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For most 401K investors Vanguard funds are a better deal as expenses are low. But they have some annoying quirks. Wire money transfers are ridiculously slow.

They also have that pretty bizarre notion that you should put money into one of their fund for life. Trading is severely discourages and that's to certain extent OK, but Vanguard goes overboard with this idea.

Critics often say that Good ole' John Bogle wont be happy till the mutual fund companies earn fees of 0.1 %. That this man ruined the money mgmt. business. Singlehandedly walmartized it. This is not completely true. Because 0.5% fee is not 0.5% fee on annual return, it is the fee on the total amount of money invested. If your after inflation return is 2%, that means that mutual fund company takes 25% of your return for often questionable, second-rate services (as in Merrill Lynch) they perform. Yes 25% percent.

Moreover Vanguard should be hold responsible for the 2008 financial crash and "Great Recession" that followed on equal footing with other major Wall street players:

Financial holding companies like the Vanguard Group, State Street Corporation, FMR (Fidelity), BlackRock, Northern Trust, Capital World Investors, Massachusetts Financial Services, Price (T. Rowe) Associates Inc., Dodge & Cox Inc., Invesco Ltd., Franklin Resources, Inc., АХА, Capital Group Companies, Pacific Investment Management Co. (PIMCO) and several others do not just own shares in American banks, they own mainly voting shares. It these financial companies that exercise the real control over the US banking system.

Some analysts believe that just four financial companies make up the main body of shareholders of Wall Street banks. The other shareholder companies either do not fall into the key shareholder category, or they are controlled by the same ‘big four’ either directly or through a chain of intermediaries. Table 4 provides a summary of the main shareholders of the leading US banks.
 

In other words it is important to understand that they are not concerned with your retirement, their main concern is with their own retirement ;-)


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[Sep 14, 2020] Gundlach Says High-Yield Bond Defaults May Almost Double - Bloomberg

Sep 14, 2020 | www.bloomberg.com

High-yield bond default rates may double as companies struggle with a protracted economic downturn even as the Federal Reserve props up valuations, said Jeffrey Gundlach.

The investment grade corporate debt market has skewed toward lower quality BBB- rated debt, but if just 50% of that were to be downgraded it could fuel a near doubling of the high-yield market, Gundlach said Tuesday on a webcast for his firm's flagship DoubleLine Total Return Bond Fund .

Gundlach's views reflect broad skepticism about the market's connection to economic realities. He criticized the Fed's emergency actions as buoying asset prices and spurring unsustainable corporate borrowing binges.

Risk assets such as equities and high yield credit markets are responding to this support, and government stimulus, disproportionately as the Covid-19 pandemic remains a threat to the recovery, he said.

"It's foolhardy to believe that one can have this kind of a shock to an economy and it just gets healed through a one-shot deal" from the Treasury, he said.

Gundlach pointed out that the global GDP forecast is -3.9%, whereas the U.S. lags at -5% despite the country's response to the Covid-19 crisis being "one of the highest in the world."

Highlighting the effect of the weekly $600 stimulus checks, he called it a distortion of the personal-income spending picture akin to the Fed's effect on the markets.

"This is a large incentive to stay on public assistance," Gundlach said, noting that benefit payments have exceeded many workers' regular income.

Gundlach also snubbed one of the market's favorite trades on a U.S. recovery, saying he's "betting against" the inflation-linked bond market. TIPS products have seen some of the strongest monthly inflows in four years, and market-implied expectations for inflation have touched a 2020 high. Gundlach repeated that the impact of the pandemic is deflationary.

[Sep 11, 2020] Are Junk Bonds Suggesting A Stock Market Top Is Near by kimblecharting

The stock market now is completely disconnected from the economy. Stein's Law, which he expressed in 1976 states: "If something cannot go on forever, it will stop."
Notable quotes:
"... Junk Bonds play a critical role in highlighted investor sentiment. When junk bonds (lower-rated debt) is performing well, then that means investors are taking more risks. When junk bonds struggle, that means investors are taking on less risk. ..."
"... At the same time, there is a divergence between the stock market (the S&P 500 made new all-time highs) and Junk Bonds (well below all-time highs and 5 percent off 2019 highs). ..."
Sep 10, 2020 | www.zerohedge.com

As investors, we have several tools and indicators at our disposal.

Whether it is technical indicators such as Fibonacci levels, moving averages, or price supports, or fundamental indicators such as corporate earnings or economic data, we have a lot of information to use when making decisions.

Today's chart incorporates both. Junk Bonds play a critical role in highlighted investor sentiment. When junk bonds (lower-rated debt) is performing well, then that means investors are taking more risks. When junk bonds struggle, that means investors are taking on less risk.

So today, we highlight the Junk Bonds ETF (JNK). Using technical analysis, we can see that JNK is trading near line (A), a price level that has served as support and resistance over the past several years. It is currently serving as price resistance.

At the same time, there is a divergence between the stock market (the S&P 500 made new all-time highs) and Junk Bonds (well below all-time highs and 5 percent off 2019 highs).

So this is an important resistance test for junk bonds. Will Junk Bonds (JNK) break down from here (bearish) or break out (bullish).

What happens here will send an important message to stocks (and investors)!

