ebook essays pieces of the puzzle
Monday, August 30th, 2010
those bubbling bonds

Everyone is trying to figure out whether there is a bond bubble.  But one problem with “bonds” is that the different parts of the fixed income market sometimes run together in performance terms and sometimes in opposite directions.  See, for example, two large ETFs:  TLT, the iShares long-term Treasury fund shown in the brown line in the top chart, and HYG, the iShares high yield offering, shown in black.  (The bottom clip is the price ratio between the two.)  You’ll notice that the price performance has been wildly divergent over the last three years.  So, where’s the bubble?

Most point to the big move in long Treasuries (which hit a wall of sorts on Friday, with TLT tagged for a 2.8% loss).  The unrelenting spike of the last few months was in response to renewed concerns about the economy, momentum players jumping on, and “duration grabbers,” forced by their strategies to play along, fueling the fire.

Conversely, HYG went nowhere recently in price terms, but was down only a penny amidst Friday’s carnage.  However, its 61% total return since the bottom eighteen months ago has been built on top of that other bond bubble — reaching for yield.

Some thoughts for those trying to navigate the bond markets, especially those without a working knowledge of bonds:  Be careful with charts like the one above, since they show price and not total return of the two funds; they can vary significantly with different kinds of bonds.  Also be wary of correlations; while these two have been negatively correlated during much of this time, there are periods when that won’t be the case.  And, if you really want to get confused, try throwing mortgage-backed securities into the mix as well; they are from yet another fixed income galaxy.

In talking about and investing in the bond market, it pays to be precise, or you’ll end up somewhere you don’t want to be.  (Chart:  Bloomberg terminal.)

the hindenburg omen

I had not read one posting about the infamous Hindenburg Omen that has obsessed parts of the blogosphere this month.  I’m not sure why, since I would normally be somewhat curious when such a concept grabs the attention of market players, although I think I may have been on vacation when it first took hold.  In any case, I did read Jeff Miller’s take on the “how” of it all at A Dash of Insight (but I must admit I didn’t take time to actually look at the indicator itself).  Miller’s piece is full of links if you want to go even deeper, but his bottom line is good enough for me:  Know what bag of stuff you are buying at the concept store before you take it home.

where to start

If you want to get into the flow of investment information on Twitter, it helps to have some ideas of good folks to follow.  You can check out those suggested by StockTwits across a range of categories, or you can find some well-known investment pros and look at those that they follow.  Some will share recommendations in “follow Friday” tweets (marked with #FF), as David Merkel did last week.  His list includes many I follow and some that I know from their other writings, but several that I don’t know.  No matter.  I trust that those Merkle singles out will provide plenty of news and views and links to chew on, making it a great place to start for those interested in fundamental investment ideas.

volatility information

Leaving aside the arguments about whether volatility should be thought of as equaling risk, learning about volatility makes sense, especially for those who own products that are affected by volatility levels and changes.  ProFunds has issued a PDF in its investor education series that focuses on volatility and its impact on levered and inverse ETFs.  The graph of historical volatilities is well done, although it makes me want more history, some interactive tools, and, just to be ghoulish, markers for the year 2008.  (Hat tip:  SurlyTrader.)