| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Bond Allocation Adjustments for 1Q 2010 |
Seeking Alpha - Dec. 28, 2009 - by Richard Shaw
The business cycle is changing from recession to recovery. Interest rates are at historic lows and are beginning to rise. Investor funds are flowing more and more toward stocks. The fear premium in US Treasuries that depressed rates is diminishing. The Fed is preparing to raise overnight rates, and some other central banks have already done so or are also preparing to raise them.
For these reasons, we do not expect bonds to do as well in 2010 as they did in 2009, and they would tend to decline.
There is some possibility of a partial recovery setback as the stimulus programs are withdrawn, and as interest rates rise. For that reason, we are behaving cautiously with both bond and stock allocations and have raised our cash allocation somewhat. We have been fully invested in bonds since November 2008 and fully invested in stocks since mid-June 2009, but we are taking a bit of a “wait and see” approach to 1Q and 1H 2010.
Therefore, we recommend considering several adjustments within your bond allocation. These comments are as to direction only, not as to degree of adjustment. This is what we are doing with our bonds, which may or may not be appropriate for you, but it’s food for thought. Your specifics govern what is best for you. Don’t apply these ideas without careful consideration, and perhaps professional guidance.
Note: We are still in with both feet, but are now only thigh deep instead of waist deep — more conservative with respect to bonds at this moment (with automatic trailing stop loss protection on all listed positions and manual stop loss parameters on all mutual fund positions).
1. Reduce tax-exempt municipal bonds to neutral or underweight in favor of taxable bonds due to deteriorating state and local government financial strength (although increasing tax rates do pull the other way — tug of war between after tax yield and capital values).
2. Shorten duration of bonds generally from market aggregate duration to less than aggregate duration to reduce risk associated with pending interest rate increases.
3. Reduce conventional Treasuries in favor of inflation protected Treasuries due to expected rising inflation.
4. Reduce conventional Treasuries to underweight in favor of overweight investment grade corporate bonds due to relative overvaluation of Treasuries, which are expected to be less in demand as the global economy improves, fear subsides, and as the US issues massive amounts of Treasury debt.
5. Reduce “junk” (below investment grade debt) from overweight to less overweight or to neutral weight in favor of overweight investment grade debt, due to substantially narrowed yield spreads between high quality and low quality credits, and due to greater vulnerability of low quality credits to potential adverse developments as stimulus support is withdrawn — this is contrarian, because an improving business cycle is generally good for junk bonds. However, just in case the stimulus removal causes problems, capital values will be protected by this weight adjustment, BUT there is a significant yield opportunity cost. This is a capital conservation move, not a gain maximizing move.
6. Reduce bonds overall to neutral or somewhat underweight in favor of overweight cash reserves as part of the duration shortening process and to create additional tactical flexibility in 1Q and 1H 2010.
We favor having some portion invested in high quality non-US bond funds, as a currency hedge and as a sovereign risk hedge. If you do not have non-US bond exposure, we recommend considering a position when the Dollar rally seems to be ending. If you already have a long-term non-US fixed income position and are concerned about the Dollar rise, or are considering a larger allocation, we do believe the Dollar will eventually resume its decline. Holding a mixture of high quality, local currency, non-Dollar exposures within your bond allocation could prove useful if the Dollar continues it’s long-term decline.
Some Illustrative Examples of Possible Changes:
This list is not exhaustive, or even inclusive of a number of fine fund choices, nor is it necessarily a list of the funds that we hold and are adjusting. It is merely a set of representative examples to make the text of the allocation adjustments more clear.
1. Reduce MUB (intermediate-term national muni bonds) in favor of a comparable duration taxable bond fund such as BIV (intermediate-term US bonds).
2. Reduce BND (aggregate US bonds) in favor of BSV (short-term US bonds).
3. Reduce IEI (3-7 year Treasuries) in favor of TIP (inflation protected Treasuries).
4. Reduce IEF (7-10 year Treasuries) in favor of LQD (investment grade corporates).
5. Reduce HYG (junk quality) in favor of LQD (investment grade).
6. Reduce bonds generally in favor of money market assets.
For non-US bonds, a choice between international government bond index funds and actively managed world and international bond mutual funds needs to be made. If you just want government bonds, the index ETFs can suffice. If you want active decisions about country weights, or if you want non-government bonds in the portfolios, actively managed bond funds are more appropriate.
World bonds: LSGBX is one active global bond fund choice.
Developed Mkt Non-US bonds: BWX is a government bonds ETF index fund. PFBDX and RPIBX are active management fund choices.
Emerging Mkt bonds: EMB is a government bonds ETF index fund. FNMIX, PEMDX and PREMX are active management fund choices.
Keep in mind for all asset categories that managing expenses to a low level is very important to long-term results, but so to is knowing when an active fund can be more effective (even with a higher expense ratio) than an index fund. Basically, (1) the more a securities type is followed by analysts and reported upon regularly, (2) the better the financial standards and reporting for/by the issuer, and (3) the more liquid the market for the security; the more index funds are likely to be the best choice. However, if (1) the securities are not widely followed by analysts, (2) the accounting standards or reporting are not strong, or (3) the securities are not traded in a liquid market; the more active management fund are likely to the best choice.
Compliance Disclosure:
In the aggregate, we currently own BND, MUB, TIP, LQD, HYG, PFBDX, RPIBX, and LSGBX in some but not all managed accounts. We do not currently own other mentioned securities. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. This report is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance. Do not rely solely on this research report when making an investment decision. Other factors may be important too. Consider seeking professional advice before implementing your portfolio ideas.
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