Money and Finance
"There are no bad bonds, only bad prices," the traders used to say. They should say it again, only louder. In the spring of 1984, long-dated Treasuries went begging at yields of nearly 14 per cent in the context of an inflation rate of just 4 per cent. Those, too, were fearful times, the recollected horror being the great inflation of the 1970s. Inflation was ineradicable, the bondphobes said. Now a new generation of creditors espouses the opposite proposition. Deflation is baked in the cake, they say.
-
The truth is that no investment asset is inherently safe. Risk or safety is an attribute of price. At the right price, a lowly convertible bond is a safer proposition than an exalted Treasury. Watching the government securities market zoom, many mistake price action for price.
...
In their magnum opus, Security Analysis, Benjamin Graham and David L. Dodd advise that "bonds should be bought on their ability to withstand depression". They wrote that in 1934. So far is that rule from being honoured by today's financiers that not a few bonds - and boxcars full of mortgages - could hardly withstand prosperity. Two urgent questions present themselves. One: does something far worse than recession loom? Two: does that certain something definitely spell much lower interest rates?
...
In corporate debt and mortgages, anomalies and non sequiturs abound. They are especially prevalent in convertible bonds. More so than even the average stressed-out fund manager, convertible arbitrageurs have been through the mill. It was they - and almost they alone - who owned convertibles. Now many of these folk must sell them.
-
Few buyers are presenting themselves, however, though extraordinary bargains keep popping up. Thus, at the end of October, a Medtronic convertible bond with a 1.5 per cent coupon with the debt maturing in April 2011 briefly traded at 80.75. This was a price to yield 10.6 per cent, an adjusted spread of 1,600 basis points over the Treasury curve (adjusted, that is, for the value of the options embedded in the convert, notably the option to exchange it for common stock at the stipulated rate). Contrary to what such a yield might imply, A1/AA minus rated Medtronic, the world's top manufacturer of medical devices for the treatment of heart disease, spinal injuries and diabetes, is no early candidate for insolvency. Almost every day brings comparable examples of risks not borne by people who, in this time of crisis, have come to define risk as "anything not guaranteed by Uncle Sam".
-
"Risk-free return" is the standard tag attached to the government's solemn obligations. An investor I know, repulsed by prevailing government yields, has a timelier description - "return-free risk".
-
....................
-
Related books:
-
Security Analysis: Sixth Edition
-
Mr. Market Miscalculates: The Bubble Years and Beyond
-
- Links
Tim Ferriss interviews Brendan Moynihan, co-author of What I Learned Losing a Million Dollars (LINK) Oaktree Is Said to Seek $10 Billion for Distressed Fund (LINK) “Credit standards have dropped and non-investment grade debt issuances reached...
- Richard Duncan: Wealth Preservation Through Diversification
The excerpt below is from the final chapter of The New Depression by Richard Duncan on inflation and deflation. Wealth Preservation through Diversification The hard truth is that it is not easy to preserve wealth. If it were, the families who were wealthy...
- Look To The East For Cheap Yield – By Merryn Somerset Webb
This brings me to one of my favourite long-term investments – what many readers insist is my “blind spot” and a market that no one has used the word “bubble” to describe for over two decades. I’m talking about Japan, of course (full disclosure:...
- Barron's Interviews - Howard Marks And Rob Arnott
From November and December. Interestingly, they both mentioned convertible bonds as an attractive area right now.-Interview with Howard Marks (11/17/2008):-What went wrong with risk management?- First of all, you need a risk manager who knows the business...
- Legg Mason Value Trust Investment Commentary: Fourth Quarter 2007
I think the market is in for a period of what the Greeks refer to as enantiodromia, the tendency of things to swing to the other side. This is not a forecast, but rather a reflection on valuation. -All of the poorest performing parts of the market, housing,...
Money and Finance
Little logic to bond world amid current risk phobias - By Jim Grant
"There are no bad bonds, only bad prices," the traders used to say. They should say it again, only louder. In the spring of 1984, long-dated Treasuries went begging at yields of nearly 14 per cent in the context of an inflation rate of just 4 per cent. Those, too, were fearful times, the recollected horror being the great inflation of the 1970s. Inflation was ineradicable, the bondphobes said. Now a new generation of creditors espouses the opposite proposition. Deflation is baked in the cake, they say.
-
The truth is that no investment asset is inherently safe. Risk or safety is an attribute of price. At the right price, a lowly convertible bond is a safer proposition than an exalted Treasury. Watching the government securities market zoom, many mistake price action for price.
...
In their magnum opus, Security Analysis, Benjamin Graham and David L. Dodd advise that "bonds should be bought on their ability to withstand depression". They wrote that in 1934. So far is that rule from being honoured by today's financiers that not a few bonds - and boxcars full of mortgages - could hardly withstand prosperity. Two urgent questions present themselves. One: does something far worse than recession loom? Two: does that certain something definitely spell much lower interest rates?
...
In corporate debt and mortgages, anomalies and non sequiturs abound. They are especially prevalent in convertible bonds. More so than even the average stressed-out fund manager, convertible arbitrageurs have been through the mill. It was they - and almost they alone - who owned convertibles. Now many of these folk must sell them.
-
Few buyers are presenting themselves, however, though extraordinary bargains keep popping up. Thus, at the end of October, a Medtronic convertible bond with a 1.5 per cent coupon with the debt maturing in April 2011 briefly traded at 80.75. This was a price to yield 10.6 per cent, an adjusted spread of 1,600 basis points over the Treasury curve (adjusted, that is, for the value of the options embedded in the convert, notably the option to exchange it for common stock at the stipulated rate). Contrary to what such a yield might imply, A1/AA minus rated Medtronic, the world's top manufacturer of medical devices for the treatment of heart disease, spinal injuries and diabetes, is no early candidate for insolvency. Almost every day brings comparable examples of risks not borne by people who, in this time of crisis, have come to define risk as "anything not guaranteed by Uncle Sam".
-
"Risk-free return" is the standard tag attached to the government's solemn obligations. An investor I know, repulsed by prevailing government yields, has a timelier description - "return-free risk".
-
....................
-
Related books:
-
Security Analysis: Sixth Edition
-
Mr. Market Miscalculates: The Bubble Years and Beyond
-
- Links
Tim Ferriss interviews Brendan Moynihan, co-author of What I Learned Losing a Million Dollars (LINK) Oaktree Is Said to Seek $10 Billion for Distressed Fund (LINK) “Credit standards have dropped and non-investment grade debt issuances reached...
- Richard Duncan: Wealth Preservation Through Diversification
The excerpt below is from the final chapter of The New Depression by Richard Duncan on inflation and deflation. Wealth Preservation through Diversification The hard truth is that it is not easy to preserve wealth. If it were, the families who were wealthy...
- Look To The East For Cheap Yield – By Merryn Somerset Webb
This brings me to one of my favourite long-term investments – what many readers insist is my “blind spot” and a market that no one has used the word “bubble” to describe for over two decades. I’m talking about Japan, of course (full disclosure:...
- Barron's Interviews - Howard Marks And Rob Arnott
From November and December. Interestingly, they both mentioned convertible bonds as an attractive area right now.-Interview with Howard Marks (11/17/2008):-What went wrong with risk management?- First of all, you need a risk manager who knows the business...
- Legg Mason Value Trust Investment Commentary: Fourth Quarter 2007
I think the market is in for a period of what the Greeks refer to as enantiodromia, the tendency of things to swing to the other side. This is not a forecast, but rather a reflection on valuation. -All of the poorest performing parts of the market, housing,...