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Old 04-09-2009, 05:23 PM   #21
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I expect my corporate bond funds to recover well before the equity funds recover. In the mean time I'll take the 6 to 7.5% yields, thank you very much!

I'm considering taking a part of my cash position which is in an AMT tax-free money market fund only yielding .34% and putting it in the Fidelity GNMA fund which is government-backed mortgages yet yielding 4.66%. Right now the average maturity is 4 years which is pretty short. In this super low yield environment, I'm thinking my 11% cash position is just too high!

Why are GNMA funds yielding so much more than treasuries? Is the spread usually this wide? I don't remember this wide of a spread.

Audrey
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Old 04-09-2009, 07:28 PM   #22
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Originally Posted by clifp View Post
In word yes Bond funds not individual issues, unless you know what you are doing. Even when you do, a search of the forum for the terms ISM OSM will provide you with hours of low cost education (and perhaps entertainment) on the trials and tribulations of buying individual corporate bonds. Suffice to say that these ISM and OSM bonds, (issued by student loan giant Sallie Mae) were recommended by a Wall St professional a few years ago. Endorsed by other Wall St types, analyized by a number of us with years of investments background, and a willingness to pour through multi-page SEC fillings. Despite a significant amount of due dillegence.

Most of these bonds were orginally purchased by members of the forum at prices at least twice there current trading level. I am not sure if collectively the forum has suffered a million dollars in paper/actual losses on this particular corporate bond, but it is certainly in the multi hundred thousand range.
Amazing how having a printed record improves truth telling.

ha
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Old 04-09-2009, 07:44 PM   #23
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Originally Posted by audreyh1 View Post
I expect my corporate bond funds to recover well before the equity funds recover. In the mean time I'll take the 6 to 7.5% yields, thank you very much!

I'm considering taking a part of my cash position which is in an AMT tax-free money market fund only yielding .34% and putting it in the Fidelity GNMA fund which is government-backed mortgages yet yielding 4.66%. Right now the average maturity is 4 years which is pretty short. In this super low yield environment, I'm thinking my 11% cash position is just too high!

Why are GNMA funds yielding so much more than treasuries? Is the spread usually this wide? I don't remember this wide of a spread.

Audrey
I believe the current spread is quite wide. This author says 1% is more typical.

The reason for any spread at all is negative convexity which is a feature of mortgage backed securites. Briefly, this means that when interst rates rise, your Ginnie Maes go down just like all other bonds of> than 0 duration. But when interest rates fall, Ginnies will not normally rise as much as other bonds of similar duration, because homeowners will often refinance and pay off the higher yielding mortgages.

Ginnie Mae's Day

Yields and Interest Rates
While losses for Ginnie Maes have have been held in check, yields have been appealing. In early 2008, for example, when Morningstar put the average yield for the category at 4.4%, popular Ginnie Mae funds were paying around 5%. The higher yield comes from the fact that Ginnie Mae pass-through certificates may have the same credit quality as Treasury bonds, but they still pay more interest. Often the spread is 100 basis points (one percentage point) or more.

"The higher yield is paid to investors for accepting 'negative convexity,'" Brennan explains. Mortgage-backed securities, including Ginnie Maes, have built-in disadvantages when interest rates move in either direction.
The assets securing Ginnie Maes are loans to homeowners, and the income pocketed by investors comes from monthly mortgage payments. Home mortgages, though, may be prepaid when homes are sold or when the loans are refinanced.
When interest rates rise, Ginnie Maes lose value, as do all fixed-income instruments. In such an environment, mortgage refinancing declines as there's little incentive to refinance at a higher rate. A refinancing slowdown effectively extends the expected maturity of outstanding Ginnie Maes, and longer-duration bonds lose more value than shorter-duration bonds when rates rise. "The more rates increase, the faster the loss in value for mortgage-backed securities," Brennan says.
On the other hand, when mortgage rates drop, refinancing increases, which effectively reduces the duration of Ginnie Maes held by investors. Short-duration bonds don't appreciate as much as long bonds when interest rates drop. Thus, Ginnie Maes don't have the same upside potential as conventional bonds.
As mortgage refinancing increases and loans are prepaid, more capital is returned to investors, who must reinvest at lower rates. Therefore, Ginnie Maes and the funds that hold them are most vulnerable to drops in interest rates and the consequent rise in mortgage refinancing."

