dollar a few months ago were currently trading
at 30¢ to 40¢ on the dollar. I suspect that there are some huge losses on the books of a lot of
pension funds.
WSJ: The Liquidity Trap That's Spooking Bond Funds
The specter of a destabilizing run on debt is haunting markets
The debt world is haunted by a specter-of a destabilizing run on markets.
Last week, this took on more form even if there weren't concrete signs of panic. Only one
mutual fund manager, Third Avenue Management, has said it would halt redemptions to forestall
having to dispose of assets in a fire sale. The rest of the industry has been quick to say
that while redemptions are elevated, particularly in high-yield bond funds, there doesn't seem
to be a rush to for the exits.
Still, growing angst comes as the oil-price rout continues and the U.S. Federal Reserve
appears ready to raise rates. This has investors worried-and starting to ask the fearful question:
"Who's next?"
Goldman Sachs, for one, put out a note Friday warning Franklin Resources "is most at risk"
given the large high-yield holdings of its funds, poor performance and large outflows. On Friday,
its shares fell sharply. Meanwhile, there were unusually large declines Friday in the value
of exchange-traded funds that track high-yield debt.
The idea of a "run" on mutual funds might sound strange. Typically, runs are associated
with highly leveraged banks engaged in maturity transformation, funding long-term loans with
short-term debt. Nearly all the programs designed to avoid destabilizing runs-from deposit
insurance to the Fed's discount window to liquidity requirements-are built for banks. But unleveraged investors, including mutual funds, can also give rise to runs. That is because
there is a liquidity mismatch in mutual funds that hold relatively illiquid assets funded by
investors entitled to daily redemptions.
"... It cuts two ways. Junk ETFs such as JNK and HYG have badly underperformed their benchmarks, owing to buying and selling in an illiquid market to replicate an index. Whereas actively managed junk mutual funds have the flexibility to deviate from index holdings in ways that can add a couple of hundred basis points a year. ..."
"... Your apology is flawed because it assumes equal access to information among investors as well as assuming all investors have the same objective. Institutional investors have different goals than hedge funds for example. The people you refer to have been fleeced that's just ok with you. As to tea leaves the people have been steeped in recovery stories for years. ..."
"... Wait, so speculators are shorting big bond positions of distressed funds? No way, hope they aren't doing this to ETF's. Jeez, didn't see this coming. I guess having the positions of big ETF's published daily might assist the speculators. ..."
"... What I do remember (and I can't remember whether it was Spring of 2008 or earlier), was that HY spreads had gapped out at least a couple of hundred bps, and equities were still at or near all-time highs. I remember sitting in a meeting with a couple I-bankers, who chuckled ruefully "equities haven't a clue". ..."
"... The received wisdom on the Street is that the bond market is smarter than the equity market. And, at last in my career, it was true, at least as far as downturns went. ..."
Yes, junk is usually the canary in the coal mine. The HY market melted in the Summer of
2008, months before equities noticed what was going on. The question really is how much contagion
there will be: how many CDS have been written on the distressed names, who holds them, etc.
My instinct tells me that there are considerably less CDS on junk than were written on MBS,
due to the smaller market, the lower liquidity and (supposed) credit quality. But how much
has that changed since 2008? I dunno.
One thing I do know: it's like the movie "Groundhog Day". The Fed always overstimulates,
and there always follows a crash. Are there any bubbles left to blow, to 'reflate' assets next
time?
Your remark on written CDS is important. While it may be difficult to get liquidity on
distressed names, it is less so on credit tiers above that or on indices. I'm sure there
is some on junk, yes, but the real opportunity for spec CDS is (perhaps, was) on the BBB
space which is the largest category in the investment grade market and is more liquid. While
it may take awhile for distressed trading to creep up the credit ratings to the larger and
more liquid names (specifically, since the definition of liquidity seems to be important
on NC: the size of the specific issues' float, approximated with average daily volume),
they will also have larger moves because potential fallen angels are repriced aggressively
in an unstable market. The other thing about CDS is that they are most often delta-hedged
which requires dealers to sell proxy's as the CDS go deeper into the money. The one restraining
factor is that once a crisis is in motion, I think its going to be difficult for specs to
get more CDS on their books. This strategy is purely directional (this is not an ETF NAV
arb), essentially owning out of the money puts with minimal cost of carry.
'Their investing strategy – putting high-risk investments into a mutual fund – seems
like exactly what not to do.'
It cuts two ways. Junk ETFs such as JNK and HYG have badly underperformed their benchmarks,
owing to buying and selling in an illiquid market to replicate an index. Whereas actively
managed junk mutual funds have the flexibility to deviate from index holdings in ways that
can add a couple of hundred basis points a year.
That said, both junk ETFs and junk mutual funds are offering daily liquidity, while holding
underlying securities that may trade once a week, or have no bids at all. As David Dayen
observes, this sets up the risk of a bank run when investors get spooked.
Take a look at the "power dive" chart of TFCIX (Third Avenue Focused Credit Fund)
- Aiieeeeee!
Now the question is contagion. Morningstar shows that 48% of TFCIX's portfolio was below
B rating, and 41% had no bond rating. Most junk funds don't have THAT ugly a portfolio.
But when the herd starts to stampede, fine distinctions can get lost in the dust cloud from
the thundering hooves.
Over to you, J-Yel. Do you feel lucky, cherie? Well, do you?
There is no CDS. There just isn't less, there is none. The stock market has pretty much
ignored it as well except that its move from 13000 to 18000 has temporarily stalled. I suspect
by the spring, this will be old news.
I think we make errors here, not understanding this particular type of financial speculation
is "anti-growth" in general. This would probably blow most of the minds on this board.
Many years ago when Alan Greenspan first proposed using monetary policy to control economies,
the critics said this was far too broad a brush.
After the dot.com crash Alan Greenspan loosened monetary policy to get the economy going
again. The broad brush effect stoked a housing boom.
When he tightened interest rates, to cool down the economy, the broad brush effect burst
the housing bubble. The teaser rate mortgages unfortunately introduced enough of a delay so
that cause and effect were too far apart to see the consequences of interest rate rises as
they were occurring.
The end result 2008.
With this total failure of monetary policy to control an economy and a clear demonstration
of the broad brush effect behind us, everyone decided to use the same idea after 2008.
Interest rates are at rock bottom around the globe, with trillions of QE pumped into the
global economy.
The broad brush effect has blown bubbles everywhere.
"9 August 2007 – BNP Paribas freeze three of their funds, indicating that they have no way
of valuing the complex assets inside them known as collateralised debt obligations (CDOs),
or packages of sub-prime loans. It is the first major bank to acknowledge the risk of exposure
to sub-prime mortgage markets. Adam Applegarth (right), Northern Rock's chief executive, later
says that it was "the day the world changed"
10th December 2015 – "Moments ago, we learned courtesy of the head of Mutual Fund Research
at Morningstar, Russ Kinnel, that the next leg of the junk bond crisis has officially arrived,
after Third Avenue announced it has blocked investor redemptions from its high yield-heavy
Focused Credit Fund, which according to the company has entered a "Plan of Liquidation" effective
December 9." When investor's can't get their money out of funds they panic.
Central Bank low interest rate policies encourage investors to look at risky environments
to get a reasonable return
Pre-2007 – Sub-prime based complex financial instruments Now – Junk bonds
The ball is rolling and the second hedge fund has closed its doors, investors money is trapped
in a world of loss.
"Here Is "Gate" #2: $1.3 Billion Hedge Fund Founded By Ex-Bear Stearns Traders, Just Suspended
Redemptions"
We know the world is downing in debt and Greece is the best example I can think of that
shows the reluctance to admit the debt is unsustainable.
Housing booms and busts across the globe ……
Those bankers have saturated the world with their debt products.
"Those bankers have saturated the world with their debt products."
I'm no apologist for Banksters but people bought this "stuff" as the Stuffies.
whether you call it greed or desperation in the face of zero yield – at the end of the
day the horizon was short since the last debacle.
getting 2 & 20 or whatever the comp arrangement was for those who are motivated by greed
– 2% of $2 Billion yields at least $40 million a year for 5 years or $200 million – not
bad for ten guys or less – obviously not fiduciaries – bouncing from Bear to Tudor to Third
Ave with no change in the model yields predictable results
I put forth the proposition the "people" deserve their fate – the tea leaves were all
there to see
Your apology is flawed because it assumes equal access to information among investors
as well as assuming all investors have the same objective. Institutional investors have
different goals than hedge funds for example. The people you refer to have been fleeced
that's just ok with you. As to tea leaves the people have been steeped in recovery stories
for years.
Also fails to recognize the collateral damage caused towards the people that did
not directly participate. It is very hard to say that they deserve their fate in this
context, in that they were largely powerless to stop it to begin with, at a reasonable
level.
Wait, so speculators are shorting big bond positions of distressed funds? No way, hope they
aren't doing this to ETF's. Jeez, didn't see this coming. I guess having the positions of big
ETF's published daily might assist the speculators.
Yesterday HYG closed at a 0.76% discount to NAV, while JNK closed at a 0.68% discount
(values from Morningstar). These are wider discounts than ETF managers like to see.
The arbitrage mechanism of buying the discounted ETF shares, redeeming them for the underlying,
and then selling the bonds at full value for an instant 0.76% gain is supposed to kick in
now.
The misperception is that the ETF junk trade is an arb right now. Its not, its directional.
The discipline to bring NAV's in line with underlying value will only kick in at much
wider levels because traders are still long (and putting on more of) the "widener" because
they anticipate higher levels of vol going forward.
Actually have already been bracing myself as demand for labor fell off a cliff at the end
of sept., and I'm guessing it's stories such as this that makes my customers tighten their
belts....
"Some say the world will end in fire Some say in ice From what I've tasted of desire I hold with those who favor (fire) INFLATION But if it had to (perish) REFINANCE twice, I think I know enough of (hate) ZIRP RATES To say that for destruction (ice) NO BID Is also great And would suffice."
All those junk companies could just declare bankruptcy and start over. That's the
way it's supposed to work. Just ask The Donald. Then it would be like that movie where
Bruce Willis saved the earth from an asteroid strike. 'Course there was only one asteroid
in that movie. Instead, we have World War Z with zombies all over the place!
But maybe JYell will buy all the junk bonds, burn them, and then the dollar will crash
and we can all get jobs?
"The HY market melted in the Summer of 2008, months before equities noticed what was going
on."
Not really. HYG market were in a downtrend during summer of 2007, together with the stockmarket.
Also in the 2008 summer both markets were in a severe meltdown. This time around the HYG´s
started their downtrend from summer 2014 with the 1:st leg down to dec same year. 2:nd leg
is now running in which the stockmarket joined.
Your right, HYG´s seems to be the canaries
here! But, from august this year they seems to go in different directions. Or are they?
You're right, it was earlier than Summer 2008, now I think about it.
What I do remember (and I can't remember whether it was Spring of 2008 or earlier), was
that HY spreads had gapped out at least a couple of hundred bps, and equities were still
at or near all-time highs. I remember sitting in a meeting with a couple I-bankers, who
chuckled ruefully "equities haven't a clue".
The received wisdom on the Street is that the bond market is smarter than the equity
market. And, at last in my career, it was true, at least as far as downturns went.
"... By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street ..."
"... Other high-risk credits, such as those backed by subprime mortgages, will follow. And the irony? Just in the nick of time, subprime is back – but this time, it's even bigger. Read… Subprime "Alt"-Mortgages from Nonbanks Run by former Countrywide Execs Backed by PE Firms Are Booming ..."
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist,
and author, with extensive international work experience. Originally published at
Wolf Street
nvestors, lured into the $1.8-trillion US junk-bond minefield by
the Fed's siren call to be fleeced by Wall Street and Corporate America, are now getting bloodied
as these bonds are plunging.
Standard & Poor's "distress ratio" for bonds, which started rising a year ago, reached 20.1% by
the end of November, up from 19.1% in October. It was its worst level since September 2009.
It engulfed 228 companies at the end of November, with $180 billion of distressed debt, up from
225 companies in October with $166 billion of distressed debt,
S&P Capital IQ reported.
Bonds are "distressed" when prices have dropped so low that yields are 1,000 basis points (10
percentage points) above Treasury yields. The "distress ratio" is the number of non-defaulted
distressed junk-bond issues divided by the total number of junk-bond issues. Once bonds take the
next step and default, they're pulled out of the "distress ratio" and added to the "default rate."
