an opportunity in bonds.

[PEtrader]

After the blood bath that is coming in bonds is about half way through, begin to look at actual bonds that are two years out from maturity that are 10-20% below par. 

[JoeyCapital]

Do you mean that the bloodbath is already halfway through, or that investors should wait until it is halfway through?

If you mean A) I disagree
B) couldn't agree more, but how would someone know when it is at the halfway point?

I disagree with A simply because we have seen (relatively) large increases in interest rates on the back of the Fed just making noises about possibly pulling the plug on QE. The mass exodus out of bond funds/etfs really only picked up momentum last month. We still have to go through the Fed actually stopping QE, then raising the Fed Funds rate back to a "normal" level. This process will probably take a couple of years...

The whole time this process is happening we, IMHO, will be in a market with far too many sellers and a huge dearth of buyers. I don't see how it will end well for fixed income investors unless they hold to maturity.

With all that said, if(when) we get to the point that you can buy an investment grade bond for 80% of par with 2 years to maturity I will be buying as many as I can get my hands on. That is the kind of potential market that makes me want to open a HF just so I can use leverage to buy more...

[PEtrader]

Do you mean that the bloodbath is already halfway through, or that investors should wait until it is halfway through?

If you mean A) I disagree
B) couldn't agree more, but how would someone know when it is at the halfway point?

I disagree with A simply because we have seen (relatively) large increases in interest rates on the back of the Fed just making noises about possibly pulling the plug on QE. The mass exodus out of bond funds/etfs really only picked up momentum last month. We still have to go through the Fed actually stopping QE, then raising the Fed Funds rate back to a "normal" level. This process will probably take a couple of years...

The whole time this process is happening we, IMHO, will be in a market with far too many sellers and a huge dearth of buyers. I don't see how it will end well for fixed income investors unless they hold to maturity.

With all that said, if(when) we get to the point that you can buy an investment grade bond for 80% of par with 2 years to maturity I will be buying as many as I can get my hands on. That is the kind of potential market that makes me want to open a HF just so I can use leverage to buy more...

option B my man.  I agree with you.

[JoeyCapital]

So what do you see as the endgame for the Fed? Are they just going to shut QE down and deal with the pain? They kind of seem to me like a kid with a bandaid on. Deep down they know the best course is to just rip it off and deal with the short term pain but they just can't bring themselves to do it...

I am scared they have gotten themselves in so deep they don't really know how to get out.

[dafe1]

So what do you see as the endgame for the Fed? Are they just going to shut QE down and deal with the pain? They kind of seem to me like a kid with a bandaid on. Deep down they know the best course is to just rip it off and deal with the short term pain but they just can't bring themselves to do it...

I am scared they have gotten themselves in so deep they don't really know how to get out.

Bernanke has known this for some time. He really has done a brilliant job, imo. The Fed will wind down QE over 6-12 months. If I had to bet on a date I would guess they begin this with the July 30th meeting. If not, I can't imagine they wait much longer than the Sept/Oct meetings.

It will definitely be an incremental winding down. They don't want to shock the system. They have been hinting at this since January because they know it will have a rather large effect on the market. This is precisely the reason why Bernanke came out and said last month that they are ending it very soon - he wanted reaction ahead of time. It was a warning almost. Although it doesn't seem like we're seeing the reaction that we should with the exception of a few specific markets - metals being one, bonds kind of being another.

The reason why I'm leaning towards July 30th is that this will cause some pain. They know that good economic data will be coming out then - so if you're going to release some (short-term) bad news you should probably try and balance it with some good news.

I think they have the plan laid out perfectly already though. They see the USD strengthening and being king dollar again.  Wind down QE. As other economies contract investment capital will be coming back to the US and there needs to be enough dollars available.  Let these bonds and treasuries from QE mature (moderating Operation Twist) as the economy needs the money.

There is going to be some definite volatility when this happens though. We all know the doom that awaits the bond market, but I think you'll see a pretty large initial hit in the Dow too. I imagine a lot of money will be shifting around... coming out and going back in over the course of a few weeks. It could be a great buying opportunity. Just my opinion though.

[hog.goblin]

The MIL has a big portion of her 401(k) in a Vanguard Retirement Fund.  2020 I think.  Naturally it's high in bonds.  She'll likely work until 2020, but does it make sense to move to 2025 or 2030/5 during this bond downturn?  Then move back when the dust settles?

[snoblind]

PE, any opportunities for someone who usually invests in mutual funds or ETF's as opposed to individual bonds?

[Old Tusk]

Why not buy individual bonds?

[snoblind]

Why not buy individual bonds?

Habit, and easier in my IRA. As well as the idea of spreading the risk...  Think I might to look into buying individual issues more, and be ready to pull the trigger.

[Old Tusk]

Talk to the guys at Vanguard fixed income.

