Bonds

A reader asked: “My investments of choice have always been ‘junk bonds’ – high yield corporate debt. I have hedged my ‘junk’ at times with short positions in the Russell 2000 Index and a long-term Government Treasuries Fund. Is there something better? What is the ideal hedge for low-quality, high-income corporate debt?” Keep Reading

Are Treasury Inflation Protected Securities (TIPS), for which the Treasury adjusts the principal based on the Consumer Price Index for all urban consumers (CPI-U), effective as an inflation hedge? In their September 2009 paper entitled “A TIPS Scorecard: Are TIPS Accomplishing What They Were Supposed to Accomplish? Can They Be Improved?”, Michelle Barnes, Zvi Bodie, Robert Triest and Christina Wang evaluate the progress of the TIPS market toward providing: (1) consumers with a hedge against real interest rate risk; (2) holders of nominal bonds with a hedge against inflation risk; and, (3) everyone with a reliable indicator of expected inflation. Using inflation rate and bond yield data available since the introduction of TIPS in September 1997, they conclude that: Keep Reading

How can long-term investors best hedge against inflation’s erosion of purchasing power? In their April 2009 paper entitled “Inflation Hedging for Long-Term Investors”, Alexander Attie and Shaun Roache assess the inflation hedging properties of traditional asset classes over different investment horizons. Using total return indexes for several asset classes from initial data availability (January 1927 at the earliest) through November 2008, they conclude that: Keep Reading

A reader suggested that we evaluate the forecasting prowess of Bill Gross, manager for PIMCO of the world’s largest bond fund. PIMCO describes itself as “one of the largest specialty fixed income managers in the world…” The predictions/recommendations evaluated here extend as far back as February 2000 and come from columns in MarketWatch, CNN/Money and TheStreet.com. The table below presents highlights from his commentary and shows the change in the 10-year Treasury note (T-note) yield (as a proxy for bond/interest rate behavior) over the 21, 63, 126 and 254 trading days after the publication date for each item. Note that a decline in T-note yield means a gain in T-note price. Red plus (minus) signs to the right of specific items indicate those that the market has subsequently proven right (wrong). We conclude that: Keep Reading

Stocks and bonds are two of the most frequently considered asset classes in asset allocation strategies. How stable is the correlation between stock returns and bond returns? In their December 2008 paper entitled “The Dynamic Correlation between Stock and Bond Returns”, Thomas Chiang and Jiandong Li apply rolling regressions to analyze variations in the correlation between stock market returns and bond market returns. Using daily returns for the Vanguard Total Bond Market Index Fund (VBMFX) and the Vanguard Total Stock Market Index Fund (VTSMX) as proxies for their respective markets over the period 6/20/96 through 6/30/08, along with contemporaneous U.S. economic data, they conclude that: Keep Reading

Triumph of the Optimists: 101 Years of Global Investment Returns by Dimson, Marsh and Staunton (2002) is thorough, logical and concise. With scores of illustrative graphs and figures, its statistics are accessible and its style straightforward. Its message, however, is somewhat at odds with the title. Below is a chapter-by-chapter review of the insights in this book: Keep Reading