During the Financial Crisis, the distress ratio fluctuated between 14.6% and, as the report put
it, a "staggering" 70%. So this can still get a lot worse.
The distress ratio of leveraged loans, defined as the percentage of performing loans trading below
80 cents on the dollar, has jumped to 6.6% in November, up from 5.7% in October, the highest since
the panic of the euro debt crisis in November 2011.
The distress ratio, according to S&P Capital IQ, "indicates the level of risk the market has priced
into the bonds. A rising distress ratio reflects an increased need for capital and is typically a
precursor to more defaults when accompanied by a severe, sustained market disruption."
And the default rate, which lags the distress ratio by about eight to nine months – it was 1.4%
in July, 2014 – has been rising relentlessly. It hit 2.5% in September, 2.7% in October, and 2.8%
on November 30.
This chart shows the deterioration in the S&P distress ratio for junk bonds (black line) and leveraged
loans (brown line). Note the spike during the euro debt-crisis panic in late 2011:
The oil-and-gas sector accounted for 37% of the total distressed debt and sported the second-highest
sector distress ratio of 50.4%. That is, half of the oil-and-gas junk debt trades at distressed
levels! The biggest names are Chesapeake Energy with $7.4 billion in distressed debt and Linn Energy
LLC with nearly $6 billion.
Both show how credit ratings are slow to catch up with reality. S&P
still rates Chesapeake B- and Linn B+. Only 24% of distressed issuers are in the rating category
of CCC to C. The rest are B- or higher, waiting in line for the downgrade as the noose tightens on
them.
The metals, mining, and steel sector has the second largest number of distressed issues and sports
the highest sector distress ratio (72.4%), with nearly three-quarters of the sector's junk debt trading
at distressed levels. Among the biggest names are Peabody Energy with $4.7 billion in distressed
debt and US Steel with $2.2 billion.
These top two sectors account for 53% of the total distressed debt. And now there are "spillover
effects" to the broader junk-rated spectrum, impacting more and more sectors. While some sectors
have no distressed debt yet, others are not so lucky:
Restaurants, 21 issuers, sector distress ratio of 21.4%;
Media and entertainment companies, 36 issuers, distress ratio of 17%;
High-tech companies, 22 issuers, distress ratio of 19%;
Chemicals, packaging, and environmental services companies, 14 issuers, distress ratio of
16.1%;
Consumer products companies, 16 issuers, distress ratio of 13.9%;
Financial institutions, 14 issuers, distress ratio of 12.6%.
The biggest names: truck maker Navistar; off-road tire, wheel, and assembly maker Titan International;
specialty chemical makers The Chemours Co. and Hexion along with Hexion US Finance Corp.; Avon Products;
Verso Paper; Advanced Micro Devices; business communications equipment and services provider Avaya;
BMC Software and its finance operation; LBO wunderkind iHeart Communications (Bain Capital) with
a whopping $8.9 billion in distressed debt; Scientific Games; jewelry and accessory retailer Claire
Stores; telecom services provider Windstream; or Texas mega-utility GenOn Energy (now part of NRG
Energy).
How much have investors in distressed bonds been bleeding? S&P's Distressed High-Yield Corporate
Bond Index has collapsed 40% from its peak in mid-2014:
In terms of investor bloodletting: 70% of all distressed bonds are either unsecured or subordinated,
the report notes. In a default, bondholders' claims to the company's assets are behind the claims
of more senior creditors, and thus any "recovery" during restructuring or bankruptcy is often minimal.
At the lowest end of the junk bond spectrum – rated CCC or lower – the bottom is now falling out.
Yields are spiking, having more than doubled from 8% in June 2014 to 16.6% now, the highest since
August 2009:
These companies, at these yields, have serious trouble raising new money to fund their cash-flow-negative
operations and pay their existing creditors. Their chances of ending up in default are increasing
as the yields move higher.
And more companies are getting downgraded into this club of debt sinners. In November,
S&P Ratings Services upgraded
only eight companies with total debt of $15.8 billion but downgraded 46 companies with total debt
of $113.7 billion, for a terrible "downgrade ratio" of 5.8 to 1, compared to 1 to 1 in 2014.
This is what the end of the Great Credit Bubble looks like. It is unraveling at the bottom. The
unraveling will spread from there, as it always does when the credit cycle ends. Investors who'd
been desperately chasing yield, thinking the Fed had abolished all risks, dove into risky bonds with
ludicrously low yields. Now they're getting bloodied even though the fed funds rate is still
at zero!
It is interesting that "distressed" in this article pretty much refers to pricing alone and says
little about whether it actually represents a significant change in the ability of companies to
repay/refinance their debts. The charts show a similar spike that happened in 2012 without any
real consequence to default rates. Of course we are right to not trust the rating agencies as
they are lagging indicators and there is a prima facie case for oil being a potential disaster
area, but the article give no evidence as to why the markets are right this time. They've been
wrong before.
The definition of distress is also somewhat arbitrary – 1000bps stinks of being a round number
rather than any meaningful economic measure. 900bps sounds pretty distressed to me. Or, as a bull
might put it, a bargain!
tegnost, December 3, 2015 at 1:07 pm
Question: What mechanism brought distress down after the euro crisis in late 2011, and is it possible
that mechanism, whatever it was, will work again?
susan the other. December 3, 2015 at 1:43 pm
It's kinda like the post above on German domestic banks looking for profit from any rotten
source. We are on the cusp of a new economy; keeping alive the old consumer/manufacturing economy
is a dead end. ...
"There is no doubt that the price of assets right now is a question mark... and ultimately
when Central Banks stop manipulating markets where that price goes is up for grabs... and probably
points down"
As Gross tweeted...
Gross: All global financial markets are a shell game now. Artificial prices,
artificial manipulation. Where's the real pea (price)?
"There is no doubt that the price of assets right now is a
question mark... and ultimately when Central Banks stop
manipulating markets where that price goes is up for grabs... and
probably points down"
As Gross tweeted...
Gross: All global financial markets are a shell
game now. Artificial prices, artificial manipulation. Where's the real
pea (price)?
"...It's very conceivable for short-term rates to rise but long-term yields to decline if the market
becomes convinced that Fed hikes will slow the economy. There's even a recent hint of that
possibility looking at the action in treasuries since mid-July (the yield on 5-year treasuries
has risen faster than yield on 10- and 30-year treasuries." . "...Finally, even if economic data is weak, there is a chance yields rise if inflation picks up.
Thus, one needs to keep inflation in mind, especially over longer time-frames."
Setting aside the often-heard "certificates of confiscation" phrase, treasuries are a
reasonable buy if one believes yields are going to stay steady or decline. They are to be avoided
if the expectation is for yields to rise.
Part of the question is whether or not the Fed hikes, and by how much. But it's more complicated
than the typical "yes-no when" analysis that we see in the media.
It's very conceivable for short-term rates to rise but long-term yields to decline if the market
becomes convinced that Fed hikes will slow the economy. There's even a recent hint of that
possibility looking at the action in treasuries since mid-July (the yield on 5-year treasuries
has risen faster than yield on 10- and 30-year treasuries.
I am still not convinced the Fed is going to hike this year. Much will depend on retail sales,
housing, and jobs.
A good retail sales report will send yields soaring, likely across the board.
Finally, even if economic data is weak, there is a chance yields rise if inflation picks up.
Thus, one needs to keep inflation in mind, especially over longer time-frames.
That said, the recent decline in crude, commodities in general, does not lend much credence to
the notion the CPI is going to take big leaps forward any time soon.
All things considered, the long end of the curve seems like a reasonable buy here provided one
believes as I do, that economic data is unlikely to send the Fed on a huge hiking spree, and that
if and when the Fed does react, yields on the long-end of the curve may not rise as everyone
seems to expect.
Anonymouse
Agreed ... any Fed rate hike will slow the economy, but they won't (can't) raise
rates.
We have entered the black-hole of zero-interest, squarely caused by the incestuous
relationship between the Fed and the Treasury whereby check-kiting and theft have become our
central bankers' legal and institutional 'right.'
Through debt monetization, bond speculation has been made risk-free .. an anomaly in nature
yet over 34 years in its bull cycle.
Risk-free bond speculation creates and maintains a
falling interest rate structure which destroys the capital of virtually every market player.
This is the greater danger .... which can only result in broad-based serial bankruptcies
unless the parasitic system is abandoned for one that embraces sound money.
According to Bloomberg, bonds wiped out all their gains for the year. The benchmark US
10-year treasury yield pushed higher to about 2.42% overnight, a level it hadn't touched since October.
German bund yields rose to about 0.99%.
There is chaos in global markets. Bonds sold off sharply on Thursday morning for a second day
in a row. They've reversed the decline, but stocks are still lower, after the chaos spilled over.
... ... ...
The International Monetary Fund slashed US growth forecasts, and urged the Federal Reserve to
delay its first interest rate hike until 2016, in a statement that crossed as the stock market opened.
In a speech last month, Fed chair Janet Yellen said it would be appropriate to raise interest rates
"at some point this year" if the economy continues to improve.
In a morning note before the open, Brean Capital's Peter Tchir wrote: "It is time to reduce US equity
holdings for the near term and look for a 3% to 5% move lower. The Treasury weakness is NOT a
'risk on' trade it is a 'risk off' trade, where low yields are viewed as a risk asset and not a safe
haven."
The sell off in global bonds started Wednesday, as European Central Bank president Mario Draghi
gave a news conference in which he said markets should get used to episodes of higher volatility.
Draghi also emphasized that the ECB had no intention to soon end its €60 billion bond-buying program,
called quantitative easing, before its planned end date of September 2016.
Bond yields, which move in the opposite direction to their prices, spiked across Europe on Wednesday,
and on Thursday this move is continuing, with German bund yields and US Treasury yields hitting new
2015 highs and continuing to climb overnight.
According to Bloomberg, bonds wiped out all their gains for the year.
... ... ...
The benchmark US 10-year treasury yield pushed higher to about 2.42% overnight, a level it hadn't
touched since October. German bund yields rose to about 0.99%.
Stephen G. Cecchetti and Kermit L. Schoenholtz (sort of a follow up on the claim that financial reform
is working -- perhaps -- but as noted in the post below this one there is more to do):
We find your
WSJ op-ed (Wednesday, May 6) misleading, short-sighted, self-serving, and very disappointing.
Vanguard has been in the forefront of providing low-cost, reliable access to U.S. and global capital
markets to millions of customers, including ourselves. Following the financial crisis of 2007-2009,
the firm naturally should be a leader in promoting a more resilient financial system. Your op-ed
sadly goes in the opposite direction.
Let's start with the most stunning example: your defense of money market mutual funds. MMMFs are
simply banks masquerading as professionally managed investment products. Like banks, they engage
in liquidity and maturity transformation. Like banks, they faced runs in 2008 that ended only
when the federal government provided a guarantee that put taxpayers at risk. Even with that guarantee,
the government still had to support many healthy U.S. corporations with household names that –
having previously relied on MMMF purchases of their commercial paper – suddenly faced a severe
credit crunch. And, to limit a fire sale amidst the crisis, the Federal Reserve had to provide
special funding to buyers to help MMMFs unload their assets.
Unsurprisingly, fund sponsors and their clients – both creditors and borrowers – want to keep
these opaque federal subsidies (especially the implicit guarantees that only become explicit and
transparent in a crisis). Like them, you make the false, but popular claim that power-hungry regulators
(who wish to limit the subsidies that make future crises more likely) are attacking (taxing!)
Main Street instead of Wall Street.
In fact, the investment company industry captured its primary regulator long ago, and hasn't let
go. The Securities and Exchange Commission's 2014 "reform"
of MMMFs is exhibit A. It almost surely makes these funds more, not less, liable to runs (see
here and
here).
And – what a surprise – Congress seems to find protecting U.S. taxpayers from contingent liabilities
(like implicit financial guarantees to your industry) less attractive than the largesse of financial
lobbyists. Even the voluminous Dodd-Frank Act didn't address MMMFs! :
After quite a bit more, they conclude with:
As the CEO of one of the largest mutual fund companies in the world that is dedicated to serving
and protecting small investors, you should be in the vanguard of advocating reforms that enhance
stability.
