In the report was the table of correlations to other asset classes and other bond market segments. A crucial element of portfolio construction is the interaction of a thing with the other things in the portfolio. Part of this understanding comes from looking under the hood (if we are talking about an ETF) but some must also come from observing actual trading. It is ok to give a fund a few months to build a little track record without you. The fund will still be there in six months.
Chances are the numbers in the table are not a shock to anyone but still instructive. It has a 0.89 correlation to ten year treasuries, it looks as though the index underlying BAB yields quite a bit more than the ten year however.This serves as a warning of sorts. Even after a noticeable move up in rates in the last few days 3.68% is a very low number by historical standards. Additionally the current environment of debt issuance creates a visible path to higher rates.
The above does not ensure higher rates just creates visibility. If ten year treasury rates do go up then the prices will go down and based on the history of the index underlying BAB so too will build America bonds. As a rule of thumb increase in yield of 100 basis points works out to about an 8% drop in price, obviously it could be a little more or a little less with an ETF. The difference with an ETF is there is no par value to collect at maturity.
According to Yahoo Finance the ten year yielded 6% or more the vast majority of the time from 1969 to 1997. Although Yahoo Finance does not go back past 1962, yields were generally lower than 6% most of the time before that in the 20th century.
You can decide for yourself what normal is, whether rates are going higher or not and if they do go up how much but it should be clear that if rates go up BAB will feel that pain. Owning BAB means believing rates will not go up or being willing to actively follow the interest rate market and being willing to take action of some sort if rates do start to rise in a meaningful way.
6 comments:
Thank you for the update on BAB, Roger. I'm quite interested in the fund, too.
I've often read that equities "look ahead" at the economy by some six months. Is it fair to say that bonds act the same way in anticipation of interest rate changes? I've not heard that same maxim applied to the bond market, though long rates seem headed up right now based on a rosier outlook for 2010.
Thanks very much.
the thing that makes the market forward looking is the collective expectation of the people participating in those markets. In that light I would say that yes the bond market can be forward looking, some feel that the bond market is "smarter" than the equity market.
While I do believe markets are forward looking they can be wrong every so often as well.
Roger,
off the topic, Barry Ritholtz has changed his tune somewhat, in line with the consensus:http://finance.yahoo.com/tech-ticker/barry-ritholtz-is-still-bullish-on-stocks-but-not-for-the-long-term-395059.html?tickers=C,XLF,ORCL,RIMM,TTWO,%5EDJI,%5EGSPC
Like to also wish happy holidays to you, Roger, Joelene, Mike C.,RW, Clive, and the rest of the participants.
Best,
Jeff from Milan, Italy
thank you Jeff
Hey Roger--Everyone and their mother is out with segment and stock picks for next year or the next decade, it seems. Most imply that what worked this year won't work next year, and smart investors will wipe the slate clean and start fresh.
It's never been obvious to me why a change in the calendar should invalidate my holdings. A convenient time to re-evaluate maybe, but that's about all.
Are you aware of any evidence that suggests investors are wise to shake up their portfolios at the beginning of the year? Do hedgies and mutual fund managers change big bets which influence the market?
Thank you for any insight.
the notion that the market cares about the calendar does not make sense I agree.
However I can see where for certain types of institutional money those people get paid based on the calendar so they could let up on the pedal in Dec of a good year and then start over in January or Feb.
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