Ha
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Old 04-09-2009, 07:48 PM   #24
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Thanks for the link on ginnie mae bonds, Ha. I hope they continue to be a good investment because I just bought a lot of Vanguard GNMA today.
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Old 04-09-2009, 08:16 PM   #25
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I have been buying corporates, mostly investment grade, both individual bonds and funds. You can buy pretty attractively priced high quality bonds right now in the single A rating range. Yesterday I bought a smidge of a nice BBB+ rated bond maturing in 5 years that yields just shy of 10% to maturity. I know the issuer and own some of the equity and am comfy the credit profile, so picking some up at this kind of yield was a no-brainer.
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Old 04-09-2009, 08:18 PM   #26
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I like GNMA and have owned some on and off over several years. However, I like Vanguard's Intermediate Term Investment Grade
better right now. It is paying over 6% and may have some capital
gain potential. This fund is in my IRA currently.

Cheers,

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Old 04-10-2009, 08:38 AM   #27
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I believe the current spread is quite wide. This author says 1% is more typical.
That's what I was thinking. Thanks for the details.

Part of my interest is that I have cash in these money market funds that have a "temporary" Fed guarantee, and the absolutely Fed guaranteed treasury-back MM funds that are yielding almost 0%, the Government bond funds that are yielding super-low. And then I see these GNMA funds which are government guaranteed and yet they have such attractive yields! Definitely motivates me to cut back on my cash position.

I already own a lot of short to intermediate corporate bonds through my other bond funds.

I've ridden the rising interest rate cycle before with GNMA funds and they definitely can get hit hard! Usually I'm nimble enough to switch over to bank loan funds before this happens.

Audrey
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Old 04-10-2009, 06:46 PM   #28
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I too was wondering why the GNMA-Treasury rate difference.
Negative convexity. Has a nice ring to it.
Thanks Ha. Thanks all! It's all good.

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Old 04-10-2009, 08:10 PM   #29
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I have been buying corporates, mostly investment grade, both individual bonds and funds. You can buy pretty attractively priced high quality bonds right now in the single A rating range. Yesterday I bought a smidge of a nice BBB+ rated bond maturing in 5 years that yields just shy of 10% to maturity. I know the issuer and own some of the equity and am comfy the credit profile, so picking some up at this kind of yield was a no-brainer.
Brewer! We haven't heard from you in a long time! I've been wondering what's been happening in your neck of the woods.

Audrey
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Old 04-10-2009, 08:14 PM   #30
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Brewer! We haven't heard from you in a long time! I've been wondering what's been happening in your neck of the woods.

Audrey
Busy. Working the soles off my shoes for the last month and change. It will subside in the next few weeks, but leaves me pressed for time.
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Old 04-11-2009, 01:47 AM   #31
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My two cents. I wouldn't get caught dead buying bonds right now(with the exception of TIPS which you just missed one of the best opportunities to buy a week ago). I don't time markets all I can say is that sometime in the next 1 1/2 years you will see a very steep increasing interest rate environment. Bonds are attractive right now, but they will become devalued as interest rates rise. Buy something that keep up with inflation.
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Old 04-19-2009, 11:04 PM   #32
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Hi -

Googled and found this forum. Why Vangard bond and not Fidelity Government fund? May I know where you buy Vangard VBMFX and if there is a transaction fee. Thanks.
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Old 04-20-2009, 07:12 AM   #33
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Hi -

