Actually, what I said was there COULD be a big one-time jump in their earnings IF they exited the 4,665 Five-year Treasury Note futures contracts at the right time, since we know the trough to peak movement in rates from late June when they wrote the futures contracts until early September was more than 150 basis points, and if held until September expiration was about 120 basis points.
Because these futures contracts were never in their Top 10 holdings, we had no idea when they exited them. Based on the earnings reported AND the portfolio movements we saw over the Summer, you can bet that they bought back the futures at the same time they began aggressively reentering Volcker 30s: one big batch in mid-July when the Ten-Year benchmark crossed back over 4% and a second big batch when it crossed 4.25% in early August. Would mean they actually realized less than 100 basis points of the movement in the futures contracts and the net effect primarily was to neutralize the losses in the portfolio that they would have experienced otherwise with rates behaving negatively throughout their 3Q re: ANY Treasury holdings. Since selling the futures contracts would have been primarily a hedge for exactly this purpose, I'd say it succeeded. Nevertheless, had they decided NOT to buy back the futures contracts when they aggressively reentered the Volcker 30s, they could have realized as much as $.30-$.35 extra in one-time earnings per share. That they did not may feel like a missed opportunity you'd like to charge them for, but keeping those contracts open when the rest of their portfolio moves suggested they thought the interest rate move up was over would have been a big gamble not in keeping with the general character of how this fund has(and should have)been managed.
Just a word on the fund manager's job and calling interest rate moves like we saw this year. The movement in the benchmark from 4.25% at the start of the year down to 3.07%, back up to 4.65% and finally back down to where it started at was one that caught a lot of bond fund and MBS REIT portfolio managers by surprise this year, and one I would be loath to crucify them over. What we learned is that the practice that began after the 70s S&L crisis, where mortgage lenders started hedging their portfolios by shorting Treasuries, has now reached a size whereby it dwarfs the available float in Treasuries. When it began the size of the mortgage market caused barely a ripple in the Treasury market. This even caught the Fed by surprise as we know from the minutes of the Open Market Committee meetings this year. Anyone good enough to call the turns we saw this year is too good to be drawing a salary managing a bond fund, since well placed bets at the start of the year and at each turn could easily have produced portfolio returns of over 1000%.
As to the possibility of a divvy cut, I would say the chances of one of $.005 per month is slightly more likely now, though the fund manager may well wait for the next quarter's results before deciding to do so.
Wouldn't be thrilled by a .005 div cut, but could certainly live with it. From your post Captain, I gather you're pleased with fund's management of risk that came with this summer's rate volatility. What grade would you give him/her? Also, what interest rate enviornment are we rooting for going foward to avoid a div cut? thx in advance.