Hypothetical investment question,

[LegendKiller]

No research is needed. Bonds aren't for your risky investments searching for big buck gains. That portion of your investments are for a safe steady growth. Go to treasurydirect.gov, buy the term you need, and you are done.
http://www.morningstar.com/cover/videocenter.aspx?id=397758

Lol....

This is why people shouldn't get investment advice from a forum unless people can positively identify they actually have investment experience.

Saying bonds should be riskless is like saying stocks should be all traded at a low multiple of risk, like a beta of 1.5. Risk has varying degrees and "riskless" bonds are anything but. Sure, on an individual bond basis if you hold one bond it may not mark to market and you haven't lost money, but that is the case if the funds in that video unless you sell the funds. Ohh god no, shorter term bond funds lost 5-8 pct. That is huge compared to Stocks!

An efficient portfolio won't just have risky stocks and risk free bonds. Or are you advocating buying the riskiest stocks out there and hedging that with tressuries? If so, that is idiotic.

You lose money holding a single govt bond to maturity the same way you lose money holding a bond mutual fund for the same period of time. Opportunity coat has a price.

Holding a single treasury at any point is just as stupid as going out and buying a grip of p&g regardless of price, relative value, market position, profitability, or product strength. As long as it is ok today, who cares?

And let's play this fools calculation out. What happens if everybody makes the same decision and says "well, shit, I'll just buy govies, regardless of rate, at the risk free rate, and not buy any corp or short-term bonds". So govies yield crashes and your diversifier drags returns down. Then Corps and other long bonds price out, rates widen, and then?????? Nobody is buying, so what do you do? At some rate they must be worth the additional risk? NO? So this idiot doesn't believe in any form of EFM? He doesn't believe anybody can price risk at the appropriate rate?

Then why are you investing at all? Because then if corps widen stocks must fall because profit will be squeezed due to higher (infinitely) financing costs, then what? Does every company just finance themselves with equity? So how efficient is that you now just have a single class of investors, equity. Nobody should be higher in the stack, nobody has any additional rights, just equity.


That is stupid money.

Wonder how much Bernstein is worth. With this great strategy of his he must be worth billions.

 

[iCyborg]

No research is needed. Bonds aren't for your risky investments searching for big buck gains. That portion of your investments are for a safe steady growth. Go to treasurydirect.gov, buy the term you need, and you are done.
http://www.morningstar.com/cover/videocenter.aspx?id=397758

So you're saying that buying one type of bond for some desired term with no research is better than any bond index fund where someone does research selecting bonds so they track some standard bond index benchmark while taking a 0.1-0.2% fee? That's flat out wrong, and it's very easy to find counterexamples.

 

[us3rnotfound]

Lol....

This is why people shouldn't get investment advice from a forum unless people can positively identify they actually have investment experience.

Saying bonds should be riskless is like saying stocks should be all traded at a low multiple of risk, like a beta of 1.5. Risk has varying degrees and "riskless" bonds are anything but. Sure, on an individual bond basis if you hold one bond it may not mark to market and you haven't lost money, but that is the case if the funds in that video unless you sell the funds. Ohh god no, shorter term bond funds lost 5-8 pct. That is huge compared to Stocks!

An efficient portfolio won't just have risky stocks and risk free bonds. Or are you advocating buying the riskiest stocks out there and hedging that with tressuries? If so, that is idiotic.

You lose money holding a single govt bond to maturity the same way you lose money holding a bond mutual fund for the same period of time. Opportunity coat has a price.

Holding a single treasury at any point is just as stupid as going out and buying a grip of p&g regardless of price, relative value, market position, profitability, or product strength. As long as it is ok today, who cares?

And let's play this fools calculation out. What happens if everybody makes the same decision and says "well, shit, I'll just buy govies, regardless of rate, at the risk free rate, and not buy any corp or short-term bonds". So govies yield crashes and your diversifier drags returns down. Then Corps and other long bonds price out, rates widen, and then?????? Nobody is buying, so what do you do? At some rate they must be worth the additional risk? NO? So this idiot doesn't believe in any form of EFM? He doesn't believe anybody can price risk at the appropriate rate?

Then why are you investing at all? Because then if corps widen stocks must fall because profit will be squeezed due to higher (infinitely) financing costs, then what? Does every company just finance themselves with equity? So how efficient is that you now just have a single class of investors, equity. Nobody should be higher in the stack, nobody has any additional rights, just equity.


That is stupid money.

Wonder how much Bernstein is worth. With this great strategy of his he must be worth billions.

Question from a neophyte, what do you mean when you say widen in this context?

 

[LegendKiller]

Question from a neophyte, what do you mean when you say widen in this context?

Total interest rate widening. There are two components to most bonds, interest rates and spreads. Interest rates will be dictated by term structure ("curve"), a 1yr bond has a lower rate than a 30yr bond. That can be dictated by the Treasury curve, swap curve, or a derivation of those. Even on the floating rate side there is a curve, overnight rates through multi-month LIBOR rates.

On the spread side it is determined by the market for the specific "riskiness" of the bond (fundamentals) or on the depth/liquidity of the market (technicals). You can have a very low risk bond that has very poor liquidity (good fundamentals but poor technicals) or a horrible bond with great liquidity. Both of those feed into the spread.

When combined you get an overall rate for the bond markets. Any given day you can have rate widening (higher interest rates) and spread widening (fundamental or technicals), or you can have rate widening and spread tightening.

Both of these feed into the price of the bond. If total interest rates widen then the price of the bond goes down. Let's say you had a 10yr bullet pay bond issued at 3% yield, interest rates are 3%, so the present value of the future cashflows is discounted at 3%, you have a par bond, typically quoted at "100". If rates have widened to 3.5%, then new price of the bond per dollar will be less than 100 (say 95). Why? Because the present value of the bond is discounted using a 3% coupon but 3.5% discount rate.

If rates tighten, back to 3%, then it'll be a par bond again. If rates tighten to 2.5%, it'll be quoted at 100 (say 105).

For simplicity sake the math works like this. The "duration" of the bond (can be viewed simply as the term length) is equal to the maturity, a 10yr bond. So to figure out the new price you take 10*(coupon-rate). 100-10*(3-3.5) = 95.

However, it isn't linear. Some bonds aren't bullets, so they may tighten less (or more). Some bonds are amortizing, so the speed at which they amortize can affect the price. Some are callable before the maturity date.If they speed up more than expected it could be good or bad. This is called "convexity" (or negative convexity).


To say that you should just buy treasuries and forget the rest of the bond market is sheer idiocy. There are gobs of ways to make a lot of money in bonds at a reasonable risk.

Furthermore, it ignores the fact that bond prices ARE going to go down because rates are going to go up. If you're sitting on long government bonds you're going to get hit. Let's say that you just do what dullard says and go buy a 30yr treasury. Let's say the Fed increased rates higher than what the market currently thinks, by 25bps (.25%) and lets say the duration is 30.

So your 100 bond will then be worth 100-30*(coupon - rate+.25%) when the rate surprise happens.

Now lets say you're actually smart about this and buy a short-duration bond fund with a duration of 1yr. Then new calculation will be 100-1*(coupon - rate+.25%).

This is why dullard's idea doesn't work.

 

[brianmanahan]

i just put %15 of my money in BND, %5 in BNDX, and call it a day.

that was easy.