[Jan 08, 2020] Where to Invest 2020

Jan 08, 2020 | www.kiplinger.com

High-yield bonds (avoid the oil patch), emerging-markets bonds and dividend-paying stocks such as real estate investment trusts and utilities are good places to hunt for yield. Funds to consider include Vanguard High Yield Corporate ( VWEHX ), yielding 4.5%, and TCW Emerging Markets Bond ( TGEIX ), yielding 5.1%. Schwab US Dividend Equity ( SCHD , $56), a member of the Kiplinger ETF 20 list of our favorite ETFs, invests in high-quality dividend payers and yields just over 3%. Spath, at Sierra Funds, is bullish on preferred stocks. IShares Preferred and Income Securities ETF ( PFF , $37) yields 5.5%. (For more ideas, see Income Investing .)

[Jan 08, 2020] The 7 Best Bond Funds for Retirement Savers in 2020

Jan 08, 2020 | www.kiplinger.com

Market value: $71.3 billion

SEC yield: 1.6%

Expense ratio: 0.17%

Suppose my outlook for the bond market is either wrong, or at best, premature. Bond yields could fall next year, or just stay relatively flat. That's why it usually makes sense to own more than one bond fund.

Vanguard Intermediate-Term Tax-Exempt Investor ( VWITX , $14.41) should hold up pretty well if rates rise only a small amount in 2020, and it could trounce the other funds in this article if rates fall.

VWITX's duration is 4.9 years. That means if bond yields rise by one percentage point, the fund's price should decline by 4.9%. That wouldn't be fun for investors, but it would hardly be catastrophic, especially when you factor in the yield.

Like most Vanguard bond offerings, Vanguard Intermediate-Term Tax-Exempt Investor is plain vanilla, and that's OK. It sticks almost entirely to high-quality municipal bonds. Its weighted average credit quality is a sterling AA.

VWITX also has been a decent performer, at an annualized 3.1% total return over the past five years.

Learn more about VWITX at the Vanguard provider site.

[Dec 21, 2019] Keep an eye on 10 year US treasuries. If they become just a little less liquid and yields rise as i believe they will

Dec 21, 2019 | peakoilbarrel.com

HHH x Ignored says: 12/12/2019 at 11:27 pm

Price of oil does have problem that will play out over next 6-8 months. Without a trade war and Brexit hanging over markets. There isn't a whole lot of reason to be holding government bonds which yield next to nothing or less than nothing in some cases. Fed is buying bills so Repo market won't implode into another 2008. Only problem is they need to be buying coupons or treasuries also. They are buying some treasuries but it's not near enough to hold interest rates down. Yields on debt are going to rise without something like a trade war holding them down. That is a problem if your long oil.

Keep an eye on 10 year US treasuries. If they become just a little less liquid and yields rise as i believe they will. These OPEC cuts aren't going to mean as much as some might think.

[Dec 07, 2019] An unprecedented frenzy of debt sales around the world is threatening to cool this year's hot returns on corporate bonds.

Dec 07, 2019 | economistsview.typepad.com

Joe -> Joe... , November 30, 2019 at 09:53 PM

https://www.bloomberg.com/news/articles/2019-11-30/record-2-4-trillion-bond-binge-is-threatening-investor-returns

An unprecedented frenzy of debt sales around the world is threatening to cool this year's hot returns on corporate bonds.

Companies have sold a record $2.43 trillion so far this year across currencies, surpassing previous full-year records. Investors rushed to snap up all this debt because they were desperate for yield as central banks cut rates. That has pushed up valuations.

Now, some troubling signs for the direction of those valuations are converging. Recent data suggest that the worst may be over for the global economy, which means many central banks could have less reason next year to guide down borrowing costs. That will all make it harder to top the double-digit returns that some investors scored on corporate bonds this year.
---
Wealthy made some real money betting on our government bailouts, in Europe an the US. Now the yields are gone, where to? China, the only rational central banker left means, park your money in China.

Joe -> Joe... , November 30, 2019 at 10:03 PM
https://finance.yahoo.com/news/while-the-us-chilled-this-thanksgiving-week-china-moved-forward-125657666.html

What this means now is that things will only get more complicated for Beijing from here on out. Chinese President Xi Jinping bet on letting the people of Hong Kong decide, and they did. Only it was against him.

We'll return to the political situation in Hong Kong momentarily, but before we do, another major development, this time on the business front.

On Tuesday, Alibaba executed a slam-dunk secondary offering in Hong Kong, raising $12.9 billion. That easily surpassed Uber's $8.1 billion IPO in May, making it the biggest public offering of 2019. For those who were predicting the death of Hong Kong -- and they've been doing that for decades, (and Kyle Bass and others are still at it) -- that again appears to be premature.
---
Clueless reporting. Xi came out of this looking great. He has one country three systems, he now has a sound central banking, investment is flowing in, not out. They are immune from sanctions, and even the trade tariffs are expanding Chinese influence in Asia, Iran, Russia and China can look forward to a new global banking system, absent the dollar. Belt and suspenders is moving forward.

I like it, I have no priors, I can point this fact without contradiction. Go Xi.

Paine -> Joe... , December 01, 2019 at 06:22 AM
This in fact is poisonous
Bourgeois think heresy

The struggle inside the party continues

Policy

Zero real sovereign note
Intetest rates

up and down the term structure

A Lerner mark up cap and trade net
For the big corporate players


A huge expansion
of the social payments system


transition to a 100 percent George tax on land lots

Immediately begin a three staged
Liberation
Of Tibet Hong Kong
and
Sinkiang

Cut North Korea loose
to unite with the south


Allow open elections at the neighborhood level

[Oct 26, 2019] Mish Pondering The Collapse Of The Entire Shadow Banking System

Oct 26, 2019 | www.zerohedge.com

Authored by Mike Shedlock via MishTalk,

What's behind the ever-increasing need for emergency repos? A couple of correspondents have an eye on shadow banking.