Instead of complaining about regulation under the guise of protecting Main Street, you should
highlight the vulnerabilities in our financial system and make the case for efficient regulation
that treats all activities equally. You should also promote investment vehicles that are likely
to prove robust in a crisis, while warning about existing products that probably won't be.
Only greater resilience in the system can make investors confident that capital markets here and
elsewhere will remain strong. That is in Vanguard's interest, too.
Sincerely,
Stephen G. Cecchetti and Kermit L. Schoenholtz
anne -> anne:
Stephen Cecchetti and Kermit Schoenholtz are intent on undermining the most important stock
and bond investment vehicle for moderately wealthy investors. Vanguard sets the finest of examples
for the entire investment industry.
pgl -> anne:
Maybe you are being paid by Vanguard but you are wrong. You are not qualified to comment on
financial economics. Stephen Cecchetti and Kermit Schoenholtz are.
And they are not trying to undermine anyone. They are simply telling the truth. Repeat your
garbage all you want but it is garbage.
Anne, unless you call the FDIC bailout of the money market funds, and the Fed providing liquidity
to them in 2008-9 totally wrong and you should have suffered losses in your holding in MMMF as
they marketed to market (breaking the buck) and froze withdrawals until they could liquidate their
holdings, or alternatively, declared bankruptcy, then you are totally bought into the free lunch
economics of Friedman, Reagan, and all the bank lobbyists dependent on government handling the
losses while they reap the profits.
I remember the debate in the late 60s and early 70s on money market funds. We (the People)
were assured that MMFs would never be seen as banks by any one investing in them because everyone
would know the MMF would someday lose value and in the process freeze the assets for some length
of time until the fund could be liquidated.
In other words, not one person putting money in a MMF would see it as a bank that pays higher
interest. More importantly, no business or corporation would ever confuse a MMF with a bank.
In 2008, it is clear that the promises made four decades earlier to allow unsophisticated investors
access money market funds without lengthy notice of intent to withdraw funds was all a lie, or
a belief in tinker bell, pixie dust, and free lunches.
The money market funds should have been left to collapse in 2008 to destroy all faith in them
as safe for individuals to use, and in the process, "destroy trillions in wealth" held by tens
of millions of upper middle class workers.
I would have lost more than I did in 2008, but the demand for greater government control of
the financial sector plus greater social safety nets would have followed.
This is the first time I've seen someone besides me state that mutual funds are banks as we
knew them in the 60s, except they pay nothing for the protection of FDIC and Federal Reserve membership.
Fees on Mutual Funds Fall. Thank Yourself. By JEFF SOMMER
Wall Street is reaping mounting revenue from mutual funds and exchange-traded funds, yet investors
are paying lower fees.
That sounds like a good deal for the millions of people who use the funds to invest their savings,
and a great deal for the companies that run and sell the funds.
But that win-win situation is not quite as benign as it would seem. Many investors are still
- often unwittingly - paying huge fees that cut into retirement savings.
A new Morningstar study offers an excellent explanation of what is happening. The report, "2015
Fee Study: Investors Are Driving Expense Ratios Down," found that, by one measure, mutual fund
and E.T.F. fees paid by individual investors had dropped significantly - 27 percent - over the
last 10 years. But it isn't mainly because Wall Street fund managers have been reducing fees.
The study found that investors have been voting with their feet, moving money from expensive funds
into cheaper ones, like index funds. That drives down the asset-weighted cost of mutual funds,
skewing the statistics.
"It's not mainly thanks to the efforts of the fund companies," Michael Rawson, an author of
the Morningstar study, said in an interview. "It's mainly because people have gravitated toward
lower-cost funds."
There's a good reason for the migration to lower-cost funds: They tend to outperform higher-cost
ones. As I've written recently, most actively managed mutual funds don't beat the market; those
that do beat it rarely manage the feat consistently. Many consumers have gotten the message. Of
the 100 lowest-cost funds on the market in March, 95 were index funds that merely try to match
the market, not beat it, according to an unpublished study by the Bogle Financial Markets Research
Center. Many investors have chosen index funds.
Yet because of the peculiar economics of the asset management industry, fund companies are
still doing great. The companies that run the funds have been reaping outsize rewards because
as fund assets have grown - thanks in part to the market's terrific performance over the last
six years - the companies' own costs have declined.
That's because of economies of scale that the companies don't share fully with customers. "The
cost of individual funds has dropped, but the assets have gotten so much bigger that the companies'
revenue from fees has grown tremendously," Mr. Rawson said. "They could be sharing more of those
revenues with consumers, but they're not."
Using publicly available documents, the Morningstar researchers estimated that in 2014, fee
revenue from all stock and bond mutual funds and E.T.F.s reached a record high of $88 billion,
up from $50 billion a decade earlier. Assets under management grew 143 percent, and industry fee
revenue surged more than 75 percent. The asset-weighted expense ratio - the funds' publicly declared
expenses divided by the actual money that investors put into them - declined, too, but only by
27 percent. "The industry - rather than fund shareholders - has benefited most," the report said.
Mr. Rawson, a Morningstar analyst, wrote the report with Ben Johnson, director of global E.T.F.
research at the company.
The details are fresh, but the economic machine that propels the asset management business
has been whirring along for decades. In a telephone interview last week, John C. Bogle, the founder
of Vanguard, the industry's low-cost leader, said that in some ways, running a fund company is
like operating a factory. As you ramp up production, it becomes cheaper to produce additional
items because important costs - fixed costs - don't rise.
For an asset management company, he said, a stock or bond portfolio is the core product and
the intellectual exercise of selecting stocks and bonds for it is a fixed cost. "When you set
up and run the portfolio, it's not much more expensive to do it when your fund has, say, $1 billion
in assets, than when it had only $30 million," Mr. Bogle said.
"Unless you cut your fees drastically, you're going to generate a lot more money for your company
as assets grow," Mr. Bogle said. "But do you think the industry wants you to understand that?
Absolutely not. Most fund companies aren't passing those savings on to investors."
Vanguard, which is owned by shareholders of its funds, passes along most of the savings. Morningstar
found that Vanguard's average asset-weighted expense ratio in 2014 was 0.14 percent, lower than
any of the other top asset management companies and lower than 0.64, the current asset-weighted
expense ratio for all funds.
Mr. Bogle says companies should charge a modest, flat fee for setting up a portfolio - not
a percentage of assets, charged annually, which is the current practice - and give fund investors
the rest of the money. That would not generate the splendid profits that asset management companies
and their owners have enjoyed, however.
No wonder that in a rising market, shares of publicly traded asset management companies tend
to outperform their own stock portfolios. For example, since the beginning of March 2009, the
start of the current bull market, through April, the stock of BlackRock, the giant E.T.F. company,
returned 27.1 percent, annualized, compared with 20.8 percent annualized in the iShares Core S&P
500 E.T.F., a BlackRock fund that tracks the Standard & Poor's 500-stock index, according to Bloomberg.
You would have been better off investing in BlackRock, the company, than in its own S.&.P. 500
index fund.
Why should mutual fund and E.T.F. investors care about the economics of fund expenses? Because
it's the dark side of compounding, a force that can be magical when it works in your favor:.
This is what Vanguard has meant for modestly wealthy conservative
long term investments since the 1970s. From Warren Buffett to David Swenson, the chief investment
officer at Yale, Vanguard has been the recommended vehicle for ordinary stock and bond investors.
Harming Vanguard would be a tragedy.
anne -> anne:
"Harming Vanguard would be a tragedy."
The point is harming Vanguard would be harming the ordinary investors who in effect own Vanguard
since Vanguard is indeed a "mutual" fund company, a company owned by fund investors.
Dan Kervick -> anne:
The well-being of modestly wealthy long-term investors is
only one factor to consider in relation to the well-being of the entire US and global economy. Shouldn't
we broaden the discussion?
anne -> Dan Kervick:
Vanguard forms
a model for investment well-being in the United States.
Bob:
Anne, having liquidity requirements is not a tax on investors. When McNabb represents
it as such, he is lying. There are no new fees or taxes imposed. It just requires that stock funds
hold a percentage of assets in safe bonds in order to handle redemptions in panic situation rather
than rely on taxpayer bailouts.
Investors are still entitled to 100% of the returns from the fund. Yes, it is true that the total
return may be somewhat less because bond returns are typically less than stock returns. However,
that isn't a tax or fee on investors.
Almost no investors maintain a 100% stock portfolio. The typical investor my have anywhere from
20% to 80% bonds. So with the liquidity proposal, some portion of the bond assets they hold anyway
will be in their stock fund. They can adjust their stock vs bond allocation accordingly, taking into
account the bonds held in their stock fund. After this adjustment, they will receive exactly the
same total portfolio return as previously.
The idea that this is a tax or fee is simply a lie. Investors still receive 100% of their investment
return.
Dan Kervick -> anne:
Well, it seems prima facie plausible that the ability of some firms to deliver very high returns
at low cost is due to the amount they have invested in high-risk, high-yield assets. An economy filled
with many such firms is going to be an economy with a higher level of systemic risk. If we want a
financially safer world, then some rich people are going to have to get richer much more slowly than
they did in the past.
JohnH: I don't believe Vanguard needs any liquidity requirements because none of its investments
use leverage. If money is needed, they would just sell the assets at the current market value and
disburse the proceeds.
MMMFs are a little different, because there is the presumption that that
value of each share will always be $1, which it will be if short term treasuries are kept to term.
In case of a run, the Fed could also buy the treasuries and keep them a few weeks to maturity, as
they do under QE.
For funds that use leverage, the risk of a run is entirely different:
Longtooth:
My interpretation of Anne's issue is that she simply favors individualism's credo for the
"moderately wealthy" over the rest of our society, and rationalizes her position by believing
(in faith) that Vanguard is immune to failure and thus would not be a participant in any new
liquidity meltdown, ergo the nation's taxpayers should shoulder the burden of for profit
financial investors when such financial markets fail.
I'm not sure what Anne's position is/was related to the meltdown just past.. but she's caught
on the horns of dilemma --- either taxpayer's bail out private investors or they suffer an
even greater financial and economic calamity.
The whole point of Cecchetti & Schoenholtz open letter is that a) Vanguard is not immune, and
b) taxpayers should NOT be placed on the horns of that dilemma again, and thus the Vanguard
letter was indeed self-serving and misleading.
EMichael -> Longtooth:
Perfect.
McMike:
Well, the critiques may be technically accurate enough as far as they go.
But I fail to see how attacking one of the last pockets of low-fee, consumer-facing
investment helps anyone in the long run, except those who wish to herd all money into complex,
opaque, high-fee vehicles.
Money Market "reform" may have found some reasonable-sounding talking points on which to
promote itself, but stepping back, one cannot help but see it is simply one more wave in the
voracious plunder and elimination of any and all alternatives to the relentless and jealous
Wall Street flim flam machine.
anne:
A democratic investment company is a company that is investor owned, that offers the finest
quality long term stock and bond funds with minimal transactions or turnover at low management
cost for investors with $10,000. For those men and women who prefer to deal with a Goldman
Sachs, a suggest giving that company a call and finding the difference.
The idea that a Warren Buffett is paid by Vanguard for recommending Vanguard only shows a
failure to understand that Vanguard is owned by investors and there are no payments made to
financial advisers for recommending the company.
DeDude -> anne:
If you think the leadership if Vanguard is controlled by and serving its investors - then
you need to get out of the Ivory tower a little more.
Leadership in any Wall Street company are always serving themselves first, second and
third. It is just that some of them are better at hiding that fact than others.
DeDude:
As much as Vanguard is trying to sell itself as the investors friend on Wall street, their
leadership is just as much a part of the Wall street vampire tribe as the rest of them. Yes,
they suck less less blood from each victim, but they are still blood-suckers. When I see
Vanguard offering a fund that restrict its investments to companies that compensate CEOs less
than average (for that industry and size), then I will know they have left the blood-sucker
tribe. The one product that would truly serve the interest of investors is not available from
any investment company, because as useful as it would be for us it is dangerous for them.
anne:
The descent to profane and violent language on this thread, the descent to intimidation and
bullying, is intolerable, horrifying, and meant only to destroy this thread and this blog.
EMichael -> anne:
Personally, I think the constant repetition of a Edwardian rant about language is
"intolerable, horrifying, and meant only to destroy this thread and this blog."
