QVM Clients Letter

By: Richard Shaw | Mon, Nov 22, 2010
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This is a follow-up to last week's letter suggesting that the best days for bonds are behind us for a while, and that reduction of bond positions is in order. We have been replacing bonds in managed accounts with high quality, above average dividend stocks with long histories of paying and growing dividends, and shortening duration among the substantially reduced bond positions we hold.

Rates have begun to rise, which means bond price have begun to decline. This daily chart of Treasury rates for 3-mo, 2-yr, 10-yr and 20-yr:

Treasury rates for 3-mo, 2-yr, 10-yr and 20-yr

Inflation Protected Treasury bond investors expect the CPI for the next 10 years to be approximately 2%, as this Federal Reserve chart shows:

Inflation Protected Treasury bond

The historic opportunity for capturing a shrinking yield spread between higher and lower quality debt has mostly passed, as this Federal Reserve chart of the spread between AAA rated corporate bonds and BAA rated corporate bonds shows:

Spread between AAA rated corporate bonds and BAA rated corporate bonds

Here are weekly 1-year charts of percentage total return performance for several important bond groupings. In each case, they are compared to US aggregate bonds (BND):

Aggregate Bonds By Duration (BSV short-term, BIV intermediate-term, BLV long-term):

Aggregate Bonds By Duration

Bonds By Type (IEF intermediate Treasuries, MUB intermediate municipal bonds, LQD intermediate inv grade corporates)

Bonds By Type

Investment Grade Corporate Bonds versus Below Investment Grade Corporate Bonds (LQD inv grade, JNK below inv grade):

Investment Grade Corporate Bonds versus Below Investment Grade Corporate Bonds

Treasuries By Duration (SHY 1-3 yr Treas, IEF 7-10 yr Treas, TLT 20+ yr Treas):

Treasuries By Duration

US versus Foreign Sovereign Debt (IEF US Treas, BWX Inv Grade Local Currency Developed Market Sovereigns, EMB Inv Grad USD Denominated Emerging Mkt Sovereigns):

US versus Foreign Sovereign Debt

Interest rates are beginning to rise, and have more room to rise than to fall. Bonds have gone from low risk to medium and high risk assets, as a result of what may be the bottom of the multi-decade decline in interest rates. We recommend substantially reducing bond exposures.

 


 

Richard Shaw

Author: Richard Shaw

Richard Shaw
QVM Group LLC

Richard Shaw

Disclaimer: Opinions expressed in this material and our disclosed positions are as of July 5, 2010. Our opinions and positions may change as subsequent conditions vary. 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. All of our published material 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, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.

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