Shadow Banking

The above from Investopedia .

Image courtesy of my friend Chris Temple.

Hey It's Not QE, Not Even Monetary

Yesterday, I commented Fed to Increase Emergency Repos to $120 Billion, But Hey, It's Not Monetary .

Let's recap before reviewing excellent comments from a couple of valued sources.

The Fed keeps increasing the size and duration of "overnight" funding. It's now up $120 billion a day, every day, extended for weeks. That is on top of new additions.

Three Fed Statements
  1. Emergency repos were needed for " end-of-quarter funding ".
  2. Balance sheet expansion is " not QE ". Rather, it's " organic growth ".
  3. This is "not monetary policy ".
Three Mish Comments
  1. Hmm. A quick check of my calendar says the quarter ended on September 30 and today is October 23.
  2. Hmm. Historically "organic" growth was about $2 to $3 billion.
  3. Hmm. Somehow it takes an emergency (but let's no longer call it that), $120 billion " at least " in repetitive " overnight " repos to control interest rates, but that does not constitute "monetary policy"

I made this statement: I claim these "non-emergency", "non-QE", "non-monetary policy" operations suggest we may already be at the effective lower bound for the Fed's current balance sheet holding .

Shadow Banking Suggestion by David Collum

Pater Tenebrarum at the Acting Man blog pinged me with these comments on my article, emphasis mine.

While there is too much collateral and not enough reserves to fund it, we don't know anything about the distribution [or quality] of this collateral . It could well be that some market participants do not have sufficient high quality collateral and were told to bugger off when they tried to repo it in the private markets.

Such market participants would become unable to fund their leveraged positions in CLOs or whatever else they hold.

Mind, I'm not saying that's the case, but the entire shadow banking system is opaque and we usually only find out what's what when someone keels over or is forced to report a huge loss.

Reader Comments
  1. Axiom7: Euro banks are starving for dollar funding and if there is a hard Brexit both UK and German banks are in big trouble. I wonder if this implies that the EU will crack in negotiations knowing that a DB fail is too-big-to-bail?
  2. Cheesie: How do you do repos with a negative interest rate?
  3. Harry-Ireland: [sarcastically], Of course, it's not QE. How can it be, it's the greatest economy ever and there's absolutely nobody over-leveraged and the system is as healthy as can be!
  4. Ian: Taking bad collateral to keep banks solvent is not QE.

In regards to point number four, I commented:

This is not TARP 2009. [The Fed is not swapping money for dodgy collateral] Someone or someones is caught in some sort of borrow-short lend-long scheme and the Fed is giving them reserves for nothing in return. Where's the collateral?

Pater Tenebrarum partially agrees.

Yes, this is not "TARP" - the Fed is not taking shoddy collateral, only treasury and agency bonds are accepted. The primary dealers hold a huge inventory of treasuries that needs to be funded every day in order to provide them with the cash needed for day-to-day operations - they are one of the main sources of the "collateral surplus".

Guessing Game

We are all guessing here, so I am submitting possible ideas for discussion.

Rehypothecation

I am not convinced the Fed isn't bailing out a US major bank, foreign bank, or some other financial institution by taking rehypothecated , essentially non-existent, as collateral.

Rehypothecation is the practice by banks and brokers of using, for their own purposes, assets that have been posted as collateral by their clients.

In a typical example of rehypothecation, securities that have been posted with a prime brokerage as collateral by a hedge fund are used by the brokerage to back its own transactions and trades.

Current Primary Dealers
  1. Amherst Pierpont Securities LLC
  2. Bank of Nova Scotia, New York Agency
  3. BMO Capital Markets Corp.
  4. BNP Paribas Securities Corp.
  5. Barclays Capital Inc.
  6. Cantor Fitzgerald & Co.
  7. Citigroup Global Markets Inc.
  8. Credit Suisse AG, New York Branch
  9. Daiwa Capital Markets America Inc.
  10. Deutsche Bank Securities Inc.
  11. Goldman Sachs & Co. LLC
  12. HSBC Securities (USA) Inc.
  13. Jefferies LLC
  14. J.P. Morgan Securities LLC
  15. Merrill Lynch, Pierce, Fenner & Smith Incorporated
  16. Mizuho Securities USA LLC
  17. Morgan Stanley & Co. LLC
  18. NatWest Markets Securities Inc.
  19. Nomura Securities International, Inc.
  20. RBC Capital Markets, LLC
  21. Societe Generale, New York Branch
  22. TD Securities (USA) LLC
  23. UBS Securities LLC.
  24. Wells Fargo Securities LLC.

The above Primary Dealer List from Wikipedia as of May 6, 2019.

Anyone spot any candidates?

My gosh, how many are foreign entities?

It's important to note those are not "shadow banking" institutions, while also noting that derivative messes within those banks would be considered "shadow banking".

Tenebrarum Reply

In this case the problem is specifically that the primary dealers are holding huge inventories of treasuries and bank reserves are apparently not sufficient to both pre-fund the daily liquidity requirements of banks and leave them with enough leeway to lend reserves to repo market participants.

The Fed itself does not accept anything except treasuries and agency MBS in its repo operations, and only organizations authorized to access the federal funds market can participate by offering collateral in exchange for Fed liquidity (mainly the primary dealers, banks, money market funds,...).

Since most of the repo lending is overnight - i.e., is reversed within a 24 hour period (except for term repos) - I don't think re-hypothecated securities play a big role in this.

