tag:blogger.com,1999:blog-2986124651030959736.post6989824349397190892..comments2024-03-28T09:42:38.695-05:00Comments on Stocks, Bonds & Politics: Bought: 100 CAR-UN.TO @ 17.35, 50 MWA @3.04, 100 VEU 47.73/Sold: 101 ENY @ 17.93, 100 NDAQ @ 21.53, 50 SUSQ @ 7.5, 50 BNCN @ 9.7, 102+ AT&T @ 28.96TENNINDEPENDENThttp://www.blogger.com/profile/17444227958539559639noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-2986124651030959736.post-79515270508307414352010-11-03T11:26:20.216-05:002010-11-03T11:26:20.216-05:00Cathie: The main risk of a bond fund is a rise in ...Cathie: The main risk of a bond fund is a rise in interest rates. That risk becomes acute when there is a long term gradual rise in rates, where there is no escape hatch for the bond investor other than to sell the position at a loss. Exchange traded bonds whether it be a TC, a mini-bond, or a TP, will have a maturity date. The existence of that date does provide an out, when the investor can recover par value, assuming the firm survives. During a period of rising rates, both the bond fund and the individual bonds, will be losing value, and investors in both will be subject to the risk of lost opportunity, that is, investing that money tied up in a bond or bond fund in the same kind of investment at a lower price and a higher yield. <br /><br /> The difference is that the bond fund investor will not likely ever be made whole by investing in a period where rates are at historic lows, as now, and then being hit with a prolonged period of rising rates like the 1960s and 1970s. A repeat of those two decades, which is a possibility, would result in more than just losses on the original principal amount for that bond fund investor, but also the value of the dividends would be lost too, as the price declines more than value of the dividends. It does not take much of a decline in price to wipe out a 3% dividend.<br /><br />The way that I look at it is that there is more credit risk by holding a few individual bonds rather than a bond fund. However, particularly now, there is more interest rate risk in the bond fund compared to an individual bond with a maturity date. If the investor can achieve broad diversity by buying individual bonds, then that will mimic the credit risk of the bond fund while reducing the current interest rate risk inherent in owning a bond fund.<br /><br />GDO and IGI, both owned, are term date bond funds, and will liquidate in 2024. While this provides more protection against interest rate risk than a normal bond fund, it is not equivalent to owning bonds maturing in 2024. It does reduce interest rate risk compared to a bond fund without a term date, while maintaining the better credit risk profile of the bond fund with a large number of diverse holdings. <br /><br />The Aegon and ING Hybrids have no maturity dates, and may never be called. There is no obligation to call those securities. In that sense, they are perpetual obligations, with many characteristics of a common stock, and lacking the bond feature of a maturity date. I would anticipate that they will react similarly to a very long term bond in a rising rate period. As shown from events during the Dark Period, they are also hyper sensitive on the downside to concerns about credit risk or deferrals.TENNINDEPENDENThttps://www.blogger.com/profile/17444227958539559639noreply@blogger.comtag:blogger.com,1999:blog-2986124651030959736.post-84039504995921945592010-11-03T10:45:47.879-05:002010-11-03T10:45:47.879-05:00Does owning a TC tied to a corporate bond offer so...Does owning a TC tied to a corporate bond offer some protection from disaster when the bond bull market corrects (whenever that might be)? I am trying to understand the longer term risks of continuing to hold bond funds (like GDO) and bond-like issues (for example, an Aegon hybrid) in this environment. I do not own US Treasuries.Anonymousnoreply@blogger.com