Bonds 01 (May 08 - Aug 10)

[kennynah]

way too much loud noises about the widening credit spreads and LIBOR...

to me...that's the end of this cycle....

i expect CDS and LIBOR to get lower from here...

above is a mid term 2-4 weeks view...

[winston]

Weekly Review

Bonds had a better day after getting crushed on Thursday with the improving economic conditions in the EU and China's backing of the Europeans. Not huge, but it was still a move up (US 10 year 3.30% versus 3.35% yield Thursday). There was a bounce in bonds. It was clubbed, and this is interesting because there was an island reversal.

There was a gap higher, then five days across, and then a gap lower on Thursday. It is at the bottom of this gap point and at the 18 day EMA, and we will see if it bounces from there.

Bonds should be selling if the US economy is strong and everything is working correctly. The problem is that the EU scared everybody, so bonds have been rallying in the US as a safe-haven trade.

If we get over the idea that the EU will collapse and we assume that the US economy will improve, then bonds should continue to sell. They are showing a little weakness but are not showing a breakdown yet.

Source: MarketFN.com

[winston]

Why the Safest Investment is Now One of the Riskiest by Alexander Green

U.S. Treasury obligations are the safest investment in the world.

However, that doesn't mean they can't be dangerous. Far from it.

Yet a few days ago, The Wall Street Journal reported that, "Long-dated Treasury securities are now the most favored financial assets for global investors fleeing the eurozone's debt crisis."

Talk about jumping out of the frying pan and into the fire...

Don't get me wrong. I'm not one of those end-of-the-worlders who expect the U.S. government to default on its sovereign obligations. That won't happen.

It wouldn't even be necessary. After all, history shows that governments always prefer to inflate their way out of a debt crisis by cranking up the printing presses instead. That way they can achieve a de facto debt reduction simply by devaluing the currency.

If you've seen the photographs of German citizens hauling wheelbarrows full of cash into the bank during the days of the Weimar Republic, you know what I'm talking about.

Of course, I don't expect inflation like that. And neither should you.

But what kind of inflation does an investor expect who loans his money to the government for 30 years at a rate of just 4.1%?

Why Treasury Bonds Could Bulldoze Your Portfolio

That 4.1% figure is the current yield on the long end - and it's a bet that has a little upside potential and a whole world of downside risk. Why?

Imagine a seesaw with interest rates and inflation on one end and bond prices on the other. If inflation goes down, bond prices go up. And vice-versa.

But how far down can rates go on the long end? Unless we have the sort of deflationary environment that Japan suffered in the 1990s, the appreciation potential here is minimal.

On the other hand, if inflation rears its ugly head, long bonds will get clobbered. And the worse inflation gets, the worse these bonds will do.

I realize that inflation is not an immediate threat. Technology and deregulation have brought costs down over the past decade. And even oil prices have moderated lately.

But if the bond market gets even a whiff of higher inflation, these bonds will drop like a stone. And I'm betting that investors who weren't around during the early 1980s - and even many who were - don't realize it.

They are so busy patting themselves on the back for eliminating default risk - and picking up a 4% yield versus next-to-nothing on the short end - that they are forgetting about interest rate risk: the risk that higher inflation will send long yields soaring and bond prices crashing.

Don't Let the Government Trick You into Speculating

Seth Klarman, President of the Baupost Group, an investment firm in Boston that manages $22 billion, says the U.S. government is inadvertently provoking its citizens into taking very bad risks right now.

How?

"By holding short-term interest rates near zero, the government is basically tricking the population into going long on just about every security except cash, at the price of almost certainly not getting an adequate return for the risks they are running. People can't stand earning 0% on their money, so the government is forcing everyone in the investing public to speculate."

Of course, most people aren't exactly in a speculating mood right now.

So what are they doing? They're buying super safe long-term Treasuries and earning over 4%.

Except that's not a safe investment - as many will eventually learn to their chagrin.