But private repo markets are broader and have far more participants, so possibly there is a problem elsewhere that is propagating into the slice of the market the Fed is connected with. Note though, since the Treasury is borrowing like crazy and is at the same time rebuilding its deposits with the Fed (which lowers bank reserves, ceteris paribus), there is a several-pronged push underway that is making short term funding of treasury collateral more difficult at the moment.

So I'm not sure a case can really be made that there is anything going on beyond what meets the eye - which is already bad enough if you ask me.

Preparation for End of LIBOR

What about all the LIBOR-based derivatives with the end of LIBOR coming up?

The Wall Street Journal reports U.S. Companies Advised to Prepare for Multiple Benchmark Rates in Transition from Libor

Libor is a scandal-plagued benchmark that is used to set the price of trillions of dollars of loans and derivatives globally. A group of banks and regulators in 2017 settled on a replacement created by the Federal Reserve known as the secured overnight financing rate, or SOFR. Companies must move away from Libor by the end of 2021, when banks will no longer be required to publish rates used to calculate it.

"We don't expect that 100% of the Libor-based positions today will migrate 100% to SOFR," Jeff Vitali, a partner at Ernst & Young, said this week during a panel at an Association for Financial Professionals conference in Boston. "It is going to be a scenario where entities are going to have to prepare and be flexible and build flexibility into their systems and models and processes that can handle multiple pricing environments in the same jurisdiction."

Repro Quake

​I invite readers to consider Tenebrarum's " Repro Quake - A Primer " but caution that it is complicated.

He informs me "a credit analyst at the largest bank in my neck of the woods sent me a mail to tell me this was by far the best article on the topic he has come across".

Note: That was supposed to be a private comment to me. I placed it in as an endorsement.

Tenebrarum live in Europe. Here are his conclusions.

What Else is the Fed Missing? Effective Lower Bound

Finally, Tenebrarum commented: " I agree on your effective lower bound comment, since obviously, the 'dearth' of excess reserves was pushing up all overnight rates, including the FF rate ."

For discussion of why the effective lower bound of interest rates may be much higher than zero, please see In Search of the Effective Lower Bound .


argento3 , 4 hours ago link

my gut tells me (I have no tangible evidence)

that some of this money is leaking out to continue to prop up the stock market. I've been trading for 46 years and current valuations are beyond ridiculous. for example, Tesla made a buck a share in the last quarter. woop di do. and the stock zooms to $300++ a share with a market cap of $58 bil. 60% more than Ford???!!! We know that Porsche and BMW and Mercedes and Audi are going to build a much better EV. another one, Cintas. They rent uniforms. what a sexy business! valued at a p/e of 32 with a $28 bil. market cap. Book value of $29 a share. the stock is at $270 !!! the list goes on and on and on Carvana, etc.

personally, I have 5% bitcoin 5% gold and have a nice chunk in a very high quality diversified commodity mutual fund. Commodities (relative to stocks) are at multi decade lows. a deep value trade. very best wishes to you. Argento

Doge , 4 hours ago link

Can you name the commodity fund you own?

argento3 , 4 hours ago link

i like both DCMSX and PCRAX (DFA and Pimco)

this sector has under performed stocks as written above. so the returns have been negative (for now)

Let it Go , 6 hours ago link

On occasion, it is important to revisit issues that have been swept under the rug or simply overlooked. For most people, the derivatives market falls into this category, partly because they don't understand exactly what derivatives are or why this market is so important.

Anyone paying attention knows that the size of the derivatives market dwarfs the global economy. Paul Wilmott who holds a doctorate in applied mathematics from Oxford University has written several books on derivatives. Wilmott estimates the derivatives market at $1.2 quadrillion, to put that in perspective it is about 20 times the size of the world economy.

http://Derivatives Could Explode Like A bomb!html

namrider , 6 hours ago link

That is an OLD guess... today it is estimated that derivatives exceeds $2 quadrillion, and that just commodity derivatives approaches the old figure. Interest rate based derivatives still dominate, my guess is much higher.

[Sep 17, 2019] Amid the settlement of Treasury coupon auctions and the influx of quarterly corporate tax payments, the rate on overnight repurchase agreements soared by 153 basis points to 3.80%, the largest daily increase since December, based on ICAP pricing.

Sep 17, 2019 | economistsview.typepad.com

Joe , September 16, 2019 at 12:11 PM


https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

One of the key U.S. borrowing markets saw a massive surge Monday, a sign the Federal Reserve is having trouble controlling short-term interest rates.

Amid the settlement of Treasury coupon auctions and the influx of quarterly corporate tax payments, the rate on overnight repurchase agreements soared by 153 basis points to 3.80%, the largest daily increase since December, based on ICAP pricing.

---------
The would be Treasury trying to tilt the curve, deposit short borrow long. Finance, in general, is rescaling to accommodate the next 2 trillion in debt while rolling over trillions of 'Uncle can do it later' debt. A quick downturn, readjustment, and the 'Uncle do it later' payments to the wealthy will continue.

This is common, our progressive tribe has moles who suddenly rush off and do a deal with the wealthy leaving the rest of us in the dark.

Paine -> Joe... , September 16, 2019 at 02:01 PM
The end time nears
Joe , September 17, 2019 at 06:08 AM
https://thehill.com/blogs/blog-briefing-room/news/461692-cost-for-recent-government-shutdowns-estimated-at-4b

Repo Squeeze Threatens to Spill Over Into Funding Markets
By Stephen Spratt
September 17, 2019, 3:19 AM PDT Updated on September 17, 2019, 5:24 AM PDT
Cross-currency basis, FX forwards, eurodollar futures shift
Sale of $78 billion in Treasuries led to sudden cash squeeze
----------------

Treasury is ahead of finance in paying for the 'Uncle do it later' trick. The short rate has jumped 10 basis points, not much but there was a reading on the overnight market of 7%. This may mean nothing, but more likely means higher consumer credit charges. W have to pay for 'Uncles later'.

