FAQ - Bonds

lite1067 said...
QJ, yes, HY bonds are rallying.
For HY bonds, its spread has dropped dramatically since 12/15. For medium-term HY bonds, its spread over treasury has dropped from 2167 to 1819 bp. Multiplied by duration, you get the 20+% total return since Dec/15. This is a lot for bonds.
The underlying reason is as you stated. People are thinking the realized default rate will be much lower than the implied default rate. I remember I posted on HT or here before, people had priced in 80% 1929 depression in corporate bonds by mid-Dec. And I think I mentioned before (here and HT), if we don't get 1929 type depression, 2009 will be a great year for corporate bonds (IG and HY), not treasury.
But again, bond is not for DT, or even short term ST. These bond ETFs have very limited liquidity.
QQQ said...
Lite, Thanks for your comments on HYG, I was thinking buy it while it was 75, because chart suggests it is going higher, but because I don't understand it, I left it.
when mky consolidates, I have all my eyes and glasses looking at its action around 50ema. if they are accumulating, they won't break it too much on the down side tickle. also VOLUME, down on light vol, up on high vol tells the story also.
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zippo said... March 27, 2009 11:09 PM
QJ, I am confused about the AGG, TIP, TLT. I thought they are all bond and should go with the same trend. But they appear behavior differently. I was thinking about parking some of my 401K money in the bond for the time being, especially in the inflation protected funds. Hope you or lite can help me on this. Thx.
what I mean is that why TIP and AGG drop some much last Oct., while TLT did not. With recent TIP spike (and Gov money printing), do you see inflation is coming sooner than later?

lite1067 said...
zippo,
let me try my best to explain without typing too much.
AGG = whole bond market including treasury (30-40%) + mortgage + corporate bonds
TIP = 7yr treasury + CPI (last oct when deflation was surfaced, CPI was negative and thus hurt TIPS). The duration corresponding TIP is about 5 years.
TLT = 20+yr long term treasury (the duration is 15years)
Right now, as fed keeps printing $$, we are in an inflationary environment where equity will outperform bond. If I have to choose among these three, TIP is the best bet as it combines the safety + inflation protection + less interest sensitivity than TLT . But again, you can use commodities and REITs for better inflation hedge.
For most people here with limited capital and short-term invest horizon, equity is arguably the better vehicle. But for mid or long term investment where you like to reduce the volatility of your portfolio performance to achieve an 'optimal' asset allocation, a combination of equity/fixed income/alternative investment such as commodities should be a good choice.