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The Bond Markets Ticking Time Bomb: Bank Loan Funds

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  • Another back to the past 2008 horror story. We have been hearing this doom and gloom song and dance story pretty much all year about the dangers of floating rate/bank loan funds. I've posted more than once my enthusiasm for NFRIX but admitted this sector is an accident waiting to happen. But when??? In the meantime, I think I will continue to enjoy the ride in NFRIX where I even ramped back up last week. Floating rate is even more trend persistent/low volatility than junk bond funds so a simple and small percentage trailing stop works quite well to protect profits.
  • Reply to @Junkster:
    so a simple and small percentage trailing stop works quite well to protect profits
    Hi Junkster,

    Thanks for your thoughts.

    What do you consider a "small percentage" for NFRIX to protect profits and would you use the same percentage for a fund such OSTIX?

    Mona
  • Mona, for OSTIX ( a glorified junk bond fund) I would use 1.25% from the recovery highs off the recent lows. Yesterday there was a distribution in OSTIX and factoring that into the price it closed at a new high off those lows. So my stop would simply be 1.25% from yesterday close. If today it's up again in price my mental stop would be 1.25% from that close. For NFRIX, I use a 1% trailing stop off recovery highs from recent lows. Sounds confusing I know. Recall how at one time late last year and early this year I had 100% of my liquid net worth in PONDX? That fund went almost an entire year without a 1% drawdown from highs. So I used 1% there as my stop and that saved me a lot of heartache as it dropped a heck of a lot more than 1% when bull run ended there.
  • edited September 2013
    First, a quick take on Ted's floating rate bank loan story. Yes - there's more risk in these than meets the eye. I do not consider them appropriate for $$ you can't afford to lose. In general, there's somewhat less credit risk with these than with traditional junk bonds (due to the way they're structured and treated during bankruptcy proceedings). The floating rate feature makes them better suited than most bonds to weather a rising rate environment.

    Secondly, I generally like bonds a lot better now than a year ago with rates about half (for some types) compared to where they sit today. However, I still don't like them very much. With some high yield muni funds off 5-10% over the past year, I'm ready to take a small speculative stumble Into that sector, betting our distressed municipalities will muddle through somehow. As always, the question is: Does the inherent risk in such a wager represent a better risk-reward equation than leaving $$ slowly rotting in cash?
  • Reply to @Junkster:
    So my stop would simply be 1.25% from yesterday close
    Hi again Junkster,

    OSTIX closed yesterday at 11.78, so at 1.25% off, we are looking at a stop of 11.63.

    A few months ago that would have seemed tight, but after setting a stop on PIGIX at 5% and feeling the pain, I now better understand the concept of protecting profits and minimizing losses.

    Mona
  • ron
    edited September 2013
    Its been good to me for almost 3 years. JRO

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  • Reply to @Mona: Mona, since the junk bond bottom of December 16, 2008, the majority of 1.00% to 1.50% declines from highs have led to further declines before bottoming. However, I would not suggest anyone trade these like me because after whatever the eventual decline is, then comes the decision of when to jump back in. I look at some technicals for that but always back in after a 1.00% to 1.50% advance off lows. Long ago someone came up with a great (and simple) methodology for open end junk bond funds which basically was sell after 2% declines and then buy back in after subsequent 2% advances. Over time that supposedly handily beat a buy and hold. I just use tigher percentages which seems to work better for me.
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