[Sep 04, 2019] BlackRock Sees Supply and Demand Driving Municipal Bond Rally [Video]

Sep 04, 2019 | finance.yahoo.com

Sep.04 -- Sean Carney, head of municipal strategy at BlackRock, discusses the municipal bond market posting its best returns since 2014. He speaks with Bloomberg's Taylor Riggs in this week's "Muni Moment" on "Bloomberg Markets."

[Aug 17, 2019] If the bond market is any indication, Donald Trump's escalating belligerence on trade is creating seriously increased risks of recession.

Aug 17, 2019 | economistsview.typepad.com

anne , August 07, 2019 at 09:17 AM

https://www.nytimes.com/2019/08/07/opinion/tariff-tantrums-and-recession-risks.html

August 7, 2019

Tariff Tantrums and Recession Risks
Why trade war scares the market so much
By Paul Krugman

If the bond market is any indication, Donald Trump's escalating belligerence on trade is creating seriously increased risks of recession. But I haven't seen many clear explanations of why that might be so. The problem isn't just, or even mainly, that he really does seem to be a Tariff Man. What's more important is that he's a capricious, unpredictable Tariff Man. And that capriciousness is really bad for business investment.

First things first: why do I emphasize the bond market, not the stock market? Not because bond investors are cooler and more rational than stock investors, although that may be true. No, the point is that expected economic growth has a much clearer effect on bonds than on stocks.

Suppose the market becomes pessimistic about growth over the next year, or even beyond. In that case, it will expect the Fed to respond by cutting short-term interest rates, and these expectations will be reflected in falling long-term rates. That's why the inversion of the yield curve -- the spread between long-term and short-term rates -- is so troubling. In the past, this has always signaled an imminent recession:

[That scary yield curve]

And the market seems in effect to be predicting that it will happen again.

But what about stocks? Lower growth means lower profits, which is bad for stocks. But it also, as we've just seen, means lower interest rates, which are good for stocks. In fact, sometimes bad news is good news: a bad economic number causes stocks to rise, because investors think it will induce the Fed to cut. So stock prices aren't a good indicator of growth expectations.

O.K., preliminaries out of the way. Now let's talk about tariffs and recession.

You often see assertions that protectionism causes recessions -- Smoot-Hawley caused the Great Depression, and all that. But this is far from clear, and often represents a category error.

Yes, Econ 101 says that protectionism hurts the economy. But it does its damage via the supply side, making the world economy less efficient. Recessions, however, are usually caused by inadequate demand, and it's not at all clear that protectionism necessarily has a negative effect on demand.

Put it this way: a global trade war would induce everyone to switch spending away from imports toward domestically produced goods and services. This will reduce everyone's exports, causing job losses in export sectors; but it will simultaneously increase spending on and employment in import-competing industries. It's not at all obvious which way the net effect would go.

To give a concrete example, think about the world economy in the 1950s, before the creation of the Common Market and long before the creation of the World Trade Organization. There was a lot more protectionism and vastly less international trade then than there would be later (the containerization revolution was still decades in the future.) But Western Europe and North America generally had more or less full employment.

So why do Trump's tariff tantrums seem to be having a pronounced negative effect on near-term economic prospects? The answer, I'd submit, is that he isn't just raising tariffs, he's doing so in an unpredictable fashion.

People are often sloppy when they talk about the adverse effects of economic uncertainty, frequently using "uncertainty" to mean "an increased probability of something bad happening." That's not really about uncertainty: it means that average expectations of what's going to happen are worse, so it's a fall in the mean, not a rise in the variance.

But uncertainty properly understood can have serious adverse effects, especially on investment.

Let me offer a hypothetical example. Suppose there are two companies, Cronycorp and Globalshmobal, that would be affected in opposite ways if Trump imposes a new set of tariffs. Cronycorp would like to sell stuff we're currently importing, and would build a new factory to make that stuff if assured that it would be protected by high tariffs. Globalshmobal has already been considering whether to build a new factory, but it relies heavily on imported inputs, and wouldn't build that factory if those imports will face high tariffs.

Suppose Trump went ahead and did the deed, imposing high tariffs and making them permanent. In that case Cronycorp would go ahead, while Globalshmobal would call off its investment. The overall effect on spending would be more or less a wash.

On the other hand, suppose that Trump were to announce that we've reached a trade deal: all tariffs on China are called off, permanently, in return for Beijing's purchase of 100 million memberships at Mar-a-Lago. In that case Cronycorp will cancel its investment plans, but Globalshmobal will go ahead. Again, the overall effect on spending is a wash.

But now introduce a third possibility, in which nobody knows what Trump will do -- probably not even Trump himself, since it will depend on what he sees on Fox News on any given night. In that case both Cronycorp and Globalshmobal will put their investments on hold: Cronycorp because it's not sure that Trump will make good on his tariff threats, Globalshmobal because it's not sure that he won't.

Technically speaking, both companies will see an option value to delaying their investments until the situation is clearer. That option value is basically a cost to investment, and the more unpredictable Trump's policy, the higher that cost. And that's why trade tantrums are exerting a depressing effect on demand.

Furthermore, it's hard to see what can reduce this uncertainty. U.S. trade law gives the president huge discretionary authority to impose tariffs; the law was never designed to deal with a chief executive who has poor impulse control. A couple of years ago many analysts expected Trump to be restrained by his advisers, but he's driven many of the cooler heads out, many of those who remain are idiots, and in any case he's reportedly paying ever less attention to other people's advice.