As Keynes said, "words ought to be a little wild".
Syaloch -> EMichael:
Amen to that.
Syaloch -> anne:
Am I missing something? Neither "vampire" nor "blood-sucker" is profanity -- unless you
mean it in the sense of blasphemous, i.e. criticism of something sacred.
Do you think that this "class of people" who work on Wall Street are holy deities and
therefore beyond reproach?
You attitudes toward Vanguard certainly seem to point in that direction:
anne -> Syaloch:
These very terms were used to characterize and dehumanize a class of people in the 1930s.
These are terrible, fearful terms to use to describe and stereotype people.
anne:
The use of profanity and a metaphor from the 1930s in describing a class of people is
intolerable. Paul Krugman made a serious mistake in using a 1930s metaphor in
description, both for the dismissing of the decency of the humanness of an entire class of
people and for setting an example as to use of the metaphor.
Millions of people were methodically murdered during the 1930s in the wake of a campaign to
stereotypically deny their decency, to deny their humanness by using dehumanizing metaphors to
describe them.
likbez -> anne:
While behavior that you mentioned are unacceptable, a part of the blame is on you: you
demonstrated a perfect example of the psychology of rentier, Anna.
Rentier capitalism is a term used to describe the belief in economic practices of parasitic
monopolization of access to any kind of property, and gaining significant amounts of profit
without contribution to society.
DeDude:
No, I think people are just having a little fun with your stuttering failure to address the
issues. However, I will stop now (before being called a Nazi again – but don't think your
bullying has worked, its just that I am tired)
DrDick -> DeDude:
Nothing I love more than passive-aggressive bullies, but that is Anne's schtick.
likbez
The key question to Anne is whether Vanguard is really better for unmanaged funds then ETFs.
You need to provides us with solid evidence or all your post with belong to the category that
Prince Hamlet defined as:
The lady doth protest too much, methinks.
And for managed funds Vanguard experienced several high profile disasters such as with
their flagship Primecap fund around 2008. In this sense there is not much to talk about here.
Thir managed funds is just a typical example of "go with the crowd" approach.
Issue of fees was important in 90th. But now IMHO Vanguard belongs to "also run" category: for
each Vanguard fund you probably can find other fund or ETF with comparable fees.
So why you so adamant in defending Vanguard Anne? It' just one of Wall Street sharks
which was broght to the surface by establishing 401K in 1978
P.S. I also consider Vanguard to be among more decent category of Wall Street sharks. But it
is still a shark.
The 3 month Treasury interest rate is at 0.05%, the 2 year Treasury rate is 0.28%, the
5 year rate is 1.31%, while the 10 year is 2.67%.
The Vanguard A rated short-term investment grade bond fund, with a maturity of 3.3 years
and a duration of 2.3 years, has a yield of 1.51%.
The Vanguard A rated intermediate-term investment grade bond fund, with a maturity of 6.5
years and a duration of 5.3 years, is yielding 2.78%.
The Vanguard A rated long-term investment grade bond fund, with a maturity of 24.6 years
and a duration of 13.6 years, is yielding 4.77%. *
The Vanguard Ba rated high yield corporate bond fund, with a maturity of 5.6 years
and a duration of 4.6 years, is yielding 4.36%.
The Vanguard convertible bond fund, with a maturity of 5.7 years and a duration of 5.0
years, is yielding 2.43%.
The Vanguard A rated high yield tax exempt bond fund, with a maturity of 9.2 years and
a duration of 7.3 years, is yielding 3.68%.
The Vanguard A rated intermediate-term tax exempt bond fund, with a maturity of 5.6 years
and a duration of 5.4 years, is yielding 2.34%.
The Vanguard GNMA bond fund, with a maturity of 8.3 years and a duration of 5.9 years,
is yielding 2.43%.
The Vanguard inflation protected Treasury bond fund, with a maturity of 8.4 years and a
duration of 8.0 years, is yielding - 0.19%.
* Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.
anne :
We should be aware that if the analysis of Paul Krugman and Lawrence Summers is reasonable
and proves correct, however sadly so far as employment matters, we can expect the sort of
interest rates we have had this year to persist for years. This is already the conclusion
of knowledgeable bond holders.
Vanguard LifeStrategy Income (NASDAQ:VASIX
- News)
This is a fund of funds that keeps most of its money in fixed-income portfolios: Vanguard Total Bond
Market (NASDAQ:VBMFX -
News) and Vanguard Short-Term
Investment-Grade (NASDAQ:VFSTX -
News).
But its equity stake can vary from 5% to 30% depending on the asset-allocation calls
of Tom Loeb and his team at Vanguard Asset Allocation (NASDAQ:VAAPX
- News), which gets 25% of assets
here (Vanguard Total Stock Market Index (NASDAQ:VTSMX
- News) accounts for the rest
of stock holdings).
Loeb uses quantitative models to figure out how much of his portfolio to devote to S&P 500 stocks
and the Lehman Brothers Long-Term Treasury Index, and his calls have been consistent and accurate
over the years. (Currently Loeb's fund has about three fourths of its assets in stocks, so
this fund's equity allocation hangs around 20%.)
That give this conservative fund a little upside potential, but it's really designed to preserve
capital and generate income. The fund's bear market rank is better than 97% of its conservative-allocation
category peers and in the third quarter through Aug. 28 it eked out a small gain that put it ahead
of 96% of its peer group.
Investors who are further away from their goals or who are more risk tolerant can check out Vanguard
LifeStrategy Conservative Growth (NASDAQ:VSCGX
- News) and Vanguard LifeStrategy
Moderate Growth (NASDAQ:VSMGX -
News), which devote more money
to equity funds and have done well in bear markets relative to their peers.
A colleague of mine recently told me that this portfolio, which keeps most of its money in bonds,
was the first fund she ever bought. My first reaction was to say that it seemed awfully conservative
for someone whose retirement was still decades off. She retorted that she was looking for a one-stop
fund that wouldn't burn an inexperienced investor. Since then she has built a more age-appropriate
asset-allocation plan around this fund, but she has never regretted her first purchase because the
fund has been so reliable. It has lost money in just three of the last 20 years, has done better
than 97% of its peers in bear markets, and has succeeded in delivering a steady stream of income
with a portfolio of undervalued, high-yielding stocks and high-quality (mostly corporate) bonds.
That the fund has held up well (better than nearly 90% of its conservative-allocation peers for the
third quarter through Aug. 28) in the middle of a credit crunch with such a large corporate bond
stake is testimony to the security-selection skills of long-time fixed-income manager Earl McEvoy
and his team from Wellington Management. Wellington's John Ryan on the equity side is no slouch either.
He's leaving the fund next year but has a seasoned understudy lined up in Michael Reckmeyer III.
My colleague argues that there are worse newbie-investor mistakes than buying this fund, and I'd
have to agree.
This fund is cautious and consistent. Longtime manager Pam Wisehaupt-Tynan keeps the portfolio's
duration, a measure of interest-rate sensitivity, low and its credit quality high. Low expenses allow
the fund's conservative approach to work in its favor over time. Put too much of your portfolio here
and you could run the risk of not keeping up with inflation or not seeing enough appreciation to
meet your goals, but it can take the edge off a taxable portfolio. It's done better than 96% of its
peers in bear markets and outpaced almost 80% of them in the current quarter through Aug. 28.
Once again, simplicity and low costs work in a Vanguard fund's favor. A mix of 60% MSCI U.S. Broad
Market Index (essentially Vanguard Total Stock Market Index ) and 40% Lehman Aggregate Bond Index
has produced reliable absolute returns. It's done better than 86% of its peers in bear markets and
has bested about four fifths of them so far in the third quarter. The fund's correlation with the
overall market is higher, but it's still a solid core holding.
This is another old stalwart managed by the redoubtable Wellington Management. In June, my colleague
Chris Davis highlighted this one of Morningstar's favorite "sleep-at-night funds", or offerings that
don't keep you awake at night wondering what they are doing. Since then the fund has acquitted itself
relatively well.
It posted a 1.9% loss for the third quarter through Aug. 28, but that was still better than 82%
of its moderate-allocation peers. Its long-term bear market rank also is still better than 86% of
its rivals. And like its sibling Wellesley Income it has delivered consistent absolute results, losing
money in just three of the last 20 calendar years.
Read more about Vanguard funds in our Vanguard Fund Family Report. To view a risk-free trial
issue, click here.
Dan Culloton does not own shares in any of the securities mentioned above.
In this interview, Brian Scott, a senior investment analyst in Vanguard's Investment Strategy Group,
discusses concerns about the bond market and explains why Vanguard believes bonds can play a crucial
diversification role in your portfolio, even in the event of a significant downturn.
We're getting
a lot of questions about whether bonds are headed for a bear market. What is a bond bear market,
and how is it different from a stock bear market?
It's an interesting question, because there is not a commonly accepted definition for a bear market
in bonds. The answer for stocks is a rather simple one. There is a widely accepted, broadly used
definition for a bear market in stocks, and that's a decline of at least 20% from peak to trough
in stocks.
Now, if you tried to use that definition and apply it to bonds, we've never had a bear market
in bonds. In fact, the worst 12-month return we've ever realized in the bond market was back
in September of 1974, when bonds declined 13.9%. So we've never had a decline of the same magnitude
as we've had in stocks, and I think that's one of the key differences between stocks and bonds.
Back to your original question then: What is a bear market in bonds? And, judging by investor
behavior and reaction to losses in bonds, I think the answer is simply any period of time wherein
you realize a negative return in bonds.
Is a bond bear market something we should be concerned about? If so, is there anything investors
can do to prepare?
We've a great deal of sympathy for the anxiety that investors feel about the bond market right
now. Typically, an investor that has an allocation to bonds-particularly those that have a large
allocation to bonds-tend to be more risk-averse and become more unsettled when they see negative
returns in any piece of their portfolio, let alone their total portfolio.
So we understand how unsettling this environment can be-and, in fact, we have actually realized
a negative return in bonds. If you're looking at the 12-month return through the end of June 2013,
bonds are now down about 0.7%-and when I say bonds, I'm referring to the Barclays U.S. Aggregate
[Bond] Index. So, by that definition, and if you use the definition of a bear market I applied earlier,
you could say-and some people have argued-that we are actually in a bear market in bonds.
And so it's unsettling; but, in times like these, what we encourage investors and their advisors
to do is to look at the total return of their portfolio. And I think they'll feel much more comfortable
when you take that perspective. As an example, an investor in
Vanguard's Balanced Index Fund that has a mix of 60% U.S. stocks and 40% U.S. bonds realized
a rate of return of 12% through June 30, 2013. So a total return perspective is especially valuable
in times like this.
You recently co-wrote a research paper in which you note that in 2010, like today, investors also
believed rising interest rates would cause bond losses, but that didn't happen. Does the experience
of the last three years suggest anything about what investors should do now?
I think the last three years are very instructive and really impart a lot of lessons that investors
can find very valuable in times like this. So for a little bit of historical perspective, back in
about April/May of 2010, the yield on a
10-year Treasury
note was about 3.3%. That was a level that was probably lower than almost all investors have
ever seen in their investment lifetime. And you have to go back to August of 1957 to see yields as
low as they were back in May of 2010.
And I think that perspective alone caused many people to assume that interest rates had to rise.
And I think an important lesson from that environment and how the market actually reacted is that
the current level of interest rates tells us absolutely nothing about their future direction.
Just because yields are low doesn't mean that they can't go lower or that they must go higher.
But at any point, in May of 2010, if you looked at what the market was pricing in and looking
at forward yield curves, the market's expectation were that yields were going to rise, and the 10-year
Treasury yield was going to rise to a level slightly over 4%.
In fact, what actually happened is that yields fell to just over 1.4%-again, I'm referring to
the 10-year Treasury note. And if you had shortened the duration of your portfolio or moved your
bond portfolio entirely into cash, you lost a tremendous amount of income.
I think another important lesson is that making knee-jerk reactions in your portfolio can
be damaging over time and potentially even incur tax losses as well as higher transaction costs.
Do you have any thoughts about how to make the case that the smartest course of action is probably
no action, assuming a portfolio is already well constructed?
That's a hard thing to do, because in the face of what you think is an impending loss in your
portfolio, it's a very natural and even human reaction to feel like you have to do something. But
we would argue, very strongly, that investors are best served by not changing their asset allocation
unless some strategic element of their asset allocation has changed.
