What to do on Bonds?

I’ve had good returns on bonds over the last year, largely because I invested in long deflation investment grade bonds. I took on a lot of duration risk by investing long, and it paid off. I’ve reduced the size of my duration bet, but it is still large relative to the consensus. That said, momentum tends to persist.

But what to do now? Yes, rates could still go lower on the long end. Credit spreads could still tighten on the long end and elsewhere. Most of my credit related positions have done well, including preferred stocks of banks.

I have a positive view on conforming mortgages, though I have no position there now.

On illiquidity I have a negative view because things are volatile enough that you need flexibility.

On FX, I am long the Swiss Franc, and it has been a loser. I suspect that with weakness in the euro, the Swissie will not break its link with the Euro. At present, the US Dollar seems ascendant. What can stand in its way?

I am tempted to put money into emerging markets debt, because their economies are run in a more orthodox manner than the developed economies, but not by much.

Really, I am scratching my head over all the various risks, and thinking that short-term investment grade credit is the only thing that I like. Beyond that, I am open to suggestions.

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About David Merkel 145 Articles

Affiliation: Finacorp Securities

David J. Merkel, CFA, FSA — From 2003-2007, I was a leading commentator at the excellent investment website RealMoney.com (http://www.RealMoney.com). Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and now I write for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I still contribute to RealMoney, but I have scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After one year of operation, I believe I have achieved that.

In 2008, I became the Chief Economist and Director of Research of Finacorp Securities. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm.

Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.

I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

Visit: The Aleph Blog

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