None of this guarantees a recession. The U.S. economy is huge, there are a lot of other things going on besides trade policy, and other policy areas don't offer as much scope for presidential capriciousness. But now you understand why Trump's tariff tantrums are having such a negative effect.

[Jun 05, 2019] Gentleman Prefer Bonds

Jun 05, 2019 | www.nakedcapitalism.com

djrichard , June 5, 2019 at 6:32 pm

I just assume the 10Y yield is reverting to trend – the trend downward it has had since 1982. The counter trend move upward in 2018 assumed the fiscal spigots were going to be turned on, that the deficit was no longer a dirty word and therefore inflation was no longer a dirty word. It's just taken til now to capitulate that none of that's going to happen.

Seems the Federal Reserve was caught by surprise by this too. Otherwise I don't think they would have raised their Fed Funds rate to where it is. Because now that the 10Y yield has capitulated, it's actually lower than the Fed Funds rate, creating an inverted yield curve. Which is unusual because normally an inverted yield curve is created on purpose by the Federal Reserve – they raise their rate above the 10Y yield rather than wait for the 10Y yield to drop below their rate. Still, every good trader knows an inverted yield curve is bad juju. So what's the Fed Reserve to do? Sit on its hands and let the inverted yield curve work its magic and create a recession?

Seems to me that the Federal Reserve doesn't want the market to crash on Trump's watch. At least not until after the 2020 election. So the Fed Reserve is signaling to the traders, "we feel your pain", they'll lower their rate to bring it back below the 10Y yield. They just need a pretext on why they're doing so, something that doesn't simply smack of the Fed Reserve propping up the stock market. "It's the PMI, it's the employment report, it's trade, it's one of those, yeah that's the ticket."

Anyways, even if the fiscal spigots get turned on, I don't see the 10Y yield reversing trend until spiraling wage inflation is a thing again. I.e. when people aren't worried about their exposure to inflating prices as long as their wages are increasing / tracking with inflation. Making it safe for them to take on debt at increasing interest rates – i.e. generating inflation. And I don't see that happening anytime soon unless there's some kind of JG program.

Until then, the trend line of the 10Y yield is downwards. Giving the Federal Reserve less and less room for their Fed Funds rate to operate in without inverting the yield curve. Seems like that won't be able to continue at some point. Interesting years ahead.

[May 16, 2019] Boom in Dodgy Wall Street Deals Points to Market Trouble Ahead

May 16, 2019 | www.bloomberg.com

The fourth-quarter stock market rout that wiped out $12 trillion in shareholder value and sparked a bout of Christmas Eve panic may have quickly been forgotten by most Americans, but not by the salespeople and financial engineers of Wall Street.

No, the selloff, it would appear, wound up triggering fears that time was running out on the longest bull market in history. And so, when early 2019 delivered a miraculous rebound, they wasted no time in peddling all sorts of deals and arrangements that test the limits of risk tolerance: from health-food makers fast-tracked into public hands to stretched retailers wrung for billions by private equity owners in the debt market.

Junk bonds are flying out the door once again. Deeply indebted companies are borrowing even more to pay equity holders . And while you can't say the megadeal IPOs got rushed to market, two that were held up as heralding a return to IPO glory days have been flops. It's quickly turning Uber and Lyft into poster children for Wall Street eagerness amid an equity-market bounce that has all but banished memories of the worst fourth quarter in a decade.

"At some point, people are going to get burned," said Marshall Front, the chief investment officer at Front Barnett Associates and 56-year Wall Street veteran. "People want to take their companies public because they don't know what the next years hold, and there are people who think we're close to the end of the cycle. If you're an investment banker, what do you do? You keep dancing until the music stops."

[May 14, 2019] 33 Ways to Get Higher Yields by John Waggoner

May 03, 2019 | www.kiplinger.com
For more than a decade, income investors have been plagued by paucity wrapped in misery. The bellwether 10-year Treasury note has doled out an average 2.6% interest since 2008. Although the Federal Reserve has nudged its target interest rate range to 2.25% to 2.50%, it has signaled that it's done raising rates for now. Even worse, the yield on the 10-year T-note briefly sank below the yield on the three-month T-bill -- an unusual inversion that can sometimes herald a recession and lower yields ahead. The takeaway: Locking your money up for longer periods is rarely worth the negligible increase in yield. What could increase your yield these days? Being a little more adventurous when it comes to credit quality. When you're a bond investor, you're also a lender, and borrowers with questionable credit must pay higher yields. Similarly, stocks with above-average yields probably have some skeletons in their balance sheets.

You can ameliorate credit risk -- but not eliminate it -- through diversification. Invest in a mutual fund, say, rather than a single issue. And invest in several different types of high-yielding investments -- for example, investment-grade bonds, preferred stocks and real estate investment trusts -- rather than just one category. Despite such caveats, income investing is not as bad as it was in 2015, when it was hard to milk even a penny's interest out of a money market. Now you can get 3.3% or more from no-risk certificates of deposit at a bank. We'll show you 33 ways to find the best yields for the risk you're willing to take, ranging from 2% all the way up to 12%. Just remember that the higher the payout, the greater the potential for some rough waters.

SEE ALSO: 20 of Wall Street's Newest Dividend Stocks Prices, yields and other data are as of April 19.