Source: Investment U

[kennynah]

Don't get me wrong. I'm not one of those end-of-the-worlders who expect the U.S. government to default on its sovereign obligations. That won't happen.

never say never....

[winston]

Ha Ha .. at least the Americans have some nice islands that people may want to buy.

Example: They can sell Guam to the Japanese. There's already so many Japanese there anyway

Or sell Hawaii to the Koreans or Japanese. There's already an ABC store on every corner of Waikiki anyway

[LenaHuat]

PIMCO's buys, which I think are good bets (both the country and currency) :-

June 2 (Bloomberg) -- Bonds backed by Australian home loans offer value as returns outweigh the risk on notes that are “close to bullet-proof AAA,” according to Pacific Investment Management Co., manager of the world’s biggest debt fund.

Pimco’s Australian unit, which manages about A$28 billion ($23.4 billion) of assets, is buying the securities in its second-largest credit-market bet behind bank debt guaranteed by Australia’s government, head of portfolio management Robert Mead said in an interview in Sydney. Pimco, which manages $1 trillion worldwide, owns notes sold by lenders including Westpac Banking Corp. and Members Equity Bank Pty Ltd., he said.

The bonds are “as close to bullet-proof AAA as you can find, as long as you’re choosing the right securities,” Mead said. They are “very attractive” at current spreads, he added.

[winston]

Weekly Review

Bonds. Bonds rallied back as well (US 10 year yield 3.24% versus 3.32% Thursday). The bond market took a sizable hit during the week because pundits statesmen all came out of various countries saying there would be no trouble in the Euro zone.

Interestingly, some of the people saying that were from the Euro zone and of course have a vested interest in seeing that the entire system does not collapse (namely the CEO of BNP Paribas).

US bonds did pull back during the week, but this looks like a normal consolidation. Nothing here is overly nefarious. They are bumping into prior highs and testing somewhat.

The TIPS show similar action. There has been a pullback over the past month to support where they look like they are trying to hold and start to bounce. Thursday was an aberration day. It broke below the 50 day EMA on the close but immediately turned back up and held above that area.

I do not think that bonds are going to start to sell off right now because Europe is not safe. I will discuss more of Europe's issues later and why that is impacting bonds and in the US and overseas bonds.


Source: MatketFN.com

[winston]

What's the T-Bill Market Saying? by Dave Forest

There have been some odd happenings in the T-Bill space recently.

Security yields can tell you a lot about what's happening in a market. And sometimes, what's about to happen.

Back at the beginning of April, an upward breakout in U.S. commercial paper yields suggested traders were sensing trouble and dumping these securities. A few weeks later, the Greek sovereign debt problem broke full force, pulling down stock markets.

In a perhaps similar signal of "something wicked this way coming", T-Bill yields have been plunging the last two weeks.

The shortest-dated bills have been falling fastest. The 4-week security yield was down as much as 88% since the end of May. The 13-week bill dropped 59%. And the 26-week bill is down 35%.

US Treasury Bill rates

US T Bills

This is a sudden and rapid fall. During the financial troubles late in 2008, short-dated T-Bills were in high demand as nervous investors cashed out of a risky assets and looked for somewhere safe to park their money.

T-Bills gave them the ability to earn a little interest without locking up their money for a long time. Just in case things turned around and better investment opportunities presented.

The drop in yields over the last two weeks suggests investors are once again heading for safety. Not totally surprising, given the still-lingering concerns over European debt.

But the interesting thing is the timing. Europe's problems came to light six weeks ago. And most of the panic selling seems to be behind us. In fact, over the last week the Dow is up 5%.

So why are investors jumping ship into T-Bills even as stock markets seem to be recovering? Are they seeing something else on the horizon?

http://oilprice.com/Finance/the-markets ... aying.html

[winston]

Weekly Review

Bonds were up late in the week. They closed the week higher (versus the prior week) as they continue to work laterally at roughly a 3-4 week range. That started when China said it had full faith and confidence in European debt and the Euro. Since then bonds have moved laterally but have not sold off appreciably.