And, by that, I mean if your investment time horizon has changed, your investment objective has
changed, if you really have an enduring change in your risk tolerance, then perhaps it's worth altering
your strategic asset allocation. However, if those circumstances have not changed, you're probably
best served by maintaining the strategic asset allocation that you set.
What are some indicators that your risk tolerance may be changing?
If you have extreme anxiety-let's face it, if you can't sleep at night, perhaps it's worth asking
yourself whether your risk tolerance has changed. What we found-and we're not unique in this-is
that investors tend to have a high level of risk tolerance when times are good and then when capital
markets are delivering strong, positive returns. That changes sometimes over time. Now, we're
not suggesting that you should frequently change your portfolio, but if you're really having a high
level of anxiety over losses, perhaps it's worth becoming more conservative.
I think another way to react to the current environment is just to recognize the role that each
asset class has in your portfolio. Stocks are designed to deliver strong capital gains-ideally, over
the long term, above the rate of inflation so that you can grow your spending power over time. The
role of bonds-at least the primary role of bonds, in our minds-is to act as a cushion or balance
to stocks. Stocks tend to be much more volatile, much more prone to significant losses in bear markets
in excess of 20%, and, when that happens, bonds tend to be an ideal cushion against equity market
volatility.
It's very paradoxical. But perhaps, if you are feeling a higher level of anxiety because of the
volatility in the fixed income markets in particular, the right answer for you might actually be
a higher allocation to bonds. Because we actually think that because bonds are a good cushion to
equity market volatility, over the long term, a higher allocation to bonds will reduce the total
downside risk in your portfolio.
Investing can provoke strong emotions. In the face of market turmoil, some investors find themselves
making impulsive decisions or, conversely, becoming paralyzed, unable to implement an investment
strategy or to rebalance a portfolio as needed.
Discipline and perspective are qualities that can
help you remain committed to your long-term investment programs through periods of market uncertainty.
Well, that's certainly counterintuitive. Despite what you just said, your paper does ask the question
of whether investors should consider moving away from bonds.
Yeah, that's the most common question we're getting right now. There's a lot of interest in other
instruments that we're calling bond substitutes. Now, there's not necessarily anything wrong with
them. So I think the term might impose kind of a negative connotation on some of these bond substitutes,
but people are viewing other higher-yielding investments as a potential substitute for the high-quality
bonds in your portfolio.
Some of those substitutes that I'm referring to are things like dividend-paying stocks, some high-yield
bonds, floating-rate bonds, etc. And one of the things that we're really encouraging investors to
recognize is that, while these instruments have higher yields than high-quality bonds like you get
with the Barclays U.S. Aggregate [Bond] Index or certainly with Treasury bonds, they do have a very
different risk profile, particularly when equities are declining. When equities are doing very poorly,
many of these bond substitutes actually act a lot more like equities than bonds.
So it sounds like attempts to reach for income could end up depressing your overall returns.
Is that right?
Over the long term, we think the answer is absolutely yes, and we've done some work around this,
and we've modeled what we think will be forward-looking returns of portfolios over the long term
for balanced investors. And what we found is the higher your allocation is to equities, the larger
the downside risk in your portfolio is over time. And that's also true if you move away from high-quality
bonds and Treasury bonds, in particular, and invest your bond allocation in some of these bond substitutes
we've been talking about.
Older investors may be worried about generating income in a low interest rate environment.
Do you have any advice?
This may be the hardest question you've asked of all, because we have a tremendous amount of sympathy
for investors in this situation, those who are older-or, really, frankly, anyone who's really dependent
on their portfolio to produce income for them, to meet their current spending needs, because you're
absolutely right. The traditional answers to providing income-high-quality bonds-are not providing
the level of income that investors have grown accustomed to. We've actually referred to these
investors-and, really, maybe more appropriately call them savers-as a sacrificial lamb of current
monetary policy. The very low interest rate environment we're faced with has really imposed a severe
penalty on these savers.
And our answer is that if you choose to move away from the high-quality bonds into instruments
that will generate more income in your portfolio, you'll likely get more income over time, but you'll
also very likely experience a much higher level of volatility in that income stream. Of course, the
only other alternative is to reduce your spending, which perhaps is even harder to do than to stomach
lower levels of income for your portfolio. So there really is no easy answer.
Vanguard really emphasizes the idea of total return. Could you talk a little bit more about
that and what that means in light of what's happening in the bond market?
I think it goes back to not looking at each piece of your portfolio and the returns that they're
currently generating, but the return of your total portfolio overall. It's very rare that all assets
in your portfolio are delivering very strong returns at any point in time. In fact, you don't want
that if you're a balanced investor, because if you do have assets that are that highly correlated
in good times, chances are they'll be very highly correlated in bad times as well, and you'll realize
very sharp losses in declining equity markets. But ideally, if you have a balanced, diversified approach
to investing, you'll realize healthy rates of total return over time.
The 3 month Treasury interest rate is at 0.04%, the 2 year Treasury rate is 0.34%, the
5 year rate is 1.52%, while the 10 year is 2.77%.
The Vanguard A rated short-term investment grade bond fund, with a maturity of 3.2 years
and a duration of 2.4 years, has a yield of 1.35%. The Vanguard A rated intermediate-term investment
grade bond fund, with a maturity of 6.5 years and a duration of 5.4 years, is yielding 2.72%.
The Vanguard A rated long-term investment grade bond fund, with a maturity of 24.0 years and
a duration of 13.2 years, is yielding 4.74%. *
The Vanguard Ba rated high yield corporate bond fund, with a maturity of 5.5 years and
a duration of 4.7 years, is yielding 4.76%.
The Vanguard convertible bond fund, with a maturity of 5.9 years and a duration of 5.2
years, is yielding 2.30%.
The Vanguard A rated high yield tax exempt bond fund, with a maturity of 9.4 years and
a duration of 7.3 years, is yielding 3.66%.
The Vanguard A rated intermediate-term tax exempt bond fund, with a maturity of 5.7 years
and a duration of 5.6 years, is yielding 2.43%.
The Vanguard GNMA bond fund, with a maturity of 8.1 years and a duration of 5.8 years,
is yielding 2.14%.
The Vanguard inflation protected Treasury bond fund, with a maturity of 8.8 years and a
duration of 8.2 years, is yielding - 0.23%.
* Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.
anne:
January, 2013
Ten Year Cyclically Adjusted Price Earnings Ratio, 1881-2013
(Standard and Poors Composite Stock Index)
August 15 PE Ratio ( 23.79)
July PE Ratio ( 23.60)
Annual Mean ( 16.48)
Annual Median ( 15.89)
-- Robert Shiller
anne
January, 2013
Dividend Yield, 1881-2013
(Standard and Poors Composite Stock Index)
August 15 Dividend Yield ( 2.00)
July Dividend Yield ( 1.93) *
The 3 month Treasury interest rate is at 0.05%, the 2 year Treasury rate is 0.30%, the
5 year rate is 1.31%, while the 10 year is 2.49%.
The Vanguard A rated short-term investment grade bond fund, with a maturity of 3.2 years
and a duration of 2.4 years, has a yield of 1.45%. The Vanguard A rated intermediate-term investment
grade bond fund, with a maturity of 6.5 years and a duration of 5.4 years, is yielding 2.80%.
The Vanguard A rated long-term investment grade bond fund, with a maturity of 24.3 years and
a duration of 13.4 years, is yielding 4.66%. *
The Vanguard Ba rated high yield corporate bond fund, with a maturity of 5.8 years and
a duration of 4.9 years, is yielding 5.14%.
The Vanguard convertible bond fund, with a maturity of 6.2 years and a duration of 5.4
years, is yielding 2.27%.
The Vanguard A rated high yield tax exempt bond fund, with a maturity of 8.1 years and
a duration of 6.8 years, is yielding 3.37%.
The Vanguard A rated intermediate-term tax exempt bond fund, with a maturity of 5.6 years
and a duration of 5.5 years, is yielding 2.32%.
The Vanguard GNMA bond fund, with a maturity of 7.8 years and a duration of 5.5 years,
is yielding 2.25%.
The Vanguard inflation protected Treasury bond fund, with a maturity of 8.8 years and a
duration of 8.1 years, is yielding - 0.16%.
* Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.
The 3 month Treasury interest rate is at 0.04%, the 2 year Treasury rate is 0.36%, the
5 year rate is 1.39%, while the 10 year is 2.49%.
The Vanguard A rated short-term investment grade bond fund, with a maturity of 3.2 years
and a duration of 2.5 years, has a yield of 1.30%. The Vanguard A rated intermediate-term investment
grade bond fund, with a maturity of 6.5 years and a duration of 5.5 years, is yielding 2.58%.
The Vanguard A rated long-term investment grade bond fund, with a maturity of 24.0 years and
a duration of 13.5 years, is yielding 4.59%. *
The Vanguard Ba rated high yield corporate bond fund, with a maturity of 5.3 years and
a duration of 4.6 years, is yielding 4.91%.
The Vanguard convertible bond fund, with a maturity of 6.2 years and a duration of 5.4
years, is yielding 2.16%.
The Vanguard A rated high yield tax exempt bond fund, with a maturity of 6.9 years and
a duration of 6.4 years, is yielding 3.04%.
The Vanguard A rated intermediate-term tax exempt bond fund, with a maturity of 5.4 years
and a duration of 5.2 years, is yielding 2.03%.
The Vanguard GNMA bond fund, with a maturity of 7.3 years and a duration of 5.0 years,
is yielding 2.20%.
The Vanguard inflation protected Treasury bond fund, with a maturity of 9.1 years and a
duration of 8.5 years, is yielding - 0.37%.
* Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.
The 3 month Treasury interest rate is at 0.04%, the 2 year Treasury rate is 0.32%, the
5 year rate is 1.29%, while the 10 year is 2.39%.
The Vanguard A rated short-term investment grade bond fund, with a maturity of 3.2 years
and a duration of 2.5 years, has a yield of 1.17%. The Vanguard A rated intermediate-term investment
grade bond fund, with a maturity of 6.5 years and a duration of 5.5 years, is yielding 2.37%.
The Vanguard A rated long-term investment grade bond fund, with a maturity of 24.0 years and
a duration of 13.5 years, is yielding 4.40%. *
The Vanguard Ba rated high yield corporate bond fund, with a maturity of 5.3 years and
a duration of 4.6 years, is yielding 4.56%.
The Vanguard convertible bond fund, with a maturity of 6.2 years and a duration of 5.4
years, is yielding 2.16%.
The Vanguard A rated high yield tax exempt bond fund, with a maturity of 6.9 years and
a duration of 6.4 years, is yielding 2.77%.
The Vanguard A rated intermediate-term tax exempt bond fund, with a maturity of 5.4 years
and a duration of 5.2 years, is yielding 1.81%.
The Vanguard GNMA bond fund, with a maturity of 7.3 years and a duration of 5.0 years,
is yielding 2.14%.
The Vanguard inflation protected Treasury bond fund, with a maturity of 9.1 years and a
duration of 8.5 years, is yielding - 0.68%.
* Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.
The 3 month Treasury interest rate is at 0.06%, the 2 year Treasury rate is 0.24%, the
5 year rate is 0.82%, while the 10 year is 1.90%.
The Vanguard A rated short-term investment grade bond fund, with a maturity of 3.1 years
and a duration of 2.3 years, has a yield of 1.02%. The Vanguard A rated intermediate-term investment
grade bond fund, with a maturity of 6.4 years and a duration of 5.3 years, is yielding 2.01%.
The Vanguard A rated long-term investment grade bond fund, with a maturity of 24.0 years and
a duration of 13.6 years, is yielding 3.95%. *
The Vanguard Ba rated high yield corporate bond fund, with a maturity of 5.1 years and
a duration of 4.3 years, is yielding 4.13%.
The Vanguard convertible bond fund, with a maturity of 6.1 years and a duration of 5.2
years, is yielding 2.22%.
The Vanguard A rated high yield tax exempt bond fund, with a maturity of 6.8 years and
a duration of 6.2 years, is yielding 2.45%.
The Vanguard A rated intermediate-term tax exempt bond fund, with a maturity of 5.5 years
and a duration of 5.1 years, is yielding 1.53%.
