the qualify of bonds during a crisis

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Leona O' Brien
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the qualify of bonds during a crisis

Post by Leona O' Brien »

Interestingly the bond market, especially high yield is getting destroyed during this Coronavirus pandemic. Now you can see the difference in behavior between AAA vs BBB vs B bonds. The lower bonds are getting crushed. They also did during the 2008 financial crisis.
The problem with the virus and reaction to it is the huge uncertainty about the so call infection/death curve. Also, when it comes to bonds, if economy shits down how will companies pay off their debts (bonds)?
Remains to be seen if it is contained in the US. That has HUGE implications on the stock market and economy. At the news that curve is leveling off we are off to the races. This uncertainty will continue for weeks. That's a killer for investors with the bears having their season and scaring everyone. And on top of that there's disgusting politics. A lot to be learned during these tricky times!

Moneisha Wilson
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Re: the qualify of bonds during a crisis

Post by Moneisha Wilson »

All of these options look at the fixed income part of a portfolio in isolation rather than at the portfolio level, and you can't do that when measuring quality. At the portfolio level, high quality US Government bonds provide the best risk adjusted portfolios. Investors are better served by taking on higher duration risk for large equity portfolios (e.g., >=80%) than credit risk.
Corporate bonds contain equity risk which can show up at the wrong time. Think about short-term investment grade corporate bonds which had negative total returns in 2008. Unconstrained bond funds such as GIOIX have only been out since 2011. They have not been stress tested during a severe equity loss such as 2000-2002 or 2008. This means it is impossible to measure the quality today.
TIPs include an insurance premium to provide protection against unexpected inflation. These are more suited for older investors who may be concerned with inflation in their bond portfolio (e.g., fat tail events). During times when inflation is relatively tame and known, these bond funds will under perform relative to nominal Treasury bonds by the cost of the insurance premium

admin
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Re: the qualify of bonds during a crisis

Post by admin »

We are not sure what is going on in the bond market. Trillions of dollars of government bonds (sovereign debt) is trading under zero percent. This means people are actually LOSING money. While the total varies by the day, it is 13 to 180 trillion or so with negative interest rates. So while government bonds may be quality, investors are losing money.
Moneisha Wilson wrote:
Thu Mar 26, 2020 6:48 am
All of these options look at the fixed income part of a portfolio in isolation rather than at the portfolio level, and you can't do that when measuring quality. At the portfolio level, high quality US Government bonds provide the best risk adjusted portfolios. Investors are better served by taking on higher duration risk for large equity portfolios (e.g., >=80%) than credit risk.
Corporate bonds contain equity risk which can show up at the wrong time. Think about short-term investment grade corporate bonds which had negative total returns in 2008. Unconstrained bond funds such as GIOIX have only been out since 2011. They have not been stress tested during a severe equity loss such as 2000-2002 or 2008. This means it is impossible to measure the quality today.
TIPs include an insurance premium to provide protection against unexpected inflation. These are more suited for older investors who may be concerned with inflation in their bond portfolio (e.g., fat tail events). During times when inflation is relatively tame and known, these bond funds will under perform relative to nominal Treasury bonds by the cost of the insurance premium

janice clonmell
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Re: the qualify of bonds during a crisis

Post by janice clonmell »

Why on earth would you invest in bond FUNDS for safety during a crisis? Funds can be mismanaged. Bond Funds can have a liquidity crisis during a run on the fund and crash. It seems to me the only way to buy safety in bonds is to buy and hold government bonds directly. Bond funds that own a lot of low-performing, low-interest bonds will become unpopular when new bonds with higher interest enter the market.
In a market where bond yields are rising, resulting in falling bond prices, I would expect a lot of runs on bond funds that will force liquidation in order to pay off those who run for the exits.

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