Check Out Kiplinger's Latest Online Broker Rankings

Short-term interest rates largely follow the Fed's interest rate policy. Most observers in 2018 thought that would mean higher rates in 2019. But slowing economic growth in the fourth quarter of 2018 and the near-death experience of the bull market in stocks changed that. The Fed's rate-hiking campaign is likely on hold for 2019. Still, money markets are good bets for money you can't stand to lose. Money market funds are mutual funds that invest in very-short-term, interest-bearing securities. They pay out what they earn, less expenses. A bank money market account's yield depends on the Fed's benchmark rate and the bank's need for deposits.

The risks: Money market mutual funds aren't insured, but they have a solid track record. The funds are designed to maintain a $1 share value; only two have allowed their shares to slip below $1 since 1994. The biggest risk with a bank money market deposit account is that your bank won't raise rates quickly when market interest rates rise but will be quick on the draw when rates fall. MMDAs are insured up to $250,000 by the federal government. How to invest: The best MMDA yields are from online banks, which don't have to pay to maintain brick-and-mortar branches. Currently, a top-yielding MMDA is from Investors eAccess , which is run by Investors Bank in New Jersey. The account has no minimum, has an annual percentage yield of 2.5% and allows six withdrawals per month. You'll get a bump from a short-term CD, provided you can keep your money locked up for a year. Merrick Bank , in Springfield, Mo., offers a one-year CD yielding 2.9%, with a $25,000 minimum. The early-withdrawal penalty is 2% of the account balance or seven days' interest, whichever is larger. The top five-year CD yield was recently 3.4%, from First National Bank of America in East Lansing, Mich.

SEE ALSO: 7 Best Ways to Earn More on Your Savings

Your primary concern in a money fund should be how much it charges in expenses. Vanguard Prime Money Market Fund (symbol VMMXX , yield 2.5%) charges an ultralow 0.16% a year and consistently sports above-average yields. Investors in high tax brackets might consider a tax-free money fund, whose interest is free from federal (and some state) income taxes, such as Vanguard Municipal Money Market Fund ( VMSXX 1.6%). To someone paying the maximum 40.8% federal tax rate, which includes the 3.8% net investment income tax, the fund has the equivalent of a 2.7% taxable yield. (To compute a muni's taxable-equivalent yield, subtract your tax bracket from 1, and divide the muni's yield by that. In this case, divide 1.6% by 1 minus 40.8%, or 59.2%). The fund's expense ratio is 0.15%.

SEE ALSO: 12 Bank Stocks That Wall Street Loves the Most //www.dianomi.com/smartads.epl?id=4908

Muni bonds are IOUs issued by states, municipalities and counties. At first glance, muni yields look as exciting as a month in traction. A 10-year, AAA-rated national muni yields 2.0%, on average, compared with 2.6% for a 10-year Treasury note. But the charm of a muni bond isn't its yield; it's that the interest is free from federal taxes -- and, if the bond is issued by the state where you live, from state and local taxes as well. As with tax-free money funds, investors should consider a muni fund's taxable equivalent yield; in the case above, it would be 3.4% for someone paying the top 40.8% federal rate.

Yields get better as you go down in credit quality. An A-rated 10-year muni -- two notches down from AAA but still good -- yields 2.3%, on average, or 3.9% for someone paying the top rate. The risks: Munis are remarkably safe from a credit perspective, even considering that defaults have inched up in recent years. But like all bonds, munis are subject to interest rate risk. If rates rise, your bond's value will drop (and vice versa), because interest rates and bond prices typically move in opposite directions. If you own an individual bond and hold it until it matures, you'll most likely get your full principal and interest. The value of muni funds, however, will vary every day.

SEE ALSO: 9 Municipal Bond Funds for Tax-Free Income

How to invest: Most investors should use a mutual fund or ETF, rather than pick their own individual bonds. Look for funds with rock-bottom expenses, such as Vanguard Limited-Term Tax-Exempt ( VMLTX , 1.8%). The fund charges just 0.17%, and yields the equivalent of 3% for someone paying the highest federal tax rate. It's a short-term fund, which means it's less sensitive to interest rate swings. That means its share price would fall less than longer-term funds' prices if rates were to rise. The average credit quality of the fund's holdings is a solid AA–. Fidelity Intermediate Municipal Income ( FLTMX , 2.0%), a member of the Kiplinger 25 , the list of our favorite no-load funds, gains a bit of yield (a taxable equivalent of 3.4% for those at the top rate) by investing in slightly longer-term bonds. The fund's expense ratio is 0.37%; the largest percentage of assets, 39%, is in AA bonds. Vanguard High-Yield Tax-Exempt Fund Investor Shares ( VWAHX , 2.9%) also charges just 0.17% in fees and yields 4.9% on a taxable-equivalent basis for someone at the highest rate. The extra yield comes from investing in a sampling of riskier bonds. But the fund's average BBB+ credit rating is still pretty good, and its return has beaten 96% of high-yield muni funds over the past 15 years.

SEE ALSO: How Smart a Bond Investor Are You? //www.dianomi.com/smartads.epl?id=4908

You get higher yields from corporate bonds than you do from government bonds because corporations are more likely to default. But that risk is slim. The one-year average default rate for investment-grade bonds (those rated BBB– or higher), is just 0.09%, going back to 1981, says Standard & Poor's. And corporate bonds rated AAA and maturing in 20 or more years recently yielded 3.7%, on average, while 20-year Treasury bonds yielded 2.8% and 30-year T-bonds, 3.0%. You can earn even more with bonds from firms with lightly dinged credit ratings. Bonds rated BBB yield an average 4.0%. The risks: The longer-term bond market moves independently of the Fed and could nudge yields higher (and prices lower) if inflation worries pick up. Though corporate defaults are rare, they can be devastating. Lehman Brothers, the brokerage firm whose bankruptcy helped fuel the Great Recession, once boasted an investment-grade credit rating.