The Vanguard GNMA bond fund, with a maturity of 6.6 years and a duration of 4.4 years,
is yielding 2.06%.
The Vanguard inflation protected Treasury bond fund, with a maturity of 9.4 years and a duration
of 8.3 years, is yielding - 1.14%.
* Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.
The 3 month Treasury interest rate is at 0.09%, the 2 year Treasury rate is 0.21%, the 5 year
rate is 0.72%, while the 10 year is 1.74%.
The Vanguard A rated short-term investment grade bond fund, with a maturity of 3.1 years and
a duration of 2.3 years, has a yield of 1.02%. The Vanguard A rated intermediate-term investment
grade bond fund, with a maturity of 6.4 years and a duration of 5.3 years, is yielding 2.01%.
The Vanguard A rated long-term investment grade bond fund, with a maturity of 24.0 years and a
duration of 13.6 years, is yielding 3.88%. *
The Vanguard Ba rated high yield corporate bond fund, with a maturity of 5.1 years and a duration
of 4.3 years, is yielding 4.14%.
The Vanguard convertible bond fund, with a maturity of 6.1 years and a duration of 5.2 years,
is yielding 2.31%.
The Vanguard A rated high yield tax exempt bond fund, with a maturity of 6.8 years and a duration
of 6.2 years, is yielding 2.45%.
The Vanguard A rated intermediate-term tax exempt bond fund, with a maturity of 5.5 years
and a duration of 5.1 years, is yielding 1.53%.
The Vanguard GNMA bond fund, with a maturity of 6.6 years and a duration of 4.4 years, is
yielding 2.16%.
The Vanguard inflation protected Treasury bond fund, with a maturity of 9.4 years and a duration
of 8.3 years, is yielding - 1.15%.
* Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.
The 3 month Treasury interest rate is at 0.10%, the 2 year Treasury rate is 0.22%, the
5 year rate is 0.70%, while the 10 year is 1.77%.
The Vanguard A rated short-term investment grade bond fund, with a maturity of 3.1 years
and a duration of 2.3 years, has a yield of 1.07%. The Vanguard A rated intermediate-term investment
grade bond fund, with a maturity of 6.4 years and a duration of 5.3 years, is yielding 2.15%.
The Vanguard A rated long-term investment grade bond fund, with a maturity of 24.3 years and
a duration of 13.8 years, is yielding 4.13%. *
The Vanguard Ba rated high yield corporate bond fund, with a maturity of 5.1 years and
a duration of 4.4 years, is yielding 4.33%.
The Vanguard convertible bond fund, with a maturity of 6.2 years and a duration of 5.3
years, is yielding 2.32%.
The Vanguard A rated high yield tax exempt bond fund, with a maturity of 6.7 years and
a duration of 6.1 years, is yielding 2.49%.
The Vanguard A rated intermediate-term tax exempt bond fund, with a maturity of 5.4 years
and a duration of 5.1 years, is yielding 1.58%.
The Vanguard GNMA bond fund, with a maturity of 6.5 years and a duration of 4.3 years,
is yielding 2.00%.
The Vanguard inflation protected Treasury bond fund, with a maturity of 9.3 years and a
duration of 8.6 years, is yielding - 1.20%.
* Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.
If what Bernanke is saying is true, bonds are in the bubble territory. In no way interest rate on
10 year treasuries can be less then 2% with inflation over 2%. This is some kind of Fed manipulation.
Long-term interest rates would be expected to rise gradually toward more normal levels over the
next several years.
From Fed Chairman Ben Bernanke: Long-Term Interest Rates. Excerpts:
[W]hy are long-term interest rates currently so low? To help answer this question, it is useful
to decompose longer-term yields into three components: one reflecting expected inflation over
the term of the security; another capturing the expected path of short-term real, or inflation-adjusted,
interest rates; and a residual component known as the term premium. Of course, none of these three
components is observed directly, but there are standard ways of estimating them. ...
[H]ow are long-term rates likely to evolve over coming years? It is worth pausing to note that,
not that long ago, central bankers would have carefully avoided this topic. However, it is now
a bedrock principle of central banking that transparency about the likely path of policy, in general,
and interest rates, in particular, can increase the effectiveness of policy. In the present context,
I would add that transparency may mitigate risks emanating from unexpected rate movements. Thus,
let me turn to prospects for long-term rates, starting with the expected path of rates and then
turning to deviations from the expected path that may arise.
If, as the FOMC anticipates, the economic recovery continues at a moderate pace, with unemployment
slowly declining and inflation expectations remaining near 2 percent,
then long-term interest rates would be expected to rise gradually toward more normal levels
over the next several years.
1 currency now -yogi:
However, it is now a bedrock principle of central banking that transparency about the
likely path of policy, in general, and interest rates, in particular, can increase the effectiveness
of policy.
"Bend over, fixed-income bitch, I'm going to fuck you up the ass. Aren't you glad I'm telling
you ahead of time?"
adornosghost:
1 currency now -yogi wrote:
He was right, of course.
"It seems somewhat ridiculous to talk of revolution . . . . But everything else is even more
ridiculous, since it implies accepting the existing order in one way or another"
Bruce in Tennessee:
2%/year inflation is not acceptable...it means 20% inflation per decade...it means the elderly
will reach a point where they will be Lucky to afford catfood....think about it. Assemble all
the pieces, demographics, 2% inflation when inflation is in the throes of global debt repudiation,
younger generations deeply in debt...and on top of all this our central bank thinks 2%/year is
acceptable...
...I suspect this allows virulent inflation to get started from a "standing start"...but I
guess we'll see. Maybe Chinese and Vietnamese wage inflation will be such that we'll see textile
mills return to North Carolina....OR maybe we'll get an even poorer class of people that are not
able to accept risk with their already insuffient funds...
..That's the ticket.
sm_landlord:
Bruce in Tennessee wrote:
2%/year inflation is not acceptable...it means 20% inflation per decade...
Actually worse than that, because inflation grows through the Magic of Compounding™
REBear:
"toward more normal levels over the next several years." Read more at Calculated Risk
I think he is saying rates not going anywhere "over the next several years"
Investment markets are just fine, even investment markets in Europe, but I take the general bond
market as the best indicator of the strength or weakness of the economy and bond investors just do
not think that significant enough growth to make a needed difference in employment is anywhere near:
The 3 month Treasury interest rate is at 0.07%, the 2 year Treasury rate is 0.23%, the 5 year
rate is 0.75%, while the 10 year is 1.85%.
The Vanguard A rated short-term investment grade bond fund, with a maturity of 3.1 years and a
duration of 2.4 years, has a yield of 1.11%. The Vanguard A rated intermediate-term investment grade
bond fund, with a maturity of 6.4 years and a duration of 5.4 years, is yielding 2.17%. The Vanguard
A rated long-term investment grade bond fund, with a maturity of 24.2 years and a duration of 13.6
years, is yielding 4.14%. *
The Vanguard Ba rated high yield corporate bond fund, with a maturity of 4.9 years and a duration
of 4.4 years, is yielding 4.48%.
The Vanguard convertible bond fund, with a maturity of 6.8 years and a duration of 7.4 years,
is yielding 2.81%.
The Vanguard A rated high yield tax exempt bond fund, with a maturity of 6.6 years and a duration
of 6.1 years, is yielding 2.40%.
The Vanguard A rated intermediate-term tax exempt bond fund, with a maturity of 5.5 years and
a duration of 5.1 years, is yielding 1.51%.
The Vanguard GNMA bond fund, with a maturity of 6.3 years and a duration of 4.3 years, is yielding
2.34%.
The Vanguard inflation protected Treasury bond fund, with a maturity of 9.1 years and a duration
of 8.5 years, is yielding - 1.17%.
* Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.
I'm pushing 60 and will be retired in a year or so anyway with a decent pension and 401K so it
really doesn't matter. I wouldn't put any trust in a group that hasn't accomplished anything in about
12 years for any reason.
Well glad you got your pension, and R/A'd or not you will have enough money. But what about
the younger folks with almost no pension or just the cash-balance? What about the next generations
of Americans? The schools are still turning out computer science and engineering graduates. We
protest because we want a future for our children and grandchildren with benefits and a decent
salary. It's not just about us older folks, and we still have a duty, even if you don't quite
see it that way. Unionize now, to stop the wholesale destruction of American jobs at IBM.
I was RA'd with the the March 28th group after 17 years of 1 or 2+ PBCs. I am 18 months away
from retirement age. You should be very worried if you get the boot before you reach your official
retirement point. Even with the bridge they gave me I am 2 months short and the result isn't nice.
So you are just greedy and care about nothing else than your little pile?
This attitude is why the US is turning into a backwater. Reminds me of bonehead [re]publican
logic. This is why I left IBM for a company that treats people with respect and pays better to
boot. Enjoy your hanging on world. BTW I am over 60 and learning and having fun.
Those of us who are younger have saved as well through our own investments. I'm in the cash
balance plan and I have saved plenty. I fully expect to be RA'd at some point and I am quite ready
for that day. Any IBMer who claims to be surprised to be laid off in this day and age and who
hasn't planned for it is an idiot. I don't need a union to "help me". I've got my own exit strategy
and it includes wealth of my own making.
How much of your retirement is invested in IBM stock? Consider how many workers at IBM are
retiring with large IBM investments. Top management is reaching its goals quicker than planned.
They have everything calculated by an entire Finance Department. They will sell their IBM stocks
at peak value. Do you know what your stock will be worth when you sell? They do!
Vanguard cuts fund fees by lowering entry bar for low-cost Admiral share class
October 6, 2010 | Yahoo! Finance
Vanguard is expanding access to its lowest-cost mutual fund share class for individual investors,
a move that will bring fee reductions to nearly 2 million clients of the nation's largest fund company.
Vanguard said Wednesday it is reducing the minimum investment amount to qualify for its Admiral
share class, which charges lower investment expenses than its Investor mutual fund shares.
The biggest cuts affect Vanguard's index funds, which the company pioneered in the late 1970s
as low-cost alternatives to actively managed funds relying on human investment-picking expertise.
Investors who previously needed to invest at least $100,000 to qualify for Admiral shares can now
get in with just $10,000 for Vanguard index funds, which passively track stock or bond market indexes.
For example, Admiral shares of Vanguard's Total Stock Market Index Fund will charge $7 in annual
expenses for every $1,000 invested, provided an investor has at least $10,000 in the fund. That's
down from $18 in annual expenses for Investor shares in the $138 billion fund, which requires a minimum
of $3,000.
For Vanguard's less-popular actively managed funds, the new investment minimum for Admiral shares
is $50,000 instead of $100,000.
A total of 52 of Vanguard's more than 170 U.S. funds offer Admiral shares with the new lower eligibility
requirements, including 17 index funds and 35 actively managed funds.
Vanguard will begin converting qualifying accounts to Admiral shares
in coming months, affecting nearly 2 million clients.
The privately held, shareholder-owned company, based in Valley Forge, Pa., has offered its Admiral
share class for 10 years, along with its Investor class and institutional shares geared toward clients
like 401(k)s or other workplace savings plans.
Vanguard's Admiral share class now holds about $340 billion, or about one-quarter of the nearly
$1.5 trillion in U.S. mutual fund assets that Vanguard manages. With the expanded access to Admiral
shares, that class will grow to $430 billion, with the $90 billion shifted from Investor class shares.
Wednesday's announcement is the latest in a string of cost-cutting moves this year by Vanguard,
which has used its size to become more efficient and drive down expenses, challenging chief rivals
Fidelity Investments and Capital Group's American Funds. In May, Vanguard began offering its brokerage
clients commission-free trades in Vanguard exchange-traded funds, a fast-growing business where Vanguard
is playing catch-up to rivals like BlackRock Inc.'s iShares ETFs and State Street's "SPDR" ETFs.
Last month, Vanguard began offering an ETF share class of its Vanguard 500 Index, a $94 billion
behemoth tracking the Standard & Poor's 500. The ETF version charges $6 per $1,000 in annual expenses,
compared with $18 for the fund's Investor class, and $7 for the Admiral class.
Vanguard last month also launched 19 new funds that offer traditional mutual fund shares along
with ETF shares that hold the same basket of stocks or bonds as the conventional fund shares.
ETF shares are priced throughout the trading day and can be traded like stocks. That makes it
possible to lock in a preferred price without waiting for a closing price, unlike with mutual funds,
whose shares are priced once a day.