[PEtrader]

The MIL has a big portion of her 401(k) in a Vanguard Retirement Fund.  2020 I think.  Naturally it's high in bonds.  She'll likely work until 2020, but does it make sense to move to 2025 or 2030/5 during this bond downturn?  Then move back when the dust settles?

I don't like the target date funds for exactly that reason,  but you are thinking down the right path.

[PEtrader]

PE, any opportunities for someone who usually invests in mutual funds or ETF's as opposed to individual bonds?

Not really in this trade unless those funds or efts are actively managing towards that which I would imagine some will.

OT is right, individual issues is where I see this trade.  I don't know why he is saying vanguard,  I think they have great bond funds, but it doesn'take sense here.

[Old Tusk]

Individual bonds are available through Vanguard. You can even buy online if you want.

[snoblind]

Not really in this trade unless those funds or efts are actively managing towards that which I would imagine some will.

OT is right, individual issues is where I see this trade.  I don't know why he is saying vanguard,  I think they have great bond funds, but it doesn'take sense here.

I've mentioned my IRA is with Vanguard before.  I've looked before, but I will check out what is available.

[PEtrader]

Individual bonds are available through Vanguard. You can even buy online if you want.

I didn't know that.  good info. 

we purchase try to purchase our bonds directly from an institutional level so low to no markup.  It is probably the same deal at Vanguard.

[hog.goblin]

I had been riding at about 8% bonds in my retirement account and cut it in half last November.  I took it off the contribution allocation too.  Now thinking I should dump the remaining 4% and move it to intl equities.

[hog.goblin]

FYI in my retirement account I'm about:

36% mid-cap
35% small-cap
25% large-cap
4% long-term bonds

[PEtrader]

I had been riding at about 8% bonds in my retirement account and cut it in half last November.  I took it off the contribution allocation too.  Now thinking I should dump the remaining 4% and move it to intl equities.

Well don't over react.  I still think there is some room for some fixed income but in the form of extremely short term paper.

[Masshog]

You might consider some of the closed end  funds that have been driven to deep discounts.  It won't protect you from further losses if rates continue to rise, and discounts can stay discounts for an extended period, but at least it would offer a buffer.  Some of the discounts last week were as much as 10%. Sorry I can't make specific recs. 

[Ash]

I had been riding at about 8% bonds in my retirement account and cut it in half last November.  I took it off the contribution allocation too.  Now thinking I should dump the remaining 4% and move it to intl equities.

I've been thinking about doing the same thing myself.

[je100]

I've been thinking about doing the same thing myself.

I'm not sure now is the time.  I would think that given the 18% drop in TLT over the last six months, now is not the time to be getting OUT of Long Term bonds.  In fact, any time I see something (especially L/T treasuries) drop that much that fast, I consider buying more.

[hog.goblin]

I only took it down from 4% to about 2% and put the difference, along with 1% of each of my US small cap and US mid cap, in small cap international. 

My retirement account is finally getting big enough that I can diversify a little better.

My bond fund was not down that much, particular with me dumping half last fall.

[hog.goblin]

Looked it up.   My LTB fund was flat YTD and down 4% last 12 months.  Up 7% over last 3 years.

[HawgWild]

After the blood bath that is coming in bonds is about half way through, begin to look at actual bonds that are two years out from maturity that are 10-20% below par.

Are we still waiting on this "blood bath"? What happened?

[hog.goblin]

Still waiting on interest rates to rise.

[PEtrader]

Aren't we all!   That's why they call it investing,  and not a sure thing :$

[Old Tusk]

Not sure that rising rates doesn't hurt equities more

[dafe1]

Thought this would be a good thread to bump...

June, maybe? .25%/quarter?

The bloodbath is late, but it's still coming.

[Old Tusk]

It is an interesting that it is a bloodbath where you don't lose money.

[McKdaddy]

Nothing new here, more of the same that we've been discussing w/ clients for a couple of years now....

http://www.cnbc.com/id/102421990

[Old Tusk]

How much have your clients no made waiting on the bloodbath?

[McKdaddy]

How much have your clients no made waiting on the bloodbath?

A lot as this bond rally keeps running. I'm certainly not hating on this bond bull. It's been kind to everyone.

[McKdaddy]

http://www.cnbc.com/id/102432304

Counterpoint to the great bond decline.

[McKdaddy]

Few surprises here regarding bonds....

http://www.cnbc.com/id/102646566

[PEtrader]

It's such an odd investing world right now,  good article.

[McKdaddy]

More bond opinions....

http://www.cnbc.com/id/102652501

I've stated on here before that the majority of my clients are retired or within 5 years of retirement, so bonds, bond funds, and risk management (err, emotional management) plays a significant part in their portfolios.  So bond concerns have had my attention for a couple of years now.  We've all said it's not a matter of if, but when, for bonds till we are blue in the face, when referencing rate normalization.  Therefore, alternative bonds/non-traditional bonds, which carry their own risk, have taken on a larger role in the past 2-3 years in my client portfolios.

