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Vanguard High-Yield Corporate Message Board

  • blairdhff blairdhff Nov 13, 2009 5:13 AM Flag

    Over inflated bond prices

    Intermediate term bond prices are now over inflated vis-a-vis current interest rate sensitivity by about 4.5% on average at this stage, which will become apparent when the FED begins to tighten again (next year?). This is what happened in June 2003. However, that time around it took only about 6 months for NAV's to recover from the decline.

    The much larger near term question is how much junk bond yields will go up when the stock market corrects (which is overdue). My guess is junk bond NAVs will drop by 10% or so, but I believe it will be orderly if anyone needs an exit.

    Any other opinions on this?

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    • Blairdhff: “Any other opinions on this?

      Jason Zweig’s Intelligent Investor column at dated 11/28, finds spreads still favor junk bonds; their yields offer protection against real rate increases.

      “At last fall's depressed prices, junk bonds out-yielded Treasury securities by a staggering 19.9 percentage points. Today, prices have recovered to roughly 92 cents on the dollar and the premium, or spread, above Treasurys has shrunk to 7.6 points, according to Bank of America Merrill Lynch. The long-term average spread is 5.6, suggesting that the yields on junk bonds could fall another two percentage points or so. Bond yields fall as prices rise, adding to total return.”

      Martin Fridson of Fridson Investment Advisors, although cool to junk bonds in general, "notes that the last three times interest rates rose by at least one percentage point, high-yield bonds outperformed Treasurys by up to 13.8 percentage points.” Zweig agrees: “Junk bonds do diversify against the risk of rising rates. Because of their fatter current income, junk bonds should lose less than Treasurys and other high-quality bonds if the Federal Reserve jacks up rates.”

      • 1 Reply to ucbme
      • Dubai World shows there are still land mines out there which can blow up, which can exacerbate the world's credit problems. If risk aversion really takes hold again, the concern will be the stock market going into the tank, again taking other investments down with it (i.e.junk bonds). It's not out of the realm of possibility that the stock market could dive 40% to 50% in a repeat of last year. If it does, get ready for another 25% to 30% drop in value for junk bond funds. We may see a test of VWEHX's downside performance compared to other junk bond funds.

    • "I've got my eye on the 30 year T-bond ($USB). It's hanging just above support by "the skin of its teeth." If the long bond breaks below 118, there's going to be trouble. Remember, the Fed, much as it would like to, does not control long bonds. As the bonds decline, interest rates rise, not exactly what the Fed wants."
      from Richard Russell's 11/12/09

      $USB closed today >119.

      • 1 Reply to bowonwing
      • Thanks for the input.

        As a precaution I also reduced my exposure to VWETX (Vanguard long term bonds)the other day, which dropped in value by about 3% in the last 6 weeks.

        Intermediate to long term bonds have become over inflated and are now getting ripe to interest rate moves which as you noted the FED can't control.

    • The fed didn't start to rise rates until June of it looks like VWEHX and other high yield funds started to rise at that time.

    • As a further note, per Bill Gross on Bloomberg this morning high-yield asset prices are currently over inflated and getting more over inflated is not good. He also thinks the FED will raise rates only if they see sustainable GDP growth of 4% 5%. However, they are typically reactionary and probably will not act until it is too late. The chance that the FED will pick exactly the right time to act is very low. There are 500 basis points between 0% and 5%, so what is the right rate for a soft landing of the economy?

      The problem as I see it is the global gusher of liquidity caused by protracted low interest rates is currently floating the prices of ALL risk assets from equities to bonds to commodities. If the current very low interest rates continue for much longer we will truly be in a huge bubble scenario in bonds, stocks, gold, and everything else in which the average person invests. This won't be good when everything goes bang and could dump us back into recession. We will have a "W" shaped "recovery." The FED is pursuing short term objectives at the expense of long term stability, and our options to preserve and safeguard assets will be very limited in this bubble to bust enviornment.

      • 1 Reply to blairdhff
      • blairdhff- you are an idiot from Missouri. I have returned and I see your uneducated and stupid investor comments. I left this fund due to a fund manager that is as stupid as you. You have your head in the ass of Hong and you cannot see light and neither can he as he has his head in the ass of Vanguard. You are a loser and you always will be. Keep your idiot comments going as it is fun to see you and Hong acting as Laurel and Hardy.

    • Why are you worried about the NAV? You're in it for those "steady div's" that come in regularly. Right? You don't care that the fund's NAV right now is 10% below where it should be. So,why do you worry if the NAV goes down 10%? Also,VWEHX will protect you on the down side. Isn't that the beauty of being in this fund?

      In any case,the FED is tying interest rate policy to the unemployment rate. Bernanke is taking his marching orders from Obama. Interest rates won't go up until unemployment stabilizes and Obama tells Bernanke it's ok to raise them. That's going to be a long time.

      • 1 Reply to therightstuffer
      • I thought you were saying "goodbye to Hong Losers", but you keep coming back again. What gives?

        Ok, I know what it is - this site is absolutely your only source of entertainment (so you really shouldn't use "loser" to describe others).

        As far as "10% below where it should be" I think you must be referring to your IQ if you really believe Obama is the one who will decide when to raise interest rates. Apparently, you know even less than I thought (shocking).

        Please provide some meaningful comment (if that's even possible), or take your non-sense with you to another board.


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