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Old 03-30-2010, 08:56 PM   #21
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This is true, but just the same a 20-year bond will still lose a lot more with a 1% interest rate hike than a 1-year bond will lose with a 3% rate hike if the yield curve flattens.
Yes, but if the the long-bond interest rates actually DROP, while then short-term interest rates climb (which is what happened last time), then the 20-year bond doesn't lose, but rather gains.

You just have to be really careful assuming stuff.

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Old 03-30-2010, 10:32 PM   #22
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Its hard to find great deals in the bond market. Treasuries look rich to me. Agency MBS (Fannies, Freddies, Ginnies) looks fairly priced at best. Investment grade corporates look fairly valued, while junk is at least fairly valued. Despite the obvious issues munis have, they seem to be bid up as well. Foreign bonds even look pretty fully priced (Greek bonds, anyone? Only yielding 6 or 7% for 10 years). So there is no obvious place to go for juice to one's portfolio.

Having said that, bonds are still worth holding. They balance things out, smooth things out and reduce volatility. All good stuff. I have been rejiggering my bond portfolio now that thebond market is fairly priced (as opposed to the huge distortions of a year ago). I have sold off all but two of my individual corporate bond positions, all of which were bought at distressed prices in the debacle. The last two I still hold are a packet of very illiquid 5 year bonds from a "crossover" name (one junk rating, one investment grade), and a slug of 4 year junk with a big coupon that I think is money good and will be called within 2 years. I have been buying more conservative stuff (intermediate bond funds) and dabbling in some FI CEFs trading at large discounts to NAV. Back to bonds being defensive in nature, in other words.
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Old 03-30-2010, 10:46 PM   #23
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I don't mean to disagree with anything said so far, but another possibility is that we get stuck in a "liquidity trap" like Japan did. Their interest rate has been essentially zero for at least a decade, maybe longer. Long bonds would look mighty good in that scenario.

There is some reason to believe that this could happen. Our bank bailout resembled what Japan did during their crisis.

However, it does look like we are coming out of the recession, so maybe we dodged that bullet.
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Old 03-31-2010, 07:27 AM   #24
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I don't mean to disagree with anything said so far, but another possibility is that we get stuck in a "liquidity trap" like Japan did. Their interest rate has been essentially zero for at least a decade, maybe longer. Long bonds would look mighty good in that scenario.

There is some reason to believe that this could happen. Our bank bailout resembled what Japan did during their crisis.

However, it does look like we are coming out of the recession, so maybe we dodged that bullet.
Yup. So short bonds would be better than long bonds if a $2 Trillion Fed balance sheet and 0% funds rate sparks inflation. Long bonds "might" be better than short bonds if the Fed gets aggressive and inflation expectations collapse. But long bonds would definitely be better than most other asset classes if we get stuck in a deflationary deleveraging cycle.

Unless you have a strong view on one of these, or any of number of other possible scenarios, its best to stick with a diversified portfolio of bonds and stop worrying so much about things.
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Old 04-01-2010, 02:17 PM   #25
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Here is Vanguard's take on the possible dangers lurking on the short end of the yield curve:

https://personal.vanguard.com/us/ins...prise-04012010
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