Also, I've been reducing stakes in high-yield paper (my partners began this reduction early in '14).  I wanted to make this move in late '14, but HYB's were falling w/ oil prices, so I wanted to allow "some" bounce back before transitioning, which has occurred thus far in '15.

Lastly, in Dec '13 and Jan '14, 2 fund companies suggested we not add floating rate to portfolios due to some liquidity issues they were witnessing in that space, and "could" become a problem down the road.  Further, they both suggested selling those floaters that had lower quality paper and keeping those of higher quality.  I appreciated this candid opinion as one of these 2 companies floater consisted moreso of lower quality paper and was advocating selling its own fund.  To present the other side of the argument, one prominent floating rate manager said he hasn't seen/doesn't see an issue in that space, but admittedly he runs what is probably the most conservative float portfolio available.

[Old Tusk]

I'm not a trader. And I am still have difficulty understanding why I should be concerned about thE"blood bath" that is supposedly coming. As in any period of increasing rates bond values will decline and some bonds will produce a yield below the current rate. But they will return to par, this to me is the nature of bond investing

[BENTON PIGGEE]

More bond opinions....

http://www.cnbc.com/id/102652501

I've stated on here before that the majority of my clients are retired or within 5 years of retirement, so bonds, bond funds, and risk management (err, emotional management) plays a significant part in their portfolios.  So bond concerns have had my attention for a couple of years now.  We've all said it's not a matter of if, but when, for bonds till we are blue in the face, when referencing rate normalization.  Therefore, alternative bonds/non-traditional bonds, which carry their own risk, have taken on a larger role in the past 2-3 years in my client portfolios.

Also, I've been reducing stakes in high-yield paper (my partners began this reduction early in '14).  I wanted to make this move in late '14, but HYB's were falling w/ oil prices, so I wanted to allow "some" bounce back before transitioning, which has occurred thus far in '15.

Lastly, in Dec '13 and Jan '14, 2 fund companies suggested we not add floating rate to portfolios due to some liquidity issues they were witnessing in that space, and "could" become a problem down the road.  Further, they both suggested selling those floaters that had lower quality paper and keeping those of higher quality.  I appreciated this candid opinion as one of these 2 companies floater consisted moreso of lower quality paper and was advocating selling its own fund.  To present the other side of the argument, one prominent floating rate manager said he hasn't seen/doesn't see an issue in that space, but admittedly he runs what is probably the most conservative float portfolio available.

I don't know a lot about bonds, but I do know if you have any floaters coming out you better have high quality paper!

[McKdaddy]

I'm not a trader. And I am still have difficulty understanding why I should be concerned about thE"blood bath" that is supposedly coming. As in any period of increasing rates bond values will decline and some bonds will produce a yield below the current rate. But they will return to par, this to me is the nature of bond investing

OT, a staunch hold-till-maturity investor needs to be "less" concerned about the impact of rising rates on a bond's market value. If rates rise, and thus the mv of the bond falls, one would not feel the effect unless they changed their strategy and try to sell the bond (which I've seen happen), or something changes where the bond needs to be liquidated from your portfolio (unfortunately, this occurs as well). Holding on to the bond simply means one would not be able to invest that principal at the higher market rates. Where investor's can get in trouble is thinking that bonds are "safe", then receiving surprises on their statement as the mv fluctuates negatively, then changing their strategy. Thankfully I've only had one client do this -- unfortunately in a grandiose way.

[McKdaddy]

I don't know a lot about bonds, but I do know if you have any floaters coming out you better have high quality paper!

Well done. +1

[McKdaddy]

But they will return to par, this to me is the nature of bond investing

True OT, you are correct. It's not a strategy for maximizing bond returns, which is what my clients prefer I attempt to do for them, but it is a sound strategy, nonetheless.

[Old Tusk]

There can be no argument that the Fed has hurt bond investment vs equities. The recovery from current levels will be long. I wish I would wake up tomorrow morning to find the 10 yr at 5%, but don't think we will see that for many years. If I had heeded the warning two years ago I would be poorer now. I guess I will be the turtle.

[McKdaddy]

If I had heeded the warning two years ago I would be poorer now. I guess I will be the turtle.

In no way do I want to come across like HiM w/ my opinions OT, so I hope not to come across that way.

I respectfully disagree w/ the "poorer now" comment. With non-traditional/alternative bonds, one would've been better-off in '13, a wash in '14, and better thus far in '15, and be in better position for when upward rates, regardless of its velocity, becomes a trend. For more conservative clients, using those non-traditional that exhibit lower risk characteristics, as compared to their peers, would be appropriate.

[McKdaddy]

There can be no argument that the Fed has hurt bond investment vs equities. The recovery from current levels will be long. I wish I would wake up tomorrow morning to find the 10 yr at 5%, but don't think we will see that for many years. If I had heeded the warning two years ago I would be poorer now. I guess I will be the turtle.

Fair enough, OT