Last week, Vanguard announced expense cuts at its 529 college savings plan offered through the
state of Nevada.
Two thoughts - first, I wonder whether Vanguard took into account that IRAs tend to feature
smaller annual contributions, which makes it hard to amass enough capital to diversify across
multiple funds.
But the asset allocation is certainly troubling. It looks like the mirror image of what happened
in the mid-1990s, when individuals were being told to diversify into equities (an
argument that leaned heavily on Jeremy Siegel) and out of stable value/money market
funds. Looks like that argument worked perhaps too well.
Perhaps they diversify in their 401k, which has higher contribution limits and matching.
On the bond side, Vanguard will offer three new municipal bond index
funds with traditional and exchange-traded shares, tracking benchmarks in the S&P National AMT-Free
Municipal Bond Index series. The expense ratio for each of Vanguard's new municipal
ETFs is estimated to be 0.12%.
Vanguard has also filed for a new real estate fund, which will be benchmarked to the S&P Global
Ex-U.S. Property Index. Vanguard Global ex-U.S. Real Estate Index Fund will offer Investor Shares,
Institutional Shares, Signal Shares, and ETF Shares.
Vanguard Group Inc., the second- biggest U.S. mutual-fund company, dropped the investment firm
run by
Jeremy Grantham as co-manager of three domestic stock funds that lagged behind peers in the past
year.
The firm, Grantham, Mayo, Van Otterloo & Co. LLC, was removed from the $10.5 billion
Explorer, the $975 million Vanguard U.S. Value and the $695 million VVIF-Small Company Growth
Portfolio, Valley Forge, Pennsylvania-based Vanguard said today in a statement. Vanguard replaced
Boston-based GMO with its own quantitative equity group, which uses mathematical models to pick stocks.
The Explorer fund, which invests in U.S. small-company stocks, slumped 11 percent in the past
year, trailing half of its peers, according to
data compiled by Bloomberg. Grantham, whose firm oversees $157 billion, said in a Jan. 23 interview
that investors should avoid equities and hold cash during what he called worst U.S. financial crisis
since World War II.
``There are plenty of bad things left in this cycle,'' Grantham, 69,
said in the interview.
Dubbed a ``perma-bear'' for his dour view on U.S. equities for more than a decade, Grantham correctly
predicted a crash in technology stocks two months before the bubble burst in March 2000. GMO had
managed the Vanguard fund since 2000.
Vanguard, which has used multiple managers for its $47 billion Windsor II and other funds since
1997, reviews external advisers and fund performance every quarter.
The quantitative group "was a good fit and it was complementary to the existing managers,''
Rebecca Cohen, a spokeswoman for Vanguard, said in an interview.
Tucker Hewes, a spokesman for GMO, declined to comment.
Prudential Plc
The
U.S. Value Fund slumped 8.1 percent in the past year, trailing 61 percent of rival funds that
invest in stocks deemed cheap based on financial yardsticks such as earnings, Bloomberg data show.
The VVIF Small Company Growth, offered to institutions and through advisers, slumped 9.9 percent
in 2007, four times the pace of the benchmark Russell 2500 Index, according to data on
Vanguard's Web site.
Vanguard picked Prudential Plc's M&G Investment Management to manage a portion of its largest
actively managed non-U.S. fund, the $18.3 billion
Vanguard International Growth Fund and the $1.9 billion VVIF - International Portfolio. London-based
M&G joins Schroder Investment Management and Baillie Gifford Overseas Ltd. in managing the non-U.S.
funds.
M&G has managed the $4.6 billion Vanguard Precious Metals and Mining Fund since its inception
in 1984. The fund climbed 41 percent in the past year, beating 98 percent of competing funds that
invest in specific industry groups, Bloomberg data show.
Vanguard's quantitative group has $25 billion active equity fund assets. Vanguard manages $1.25
trillion in U.S. mutual-fund assets. It ranks second to Fidelity Investments in Boston, which manages
$1.6 trillion.
I had yields over 4% in my Vanguard Prime MM and Fidelity Cash Reserves funds, with no risk. Unless
we get a year end rally, these will beat VWNFX. Why are you defending this fund? Can't take criticism?
I think it is ridiculous they set a high minimum initial investment ($10,000) on this fund. There
is nothing premium about Windsor II anymore.
Vanguard is a has-been investment firm. Lack of fresh ideas, marginal
returns and dead interest by Yahoo subscribers should be clues enough for any new investor.
On the bond side, Vanguard will offer three new municipal bond index funds with traditional and
exchange-traded shares, tracking benchmarks in the S&P National AMT-Free Municipal Bond Index series.
The expense ratio for each of Vanguard's new municipal ETFs is estimated to be 0.12%.
Vanguard has also filed for a new real estate fund, which will be benchmarked to the S&P Global
Ex-U.S. Property Index. Vanguard Global ex-U.S. Real Estate Index Fund will offer Investor Shares,
Institutional Shares, Signal Shares, and ETF Shares.
Only by signing up for electronic delivery of shareholder materials (statements, confirmations,
and so on) you can avoid fees for underinvestment in a fund. Of course, you could consolidate funds
to get over the minimums, or maintain $100,000 or more in total Vanguard investments. But if that's
not your cup of tea, simply signing up for electronic delivery is your best bet. In our case, we
actually signed up for this long ago to stem the flow of paperwork into our mailbox.
"Investors too often let their retirement nest eggs lie without proper attention, and don't
do enough to diversify their savings, according to a study to be published by mutual-fund giant Vanguard
Group."
Thats an all too true statement from mutual fund giant Vanguard. They looked at five million
people with employer-sponsored defined-contribution plans or individual retirement accounts it administers.
Vanguard found that during the first half 2005, only 10% of investors in the defined-contribution
plans and 8% of IRA owners made any trades within the accounts.
Thats not to suggest that people should be overtrading -- but one would have thought there would
have been more assel reallocation or rebalancing going on.
Vanguard also found that IRA holders are about twice as likely to invest in a single asset
class or single fund as are those with defined-contribution plans. The typical IRA holder chooses
just one fund, compared with the three funds typically held in a defined-contribution plan, such
as a 401(k) retirement savings account.
The average Vanguard-administered defined-contribution plan offered 18 funds at the end of
2004, compared with more than 70 Vanguard funds offered to IRA investors, according to the study.
The plethora of choices offered to IRA investors may result in "choice overload," Vanguard said.
Why reallocate? Consider:
Stocks accounted for about 70% of combined assets in IRAs and defined-contribution plans held
by the average investor in his late 40s, Vanguard said. But half of the IRA holders put their
entire accounts into stocks, compared with 20% of the defined-contribution holders. At the other
end of the spectrum, 14% of the defined-contribution investors put all of their money into fixed-income
investments, compared with 8% of Vanguard IRA investors.
"It is interesting to us that so many people do appear to take extreme positions, so 100% equity
or no equity," said Ms. Young.
Vanguard also advises investors in the plans against trying to time their moves in and out of
investments and trading frequently. "Investors should be duly skeptical of their own rationales for
market-timing, and instead they should consider making trading decisions based on changes in their
overall circumstances rather than their short-term outlook for the financial markets," the study
said.
Wall Mart is too mean and should be punished for how it handle 401K accounts. They selected the
most greedy and incompetent of money managers possible ;-) ...
I just ran across
an interesting article that talks about a lawsuit against Wal-Mart over their 401(k) investment
selections.
The suit claims that Wal-Mart harmed their employees by offering high-cost retail funds instead
of the cheaper institutional funds for which they surely qualify, and by only offering actively-managed
(and thus costly) fund options rather than choosing a company such as Vanguard that offers low-cost
index funds. Overall, the suit claims that if the Wal-Mart 401(k) had been invested in Vanguard funds,
it would have been worth an additional $140 million over the six year period under consideration.
This is an interesting case. While I'm not a big fan of lawsuits of this nature, the lack of affordable
investment options in many 401(k) plans is a real issue that needs to be dealt with.
In case you didn't know, Vanguard has traditionally levied a $10 annual account fee on IRAs (traditional,
Roth, or SEP) and ESAs with a balance of less than $5,000, index fund accounts with a balance of
less than $10,000, and all non-retirement accounts with a balance of less than $2,500. Going forward,
they've decided to levy a $20 fee for each Vanguard fund in which you have a balance of less than
$10,000.
The good news here is that you avoid these fees entire
Job Title: Financial Counselor Location: Malvern, PA Submitted on: 07-May-03
Job Title
Workplace Survey
Financial Counselor
The Malvern (Valley Forge) offices of the company are still professional dress. The IT division
is a little looser. The company has a very frugal culture, tends to develop systems "in-house" versus
off the shelf because "we are vanguard and nobody knows how we run our ship."
This tends to produce technology that is often too late and too little.
Nothing original gets done. We are very proud of how little we spend to run the operation.
The Admiral Share class was in reality a revenue give-back that has basically hamstrung the company
from investing in itself recently. The pay sucks. If you come from the outside (like I did) you have
to get everything you want upfront (sign-on bonus, base, etc.) because you won't get it once you
are in the door. Previous work experience means nothing once you are in. The IT division loves getting
the talent from the likes of Lockheed Martin, GE, Unisys, Conrail and every other large companies
IT divisions that have shrunk in the easter PA area over the past 5 years. Once inside it doesn't
matter because you will be outnumbered. Forget about raises.
The company had a four scale rating system (prior to last year) where 1% of the company gets an
"Exceeds" rating, 60% get "Achieves" close to 30% got "Needs..." and the rest basically don't make
it till review time. Anyhow they revampted the reviews so that 1% of the 1% get "consitency exceeds,
5-10 percent get "exceeds" 80% get "achieves" and the bottom get "needs improvement." With the "redeployments"
going on this past year (consitently denied in the press, and vanguard never lays off), getting a
needs improve rating means you need to look elsewhere. Oh, in case you were wondering I received
an "exceeds" rating this past year. That equated to a 2% raise. Sure glad
I busted my hump to by doing more and better than the rest so that my raise could be double 60%
of my coworkers who got a 1% raise. To put this in perspective, inflation was 2.2% this past year.
Vanguard likes to use the phrase total compensation, which includes partnership which is to count
towards your comp but shouldn't be included for its not guaranteed. Anyhow the company line is that
it aligns shareholder interests with the crews. In reality it is an involuntary deferred comp that
you get after the fact and is capped. Everybody knows it's capped, until it got out in the press
that Brennan and other officers partnership payouts are not capped. No wonder Brennan wants to get
to 100 per share by 2005. It's not really the motivation you would think since the majority of the
crew is capped and all of the crew will be by then. So if you don't mind being underpaid for the
next few years.....
Mutual fund directors are as close as we get to "insiders" in the mutual fund world, and
it can be fun (and occasionally instructive) to see how insiders invest their own money.....According
to recent proxy materials from Vanguard, a group of seven directors (technically, trustees)
runs all 109 Vanguard funds, and each director personally owns, in total, at least $100,000 worth
of Vanguard funds.....But as you might expect, the type of funds, and the amount invested,
varies widely from director to director.....For example:
John Brennan, Vanguard CEO, owns 30 different Vanguard funds (not counting money
market and muni funds).
Of Brennan's 30 funds, he owns at least 19 with a value of "Over $100,000," so he could have
some serious money on the line. At the opposite end is director Joann Heisen. Of her three
Vanguard funds, one (Wellington) is valued at less $10,000, Health Care is valued
between $10,001 and $50,000, and Capital Opportunity is worth "Over $100,000" -- though
we'd bet not much more than $100,000.
In an apparent act of contrition, Brennan is the only director who owns Vanguard U.S. Growth
("$50,001 - $100,000").
Windsor is the only actively-managed Vanguard fund owned by as many as four
directors. Among the index funds, only two are owned by as many as four directors: Index 500
and (surprisingly) European Stock Index.
You can view all of the Vanguard directors, and the funds they own, on the
accompanying page
>> a few hundred posts back someone mentioned bond funds, and was told to avoid
them (bond funds are evil)--but further along , someone asks about Vanguard bond funds and they seem
acceptable to everyone. I am pretty confused actually. are they ok or not ok? <<
Two things:
1. Bond funds usually get a bad rap because they never "mature." For example, if you put $5,000 into
a bond (or group of bonds) with a 5-year maturity, after five years, you'll get your $5,000 back
plus the interest paid on the bonds (assuming no defaults). But a bond *fund* with a 5-year maturity
always seeks to keep that maturity, so if interest rates rise, after five years you have less than
$5,000. (Of course, if they fall, you have *more* than $5,000.)
