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Time To Close Bond Funds For Investors' Own Good ?


  • Appears what the quoted individuals in the "close bond funds" story were really saying is "We've got to get these people to buy our stock funds, with their higher ERs, or our profits and bonuses are going into the toilet!"
  • Mr. Haaga asked “Why not just close your bond funds and tell people they can't have anymore because it's no good for them?”

    What arrogance that would exhibit!! Those panelists who stressed the importance of education had it right.
  • Reply to @AndyJ: Do I think stocks are more attractive than some bonds at this point? Yeah, although that's a generalization. But on the flip side of that, people have to be allowed to make their own choices.

    I do think that a lot of the near-constant screaming on CNBC about how the retail investor is leaving is what you mentioned regarding the industry needing retail participation.
  • edited May 2012
    Reply to @scott: I hope I didn't imply that stocks aren't worth owning; I didn't mean that at all. I was a heavily committed stock fan during the foreign-stock runup in the mid-aughts and during the 2009 ff. recovery, and have never been out of them.

    But there are really good reasons why some people are emphasizing bond funds lately, including the realization that there's no guarantee rates are going up anytime soon; boomers retiring and dialing back stock exposure; the knowledge that nothing's been fixed since the meltdown, and assets that won't get absolutely killed if another meltdown comes along aren't a bad idea; and the knowledge that stocks aren't cheap anymore.

    The average d-i-y investor may be more on top of the situation than the stock sellers & pundits who say, look, the S&P is yielding as much as a 10y Treasury, so sell T's and buy the S&P (like there's nothing else to consider besides yield).
  • How do you close a ETF. If you close open end mutual funds, people will simply buy the ETF.

    I am not even addressing the practicality of closing all open end bond mutual funds.
  • Reply to @AndyJ: No, I definitely didn't think you were saying stocks weren't worth owning. I think my main issue in terms of fixed income is with treasuries - you may be getting inflows from other countries and from people really desperate for yield, but the fundamentals are weak at best. Corporates, EM (to some degree) and some other fixed income, fine and I completely (as I've noted in other threads) understand the reasoning.

    I do think this is worth reading, as my concern that the demand for yield results in stuff like this (not on a grand scale, but I think there's probably a fair amount of this going on):

    Otherwise, I understand completely the move towards income - especially by older investors who are not going to be pulled into risk again.
  • edited May 2012
    I agree, there is no way from my thoughts to keep investors from buying bonds. If you close only one avenue to the freeway ... then investos will get on the freeway through an alternate route(s). Simply closing purchases in open end bond funds will not stop investors from buying bonds as there are the bonds themselves, closed end bond funds and etfs for the investor to use as an alternate route.

    I use to think a lot of the American Funds Group and it's people. With comments like that ... Well, let us just say ... It got me to thinking! Why would you wish to band bonds as they are part of most asset allocation models?

    Good Investing,
  • edited May 2012
    Reply to @scott: Hey Scott, On T's, the obvious and simple thing the "trade in your Treasuries for dividend stocks" people don't acknowledge is that individual investors, and many diversified bond fund managers like Gross and Gundlach, are holding T's entirely as a hedge against a big risk-off move.

    The only reason those people would get rid of T's in favor of stocks (or, say, high yield bonds in the case of bond fund managers) is deciding there's negligible probability of a risk-off scenario. I'm kinda doubting a conclusion of that sort would be all that rational these days, so I wouldn't expect managers like G&G to sell most of their T's until there's real growth, a pickup in inflation, and imminent Fed rate rises. And the latter has been pushed out to 2014 ...

    I think there's been a move in the past few months away from straight T's toward high-quality corporates and munis as a tradeoff between yield/return and hedging, which is pretty rational for this market too, imho. Muni CEFs, for example, have a significant following on the M* boards.

    The ZH piece is interesting - the next crash could be a doozy.

    Cheers, AJ
  • edited May 2012
    Reply to @AndyJ: It's not necessarily trade in treasuries for div-paying stocks - I don't think the answer is necessarily black or white, simple or obvious. I think in the scramble for yield, there are a lot of people who bought into MLPs (for example), seeing the high yield but not doing research on the potential volatility. A fair amount of other dividend plays were likely piled into without careful research because everyone and their cousin was/is scrambling for yield.

    Treasuries are fundamentally weak, but the demand could continue for months or years. That said, I think the move into treasuries will reverse at some point sooner than later, and I think that move may be sudden and severe.

    From a Citigroup Analyst: "We also believe, when we look at the setup of the US ten-year yield, it suggests we could actually be seeing levels as low as 1.15% to 1.2% on US ten-year yields also. Overall, when we look at these bond market charts, and in particular when we look at the US charts, the indication of the type of levels we may go to, on yields and on the yield curve, are levels that are very hard to justify when you look at the underlying fundamental backdrop in the US.

    So our bias is to believe these moves that are going to come, are going to be people who are actually trying to preserve capital. The most likely cause and effect on this is going to be further turmoil (in the markets). Essentially, in that instance, the beneficiaries would tend to be German bonds, US bonds, the US dollar and the Swiss franc.”",_Bonds_to_Rally_&_Gold_to_Remain_Firm.html

    And other take:
    "“If you look at the following weekly chart of the US Ten-Year Note, notice the yield has never closed, on a weekly basis, below the 1.8% level. It has penetrated that level on more than once occasion, but always recovered to close back above that level by Friday.

    If we were to see a weekly close below the 1.8% level, that would definitely confirm the market would be expecting a serious bout of deflation. When the Citibank analyst, Fitzpatrick, mentioned in his KWN interview that the US Ten-Year yield could fall to as low as 1.15%, people have to understand that the conditions around the world would have to be absolutely horrific for that to occur (see chart below).",_It_Will_Signal_A_Collapse.html

    Finally, an extreme take on the longer term from Marc Faber, but not one that I think is entirely out of the question in this day and age:

    "Look at the history, for example, of Germany, for the last 100 years. They had World War I. They had the hyper-inflation in World War II. The bond-holders got wiped out three times. If you owned Siemens, and you still own Siemens today, it was not a fantastic investment, but at least you still have something. You were not wiped out. I think that in equities you will be better off because you have an ownership in a company, than by being the lenders to companies, and the lenders, especially, to governments."

    As for corporate bonds, an environment that allows things to happen like the Chesapeake issue in the article earlier in this thread is concerning - that's absolutely not to say that it's a large-scale problem and I do think corporates are a good choice overall. However, I think there is the potential for a negative flipside of all of this corporate debt issuance and it would not surprise me if there were a lot more companies in a situation similar to what Chesapeake is currently doing. The scramble for yield will result (and has resulted) in people looking at yield over credit risk.
  • Reply to @scott: I agree with most of what you've said; my comments were mainly about the "trade in your low-yielding bonds for dividend stocks" meme that is expressed somewhere in the financial media nearly every single day.

    However, I do have to say the hyperinflation-now talk from a few select sources is totally divorced from reality. We're in a liquidity trap, with high unemployment, low and stagnant real wages, and deficient demand, all of which puts us closer to current day Japan than, say, post-WW I Germany.
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