Conservative investors were stunned when their corporate
bond funds took double-digit losses in the frightening market
collapse of September-October 2008. Long-term corporate bonds
fell 16 percent through October, according to Ibbotson Associates--their worst performance on record.
That wasn't supposed to happen. In bad stock markets,
investors expect their bonds to rise in price or at least hold
flat. Instead, for the first time, all the major asset classes
fell together. In February, they were all savaged again.
Yep. As David Swensen has longnoted, for portfolio diversification and risk-management purposes, treasury notes and bonds have substantial advantages over corporates, which can (and when it matters most, do) behave too much like their equity cousins.
We're woefully late with this, but March 25th was The Float's birthday. We'll mark the occasion by sharing our 10 favorite posts from this blog's second year. (Click here for the first year's Top 10.) In chronological order...
As we wrote on Wednesday, calling February home sales "improved" required either breathtaking innumeracy or outright dishonesty. Barry Ritholtz agrees.
Yesterday we pointed you to Roger Gibson's discussion of strategic asset allocation, one characteristic of which is the assumption of roughly normal/Gaussian distributions. Nassim Taleb sees power-law distributions instead, and this is a distinction with a difference.
John Hussman weighs in on the latest emergency measures from the federal government (emphasis added in bold):
[F]rom early reports regarding the toxic assets plan, it appears that the
Treasury envisions allowing private investors to bid for toxic mortgage
securities, but only to put up about 7% of the purchase price, with the
TARP matching that amount -- the remainder being "non-recourse"
financing from the Fed and FDIC. This essentially implies that the
government would grant bidders a put option against 86% of whatever
price is bid. This is not only an invitation for rampant moral hazard,
as it would allow the financing of largely speculative and inefficiently
priced bids with the public bearing the cost of losses, but of much
greater concern, it is a likely recipe for the insolvency of the
Federal Deposit Insurance Corporation, and represents a major end-run
around Congress by unelected bureaucrats.
There is no doubt that the Fed also intends for the extra trillion in
base money to end up as bank reserves. But think about what this move
implies in equilibrium. The largest purchasers of U.S. Treasury bonds
at present are foreign central banks. So what the Fed is really doing
is printing enough money to crater the exchange value of the U.S.
dollar, while leaving foreigners with a trillion dollars of savings
that they would otherwise have invested in Treasury bonds, which they
will now use, not to buy our lousy, toxic assets, but to acquire our productive
assets, and at a steep discount thanks to the currency depreciation. So
yes, the extra trillion in dollar bills will ultimately end up as bank
reserves (and currency in circulation), but only by encouraging Beijing
to go on a shopping spree to acquire a claim on our future production.
Ultimately, funding the bailout of lousy assets comes at the cost of
debasing our currency and selling our good assets to foreigners.
And for good measure, here's Tom Toles, who's all over this story...