Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Bonds observations from Vanguard
Old 09-09-2012, 05:46 PM   #1
Thinks s/he gets paid by the post
veremchuka's Avatar
 
Join Date: Oct 2010
Location: irradiated - too close to the nuclear furnace
Posts: 1,294
Bonds observations from Vanguard

https://personal.vanguard.com/us/ins...RSS&Channel=AN

Ken Volpert, head of Vanguard's Taxable Bond Group, made some interesting observations. I'm not sure whether these comments apply to only taxable accounts but I suspect not. The italics are mine for emphasis.

About high yield bonds:

Quote:
We are less optimistic about high-yield strategies, which will show volatility similar to stocks if we are facing a recession or a breakup of the euro. I know these products are popular with advisors. So I would caution them to consider investing in mutual funds instead of ETFs for this sector. The reason is the liquidity of the underlying bonds. When high-yield bonds are doing well and cash flow is positive, investors in ETFs are typically paying a significant premium over NAV in the less transparent, less liquid market for below-investment-grade bonds. When high-yield bonds are declining and cash flow reverses, investors could face not only the disappearance of that premium, but also a discount to NAV when selling the ETF. For ETF investors itís really important in this segment of the market not to trade with the crowd because the crowd will bear the brunt of these premium-to-discount swings.
and for MBS:

Quote:
The prices for MBS are getting bid up because of the desire for yields above those on Treasuries. This has reduced the yields on MBS, but there is still a pickup over Treasuries. We also anticipate a boon for this segment if the Federal Reserve buys MBS in the next round of quantitative easing.
__________________

__________________
veremchuka is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 09-09-2012, 06:11 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,414
When the difference between the etf price and the basket of what it holds differs arbitragers usually buy one and sell
the other bringing prices back together.
__________________

__________________
mathjak107 is offline   Reply With Quote
Old 09-09-2012, 07:14 PM   #3
Thinks s/he gets paid by the post
photoguy's Avatar
 
Join Date: Jun 2010
Posts: 2,301
There are problems with the arbitrage mechanism that makes it less efficient for high yield bonds:

Why Bond ETFs Often Do Not Track their NAVLearnBonds.com

Basically, unlike stocks, many of the HY holdings do not trade as actively and hence it's harder to price and resell them.
__________________
photoguy is offline   Reply With Quote
Old 09-09-2012, 09:15 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,627
Easy solution: Don't invest in below-investment-grade bonds if you use ETFs.
__________________
LOL! is offline   Reply With Quote
Old 09-10-2012, 03:54 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,414
Quote:
Originally Posted by photoguy View Post
There are problems with the arbitrage mechanism that makes it less efficient for high yield bonds:

Why Bond ETFs Often Do Not Track their NAVLearnBonds.com

Basically, unlike stocks, many of the HY holdings do not trade as actively and hence it's harder to price and resell them.

thanks for the article, it does make sense.
__________________
mathjak107 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 08:51 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.