Googled and found this forum. May I know where you buy Vangard VBMFX and if there is a transaction fee. Thanks.
Just go to the vanguard web site. Open an account and buy all you want.
Hope that helps,
Steve
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Old 04-20-2009, 08:08 AM   #34
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Good Morning Group,
I too am trying to get my mind right concerning bonds. I need to add bonds to my portfolio but have procrastinated. Now it seems the NAV's are up and I should have bought earlier in the game. The tax exempt funds are back close to 52 week highs and GNMA has risen a good bit too. I guess I want the best of both worlds but my timing skills are bad to say the least. Is my mind set wrong? Do I just need to accept the fact that I may see (hard earned) principle fluctuate even with bonds? What say the guru's of retirement?
I guess the one good thing about my procrastination is I've now watched over the last several months what these bond fund NAV's can do during bad market conditions. I would have been shocked had I thrown my money in bonds to watch it shrink like the funds did this past year. It was bad enough watching my stock funds disintegrate.
Its been one heck of a year for new investors trying to get our money set up to live off the income. I think I've done OK in my pursuit of buying stock funds as the markets crashed. But haven't seen daylight on those yet, getting very close though. I'm happy I have gone slow with my money moves and have managed to keep most of the funds safe in MM funds. But also need stable investments for my income in retirement.
The plan was to get everything set up & invested to retire at the end of this (2009) year. I've learned a ton but still working toward our goal. Oh, and will be leaning on all my forum friends for the rest of my life for moral support/advise.
What a year to get an investment education?
Steve
PS. Nothing like an early monday morning to spill out your heart and soul !!!
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Old 04-20-2009, 08:18 AM   #35
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My two cents. I wouldn't get caught dead buying bonds right now(with the exception of TIPS which you just missed one of the best opportunities to buy a week ago).
Are you buying at auction or secondary market? Or maybe just Tips funds?
Thanks,
Steve
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Old 04-20-2009, 09:13 AM   #36
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Has anybody answered the OP's question ? <Is now a horrible time to buy a bond fund ?>

I didn't see any discussion about bonds priced for the (coming) corporate and municipal defaults. Or for the very possible inflationary scenario that may come due to all of the stimulus/fed bailouts/dollar weakness.

In my opinion, bonds longer than a few years in maturity are not priced right. But what do I know ?
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Old 04-20-2009, 11:13 AM   #37
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I've also been thinking short term is probably best.
Not sure if anyone answered the OP's question but it sure instigated plenty follow up questions. When it comes to bonds, the more discussion the better as for my thinking. I'm sure that will help all that are interested.
Steve
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Old 04-20-2009, 11:23 AM   #38
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I've also been thinking short term is probably best.
Not sure if anyone answered the OP's question but it sure instigated plenty follow up questions. When it comes to bonds, the more discussion the better as for my thinking. I'm sure that will help all that are interested.
Steve
The original question could not possibly be answered. Who could possibly know if any time were "the worst possible time" for anything?
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Plenty of Follow Up is Good
Old 04-20-2009, 11:58 AM   #39
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Plenty of Follow Up is Good

Quote:
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I've also been thinking short term is probably best.
Not sure if anyone answered the OP's question but it sure instigated plenty follow up questions. When it comes to bonds, the more discussion the better as for my thinking. I'm sure that will help all that are interested.
Steve
First I buy EM funds to diversify my portfolio (2007) then REITs and Oil funds (2008). Although I still think they were good moves, if I had it to do over again I would have waited. So now I want to buy bonds? Therefore this is may be the WORST time to buy.

They seem to be valued poorly relative to other investments but one never knows. Time to take a small position and utilize the wisdom of the ER Forum. My finance professor said that one should start a career in finance by learning about fixed income vehicles.

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Old 04-21-2009, 12:03 PM   #40
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Most people seem to use bonds or bond funds to reduce the volatility of their total portfolio. To me, bond funds seem similar to stock funds in that the NAV fluctuates and can actually decline.

A bond fund can get badly hurt by rising interest rates or ratings decline. But if you hold an actual bond ladder, you don't sell before maturity and don't care about ratings decline unless the bond actually defaults. And rising interest rates only mean that you earn a little less money, you don't actually lose it.

Because of transaction costs and the difficulty of diversification, I'm looking to use a CD ladder rather than a bond ladder.

Perhaps someone here can convince me otherwise, because bond funds are certainly convenient.
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