2. Many folks here believe that if it's Vanguard, it can do no wrong, and that if it's not Vanguard,
it sucks. Vanguard is certainly one of the better fund families out there if not the best, but I
don't think one can conclude that they are the solution for everyone and everything. You'll probably
find that the Vanguard product family is a good choice for you, but do your own research to make
sure. Vanguard is heavily hyped here -- with some good reason -- but there's much more out there
as well.
My favorite Vanguard midcap funds are the Vanguard Capital
Opportunity fund and the
Vanguard Selected Value (VASVX)
fund, though I don't think many 401k plans hold them.
You could ask for them or simply go with an index duo: Vanguard Mid-Cap Growth Index
(VMGIX)
and Vanguard Mid-Cap Value Index (VMVIX).
Of course, holding an equal weighting in these two index funds would be the same as investing in
the broader Vanguard Mid-Cap Index (VIMSX),
but having the two funds allows you to adjust your midcap assets to lean more heavily toward the
growth or value side, depending on what's happening in the market.
Right now, for example, you'd want to overweight the growth side of the ledger. The financial
stocks that are a heavy component in the value index fund have had a healthy run of late, as have
the tech stocks in the growth fund.
But there's a better chance that tech stocks will continue to gain momentum in the economic recovery,
while the banks will tread water until economic skies are clearer.
Best Vanguard international funds
I recommend you have 10% to 15% of your 401k
in international funds, and Vanguard has some stellar choices. Vanguard International Growth
(VWIGX)
is likely to be one of your 401k offerings, and it's a fine fund to own.
With three managers, International Growth still holds just 170 stocks or so, and close to 20%
of its assets are in the top 10 stocks. That's the kind of concentration I like. The managers also
aren't afraid to invest in emerging markets, something you don't always find in more-plain-vanilla
offerings.
As I said before, you'll want to spice your foreign holdings with some of the Vanguard Emerging
Markets Index fund, and it's worth your while to demand your 401k administrator give you access to
this fund.
Globally, emerging economies are showing increased economic firepower, hungry consumers and the ability
to take advantage of newly aggressive importers, exporters, manufacturers and entrepreneurs. Emerging
Markets Index will give you nice exposure to one of the most powerful investment markets out there
-- China -- with about 20% of its assets in this economic powerhouse.
In addition, Emerging Markets has investments in Brazil (15%), Korea (13%) and Taiwan (12%).
I'd also like to see you have some exposure to foreign small caps. Vanguard FTSE All-World
ex-US Small-Cap Index (VFSVX)
is a new Vanguard fund that invests in small-cap non-U.S. stocks. This fund tracks an
FTSE benchmark of more than 3,000 stocks, and it will give you excellent exposure to this sector
of the market.
Best Vanguard bond funds
If you own Wellington in your 401k, you already have exposure to high-quality corporate and government
bonds, so you don't need to diversify into another bond fund in your 401k. But if not, put about
10% of your 401k money in Vanguard Short-Term Investment-Grade Bond Fund (VFSTX).
This fund invests at least 80% of its assets in "investment-grade"
or better short- and intermediate-term bonds, and that has been a good place to be lately. As banks
have pulled in their lending, corporate bond issuance worldwide has gone through the roof. This fund
has performed well this year and should continue to do so down the road.
Vanguard's Intermediate-Term Investment-Grade Bond Fund (VFICX)
is also a good choice, but it will be a bit more volatile when interest rates begin to rise.
Putting it all together
If you are able to invest in any of the Vanguard Primecap-managed funds, put most of your equity
money there. If not, start with Wellington. Round out your equity holdings with Vanguard Mid-Cap
Growth and Vanguard Mid-Cap Value, overweighting in one or the other depending on what's happening
in the market.
You'll want 10% to 15% of your 401k money in international funds, including Vanguard International
Growth, Vanguard Emerging Markets Index and Vanguard World ex-US Small-Cap Index.
And if you don't have a balanced fund like Wellington, which already owns bonds, put 10% of your
401k money in Vanguard Short-Term Investment-Grade Bond Fund or Vanguard Intermediate-Term Investment-Grade
Bond Fund.
The chart below gives you the starting point I'd recommend, naming key funds and their focus areas.
If you don't have all the choices (or, I suppose, Vanguard at all), the focus areas might still give
you some guidance.
Remember, it's your retirement. So make sure your 401k plan is designed to help you, not your
benefits manager.
Portfolios for long-term growth investors
Fund
Focus
Allocation
Using Wellington as your core
Wellington
Balanced (60% stock/40% bond)
40%
Mid-Cap Growth Index
Stock -- midcap growth
25%
Mid-Cap Value Index
Stock -- midcap value
15%
International Growth
Foreign stock -- large
10%
Emerging Markets Index
Foreign stock -- emerging
5%
World ex-US Small-Cap Index
Foreign stock -- small
5%
Total
100%
Using Primecap-run funds as your core
Primecap/Primecap Core/Capital Opportunity
Stock -- Growth at a reasonable price
44%
Selected Value
Stock -- mid-cap value
20%
International Growth
Foreign stock -- large
10%
Emerging Markets Index
Foreign stock -- emerging
5%
World ex-US Small-Cap Index
Foreign stock -- small
5%
Short-Term Investment-Grade Bond
Short corporate bonds
8%
Intermediate-Term Investment-Grade Bond
Intermediate corporate bonds
8%
Total
100%
Dan Wiener is the editor of The Independent Adviser for Vanguard Investors. A five-time winner
of the Newsletter Publishers Foundation's Editorial Excellence Award, Wiener is the founder of the
Fund Family Shareholder Association and chief executive officer and chief investment strategist of
Adviser Investment Management, a Newton, Mass., investment advisory firm.
Vanguard's Best Bear Market Mutual Funds
Thursday August 30, 7:00 am ET
By Dan Culloton
The increased market volatility in recent months as well as Vanguard's announcement that it will
launch a market-neutral fund for institutional investors before the end of the year got me thinking
(a dangerous development, to be sure). Are any of Vanguard's funds any good at reducing volatility
without sacrificing the potential for capital appreciation like a market-neutral fund is supposed
to do? And if market-neutral funds are such a great idea, does the typical Vanguard investor need
one in his or her portfolio? To answer these questions I looked at the bear market ranks of Vanguard
funds, as well as measures of their volatility, such as standard deviation. I also checked how the
funds have held up relative to their peers during the tumultuous third quarter. I found that quite
a few Vanguard funds looked good according to the bear market ranking (which gauges how funds have
done in down markets over the past five years), so the answer to the first question is a resounding
yes. That also answers the second question. With so many options with long histories of minimizing
market risk while delivering some capital appreciation, most Vanguard investors could live long and
happy lives without a market-neutral fund. I've highlighted below what I think are the best Vanguard
funds for a bear market. Granted, they don't use the sophisticated strategies of a market-neutral
fund, but they've delivered pretty good downside protection and absolute returns at less than half
the projected cost of the proposed Vanguard Market Neutral Fund.
A caveat: I'm not predicting that the end is nigh (I'll leave that to Jeremy Grantham) or urging
you to dump all your holdings and buy one of these funds. I still believe that the best safeguard
against a bear market is to be a long-term investor with a sound long-term plan. But if the recent
undulations have been giving you panic attacks in the shower or causing you to check out the return
prospects of shoeboxes and mattresses, it may be time to re-evaluate your risk profile and perhaps
consider funds like these.
Vanguard LifeStrategy Income (NASDAQ:VASIX
- News)
This is a fund of funds that keeps most of its money in fixed-income portfolios: Vanguard Total Bond
Market (NASDAQ:VBMFX -
News) and Vanguard Short-Term
Investment-Grade (NASDAQ:VFSTX -
News). But its equity stake can
vary from 5% to 30% depending on the asset-allocation calls of Tom Loeb and his team at Vanguard
Asset Allocation (NASDAQ:VAAPX -
News), which gets 25% of assets
here (Vanguard Total Stock Market Index (NASDAQ:VTSMX
- News) accounts for the rest
of stock holdings). Loeb uses quantitative models to figure out how much of his portfolio to devote
to S&P 500 stocks and the Lehman Brothers Long-Term Treasury Index, and his calls have been consistent
and accurate over the years. (Currently Loeb's fund has about three fourths of its assets in stocks,
so this fund's equity allocation hangs around 20%.) That give this conservative fund a little upside
potential, but it's really designed to preserve capital and generate income. The fund's bear market
rank is better than 97% of its conservative-allocation category peers and in the third quarter through
Aug. 28 it eked out a small gain that put it ahead of 96% of its peer group. Investors who are further
away from their goals or who are more risk tolerant can check out Vanguard LifeStrategy Conservative
Growth (NASDAQ:VSCGX -
News) and Vanguard LifeStrategy
Moderate Growth (NASDAQ:VSMGX -
News), which devote more money
to equity funds and have done well in bear markets relative to their peers.
Vanguard Wellesley Income (NASDAQ:VWINX
- News)
A colleague of mine recently told me that this portfolio, which keeps most of its money in bonds,
was the first fund she ever bought. My first reaction was to say that it seemed awfully conservative
for someone whose retirement was still decades off. She retorted that she was looking for a one-stop
fund that wouldn't burn an inexperienced investor. Since then she has built a more age-appropriate
asset-allocation plan around this fund, but she has never regretted her first purchase because the
fund has been so reliable. It has lost money in just three of the last 20 years, has done better
than 97% of its peers in bear markets, and has succeeded in delivering a steady stream of income
with a portfolio of undervalued, high-yielding stocks and high-quality (mostly corporate) bonds.
That the fund has held up well (better than nearly 90% of its conservative-allocation peers for the
third quarter through Aug. 28) in the middle of a credit crunch with such a large corporate bond
stake is testimony to the security-selection skills of long-time fixed-income manager Earl McEvoy
and his team from Wellington Management. Wellington's John Ryan on the equity side is no slouch either.
He's leaving the fund next year but has a seasoned understudy lined up in Michael Reckmeyer III.
My colleague argues that there are worse newbie-investor mistakes than buying this fund, and I'd
have to agree.
Vanguard Short-Term Tax-Exempt (NASDAQ:VWSTX
- News)
This fund is cautious and consistent. Longtime manager Pam Wisehaupt-Tynan keeps the portfolio's
duration, a measure of interest-rate sensitivity, low and its credit quality high. Low expenses allow
the fund's conservative approach to work in its favor over time. Put too much of your portfolio here
and you could run the risk of not keeping up with inflation or not seeing enough appreciation to
meet your goals, but it can take the edge off a taxable portfolio. It's done better than 96% of its
peers in bear markets and outpaced almost 80% of them in the current quarter through Aug. 28.
Vanguard Balanced Index (NASDAQ:VBINX
- News)
Once again, simplicity and low costs work in a Vanguard fund's favor. A mix of 60% MSCI U.S. Broad
Market Index (essentially Vanguard Total Stock Market Index ) and 40% Lehman Aggregate Bond Index
has produced reliable absolute returns. It's done better than 86% of its peers in bear markets and
has bested about four fifths of them so far in the third quarter. The fund's correlation with the
overall market is higher, but it's still a solid core holding.
Vanguard Wellington (NASDAQ:VWELX
- News)
This is another old stalwart managed by the redoubtable Wellington Management. In June, my colleague
Chris Davis highlighted this one of Morningstar's favorite "sleep-at-night funds", or offerings that
don't keep you awake at night wondering what they are doing. Since then the fund has acquitted itself
relatively well. It posted a 1.9% loss for the third quarter through Aug. 28, but that was still
better than 82% of its moderate-allocation peers. Its long-term bear market rank also is still better
than 86% of its rivals. And like its sibling Wellesley Income it has delivered consistent absolute
results, losing money in just three of the last 20 calendar years.
Read more about Vanguard funds in our Vanguard Fund Family Report. To view a risk-free trial issue,
click here.
Dan Culloton does not own shares in any of the securities mentioned above.
The Last but not LeastTechnology is dominated by
two types of people: those who understand what they do not manage and those who manage what they do not understand ~Archibald Putt.
Ph.D
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