Friday, October 10, 2008


While I sold my Vanguard bond ETFs earlier this year, I still track them to see how the bond market is faring in a broad way.  Information about these bond ETFs can be found at the Vanguard web site.  I was drawn to them soon after they started to trade due to their very low expense ratios and the large number of holdings. I always feel more comfortable with funds that give  me a security blanket by holding hundreds of names.   I have owned BND- the total bond market portfolio; BSV-short term bonds; and  BIV-intermediate term loans.

My primary reason for selling them, as related in my emails, was almost entirely the yield.  The price of BND had risen to the point that the yield had fallen to 4 1/2% or so.  I had a good profit so I sold which was also the case with BSV.  I am buying individual issues now to replace the bond ETF holdings focusing on senior debt contained in Trust Certificates that are yielding well in excess of 10%.  The only junior debt TC that I will add is from AON, the insurance broker.  I see a few issues now, one rung below investment grade, that are selling at prices that will yield between 20 to 30% depending on the issue.  

A few moments ago I checked the prices of these Vanguard Bond ETFs.  The total bond ETF has fallen this morning almost 5% to 68.7.  This has more to do with perceived enhanced credit risk for corporate paper rather than a changed perception of inflation risk.  The TIP ETF which has treasury inflation protected bonds is falling to a new low, down almost 4% today to below 94.  The short term Treasury ETF, SHY, which contains 1 to 3 year treasury securities, is almost unchanged.  The ETFs which contains mostly corporate bonds are diverging from the prices of treasuries. 

The foreign bond ETFs, BWX and WIP, are being hit today primarily due to the rise in the U.S. dollar. 

For the meeting of the finance ministers this weekend,  a plan needs to be developed to bring down the 3 month LIBOR rate, possibly with some kind of insurance plan.  A number of rates are tied to LIBOR, including many variable rate mortgages.  As this rate climbs to 5%, way out of line with the 3 month Treasury Bill rate of less than .5%, this will place even more strain on those who are already struggling who have to pay rates tied to LIBOR.

I listened to W and did not here anything new. The market rose before the statement, even going positive, and has now turned south again after W's pep talk, now falling over 300 people. 
The people who wrote credit default protection on Lehman senior debt may have to pay 91 cents for each $1 in face amount of the Lehman senior debt obligations.   The common and preferred stock was wiped out by the bankruptcy and any junior debt will be holding air.  As it turned out, Lehman was in fact to big to fail.  It is still to early to know whether the people on the hook for the insurance for the Lehman debt will actually have the funds to pay it.

The opening today broke 8000 and it would be reasonable  to suggest that the 2002 lows will be hit.  I would go back further and say that most of the stock market appreciation since 1997 has been wiped out this year, primarily in September and October.

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