This from Barron's;
"Basically, what happened is that the liquidity has gone out of the bond market," says Daniel J. Fuss, co-manager of the Loomis Sayles Bond Fund (LBFAX), which was down 13.19% in the quarter, though its 10-year record is near the top of its peer group.
Fuss knows what he is doing, this is just an unusual period for all asset classes.
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9 comments:
Roger, I would like to go back to FTEXX. the yield is not 8% as suggested by a comment earlier today. It is 4.65--probably the tax-adjusted equivalent of 8%. I am pretty heavy in this fund not because of yield chasing but because I parked a lot of money there a couple of months ago. The high yield made me very nervous last week and I asked my financial advisor about it. He sent me some commentary on the Vanguard website essentially saying this is an unusual situation, but not a cause for worry. (They were talking about their own muni funds, not Fidelity's, but the situation is similar. He said if I was concerned, I could move that money into a Treasury money market account, but that if he were in my shoes he would leave it there.
My question is, how can a relatively unsophisticated investor make sense of this sort of situation, when things that looked safe 3 months ago now look risky?
it is a money market. yahoo finance says the avg maturity is 28 days. yahoo finance does not list the holdings.
so if the CP market cant function properly why would the 30 day muni market be any different?
these markets need to be able to roll forward to keep the money moving. the municipalities have pay roll and operations to fund just like california. i doubt cali will be the only one.
one way to look at munis yielding more in nominal terms is that there is a risk that exists that as you mention is not normal. anyone then in that market is taking that risk. the risk is either meaningful or it is not, that's up to you.
it is not unreasonable to expect that Fido would make up the diff if the fund broke the back but there is nothing that says they have to.
ask them what's in there, do a little digging on the states they are heaviest in.
I wrote last week about asset allocation and owning SPY, EFA, IWM, EEM and SHY. I think your comment was this was fine for certain dollar size portfolios? How and why do draw the line, over $100,000, under $250,000?
I agree with your comment about in this market, correalations have been blended away. SHY and IEF are providing defense in the portfolio. If your holdings were as mentioned above, what percentage would you allocate to other ETF's to get narrower? My only problem is now you are making sector or country bets?
Keep on writing, you are very good at keeping things in perspective.
certain dollar size pertains to commission being too much relative to the account. At $100k, spending $400 implementing a portfolio doesn't seem like a great idea to me.
i've written many times about portfolio construction for a large enough account, 40-45 equity holdings most being initially implemented at 2 or 3% each. country weights during a bull phase would normally top out at 6% but i recall being bigger than that in the UK several years ago.
sectors are overweight or underweight versus SPX based on my assessment of where we are in teh stock market cycle and economic cycle with any other ideas about certain themes tossed in.
Interesting performace for bonds. So much for a safe haven.
T
with regard to the muni money funds and muni bonds, accrued interest's (accruedint.blogspot.com) blog had some insightful comments on friday (the second comment down if one wants to read it).
according to AI, liquidity has disappeared and firms that provide liquidity can't hold inventory, so there is virtually no trading. when someone needs to sell (for example, for redemptions out of a fund), the price needs to go down enough to induce someone else to buy that muni paper simultaneously as the dealer can't hold inventory since their financing is not secure enough. consequently, when price goes down, yield goes up--and recently that has been considerably--especially since the reserve fund broke the buck and apparently caused a scramble to exit muni money market funds.
AI did not mention it, but from what i have seen, solvency has not been an issue so far in muni land--one alabama county went bk a few weeks ago, but that derived from several other issues like apparently very poor management of a sewer project and its financing from a couple of years ago and their bankruptcy has been anticipated since sometime in the spring. obviously the recent calif funding crisis throws a new wrinkle although it sounds more like a near term liquidity issue rather than a budget breakdown (but i am certainly no expert on the calif situation.)
--gj49
Are there any safe havens? It's getting scary out there.
From Seeking Alpha:
We know that credit ratings agencies made enormous errors over the past few years when it came to rating structured products. And of course it's never easy to rate leveraged institutions, like banks, which are susceptible to runs. But what about the more conventional credits, like sovereigns?
Last year, Moody's briefly gave all of Iceland's major banks, including Glitnir, a triple-A rating, on the grounds that if they ever got into trouble, the Icelandic government would bail them out. After much ridicule, Moody's changed its mind. Clearly, it was silly to treat Iceland's banks as though they were just as creditworthy as the sovereign.
Fast-forward to today, and Iceland has indeed bailed out Glitnir. But here's the thing: Iceland's credit default swaps are now suggesting that the sovereign itself is a distressed credit.
Contracts on Iceland's debt jumped to 17.5 percent upfront and 5 percent a year to protect 10 million euros ($13.8 million) of bonds.
This is not how triple-A sovereigns behave. It's as though the analysts at Moody's (MCO) were only able to see one step ahead, and not two: They could anticipate that Iceland would bail out its banks, but they couldn't anticipate that when a tiny country bails out a bank whose assets vastly exceed the country's own GDP, then the sovereign itself loses much creditworthiness. One scary datapoint: The assets of Kaupthing Bank amount to 623% of Iceland's GDP, which is possibly why its own credit default swaps are trading somewhere over 2500bp.
How bad can things get in Iceland? Here's what one local emailed Tom Braithwaite:
They are fighting powers that they are powerless to fight. It's like tackling a storm raging in the sea with a teaspoon.
The main supermarket can't get imported goods because they have no currency. The shops are half empty. One of the store managers has advised people to start hoarding. We're running out of oil. And winter came last night - about a month early.
Received opinion has it that if Iceland backstops the Icelandic banks, then the other Nordic countries, or someone, will backstop Iceland. Which might be true: we'll find out "very soon". But there's no news yet.
Anon Re: FTEXX
Look at the treasury website to see the details of the mm guarantee program put into place as of 9/19. Then check to see if your fund is participating.
Is there any place to check stable value funds that are in 401k plans? Can there be difficulty with them?
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