Friday they lost a little ground (10 year US treasury 3.22% versus 3.20% Thursday), but still at very high levels just off the peaks. There is still fear supporting US bonds. If the economy is recovering well and things were thought to be better in the future, bonds would be selling and yields would be rising.

Instead bond yields are staying low and bonds holding at their range highs. That is not what is expected and anticipated with an improving economy and, frankly, worries about inflation.

Source: MarketFN.com

[winston]

Get That Time Bomb Out of Your Portfolio by Alexander Green

Tens of millions of investors have a ticking time bomb in their fixed-income portfolios.

Are you one of them? If so, there's still time to defuse it.

A few weeks ago, I wrote an Investment U column entitled, "Why the Safest Investment is Now One of the Riskiest."

I noted that investors - frustrated by the microscopic yields on money market funds and certificates of deposit (CDs) - have poured money into longer-term Treasury funds.

Their thinking is simple. Too simple: "These funds yield over 5%, not bad in this environment, and the bonds they hold are guaranteed by the full faith and credit of Uncle Sam. What's to worry about?"

Plenty...

The Bond Market Boogeyman

Unlike individuals, corporations, and municipalities, the federal government can simply create money to meet any obligations. U.S. Treasuries are thus free of credit risk. But they aren't free of interest-rate risk.

When interest rates go up, Treasury bond prices go down. Yet investors are comforting themselves that inflation isn't currently a problem and that long-term rates remain near historic lows.

Don't be fooled. There is a monster on the horizon - and he makes Beowulf's Grindel look like Barney.

* Over the past 18 months, the federal debt has surged from $5.5 trillion to more than $8.6 trillion.

* Two years ago, it was 38% of GDP. Today, it's 59% of GDP. And by the Congressional Budget Office's own estimates, it's going much higher still.

This is dangerous. Yet inflation has remained remarkably subdued so far. But understand that if the government opts to stimulate the economy further - especially if some emergency action is needed - short-term rates are already at zero.

Having already thrown the kitchen sink at the slowdown from a monetary standpoint, the federal government will almost certainly opt to spend even more dramatically.

The bond markets will not take this news well. Long-term rates are likely to spike. And when they do, it will get real ugly, real quick.

Investors always think they have time to move out of longer obligations before that happens. But that is not likely to be true...

The Triple Threat to This Asset Class

Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points, driving a stake through most people's bond portfolios.

Making matters worse, millions of Mom-and-Pop investors have unwittingly plunged into leveraged bond funds in recent years, often on their brokers' recommendation.
Investment U - What's It Mean?

Leveraged bond funds borrow money in the short-term to buy more longer-dated issues and enhance the funds' yields. This is all well and good when rates are flat to lower. But when rates spike higher, look out below. The same thing will happen to these funds as to a margined stock portfolio in a correction.

In fact, leveraged closed-end bond fund investors could get hit with a triple-whammy...

* The bonds in the fund will drop when interest rates rise.

* The drop will be compounded by the fact that the portfolio is leveraged.

* The fund could plunge to a deep discount to its net asset value, too.

Not pretty. So what to do?

Become a Bomb Disposal Expert... On Your Portfolio

~ First, check to see what percentage of your portfolio is in long-term bonds. It shouldn't be more than 10% as a maximum (as protection against a deflationary scenario).

~ Second, visit www.etfconnect.com and type in the symbols for your fixed-income ETFs or closed-end funds.

Then look at the number beside the fund's "effective leverage." Zero means the fund is unleveraged. But some may be leveraged up to 40% or more. (That's how these funds are able to yield more than the bonds they invest in, even after expenses.)

In sum, this is a time to pare back your long-term bond holdings and eliminate most of your leveraged holdings.

Don't take these words lightly. There is danger on the horizon. But if you act now, there's still time to get that ticking time bomb out of your portfolio.


Source: Investment U