How to invest: Active managers select the bonds at Dodge & Cox Income ( DODIX , 3.5%). This fund has beaten 84% of its peers over the past 15 years, using a value-oriented approach. It holds relatively short-term bonds, giving its portfolio a duration of 4.4 years, which means its share price would fall roughly 4.4% if interest rates rose by one percentage point over 12 months. The fund's average credit quality is A, and it charges 0.42% in expenses. If you prefer to own a sampling of the corporate bond market for a super-low fee, Vanguard Intermediate-Term Corporate Bond Index Fund Admiral Shares ( VICSX , 3.6%) is a good choice. Vanguard recently lowered the minimum investment to $3,000, and the fund charges just 0.07%. Interest-rate risk is high with Vanguard Long-Term Bond ETF ( BLV , $91, 3.8%). The exchange-traded fund has a duration of 15, which means fund shares would fall 15% if interest rates moved up by one percentage point in a year's time. Still, the yield on this long-term bond offering is enticing, and the fund's expense ratio is just 0.07%. SEE ALSO: The 7 Best Bond Funds for Retirement Savers in 2019 //www.dianomi.com/smartads.epl?id=4908

Dividend stocks have one advantage that bonds don't: They can, and often do, raise their payout. For example, Procter & Gamble ( PG , $106, 2.7%), a member of the Kiplinger Dividend 15 , the list of our favorite dividend-paying stocks, raised its dividend from $2.53 a share in 2014 to $2.84 in 2018, a 2.3% annualized increase. Preferred stocks, like bonds, pay a fixed dividend and typically offer higher yields than common stocks. Banks and other financial services firms are the typical issuers, and, like most high-dividend investments, they are sensitive to changes in interest rates. Yields for preferreds are in the 6% range, and a generous crop of new issues offers plenty of choices.

The risks: Dividend stocks are still stocks, and they will fall when the stock market does. Furthermore, Wall Street clobbers companies that cut their dividend. General Electric slashed its dividend to a penny per share on December 7, 2018, and the stock fell 4.7% that day. How to invest: Some slower-growing industries, such as utilities or telecommunications firms, tend to pay above-average dividends. Verizon Communications ( VZ , $58, 4.2%), a Kip 15 dividend stock, is the largest wireless carrier in the U.S. Its investment in Fios fiber-optic cable should pay off in coming years. SPDR Portfolio S&P 500 High Dividend ETF ( SPYD , $39, 4.3%) tracks the highest-yielding stocks in the S&P 500 index. The fund has 80 holdings and is sufficiently diversified to handle a clunker or two. Utility PPL Corp. ( PPL , $31, 5.3%) derives more than 50% of its earnings from the United Kingdom. Worries that the U.K.'s departure from the European Union will pressure PPL's earnings have weighed on the stock's price, boosting its yield. Nevertheless, PPL's U.S. operations provide strong support for the company's generous payout. Ma Bell is a Dividend Aristocrat , meaning that AT&T ( T , $32, 6.4%) has raised its dividend for at least 25 consecutive years (35 straight years, in AT&T's case). The company has plenty of free cash flow to keep raising its payout. SEE ALSO: 9 High-Yield Dividend Stocks That Deserve Your Attention //www.dianomi.com/smartads.epl?id=4908

You can invest in two types of REITs: those that invest in property and those that invest in mortgages. Both types must pass on at least 90% of their revenue to investors, which is partly why they have such excellent yields. Typically, REITs that invest in income-producing real estate have lower yields than those that invest in mortgages. The average property REIT yields 4.1%, compared with the average mortgage REIT yield of 10.6%, according to the National Association of Real Estate Investment Trusts. Why the big difference? Property REITs rack up expenses when they buy and sell income properties or lease them out as landlords. Mortgage REITs either buy mortgages or originate them, using borrowed money or money raised through selling shares as their capital.

The risks: When the economy slows down, so does the real estate market, and most REITs will take a hit in a recession. Mortgage REITs are exceptionally sensitive to interest rate increases, which squeeze their profit margins, and to recessions, which increase the likelihood of loan defaults. REIT dividends are not qualified dividends for tax purposes and are taxed at your ordinary income tax rate. How to invest: Realty Income Corp. ( O , $69, 4.0%) invests in property and rents it to large, dependable corporations, such as Walgreens, 7-Eleven and Fed-Ex. It's a Kiplinger 15 dividend stalwart and pays dividends monthly. Fidelity Real Estate Income ( FRIFX , 4.0%) isn't a REIT, although it invests in them (among other things). The fund puts income first. It has 43% of its assets in bonds, most of them issued by REITs. The fund lost 0.6% in 2018, compared with a 6% loss for other real estate funds. Investors will forgive a lot in exchange for a high yield. In the case of iShares Mortgage Real Estate Capped ETF ( REM , $44, 8.2%), they're choosing to accept a high degree of concentration: The top four holdings account for 44% of the ETF's portfolio. Although concentration can increase risk, in this instance the fund's huge position in mortgage REITs has helped returns. Falling interest rates late in 2018 pushed up mortgage REITs, limiting the fund's losses to just 3% in 2018. Annaly Capital Management ( NLY , $10, 12%) is a REIT that borrows cheaply to buy government-guaranteed mortgage securities. Most of those holdings are rated AA+ or better. Annaly boosts its yield by investing in and originating commercial real estate loans and by making loans to private equity firms. Its 2018 purchase of MTGE Investment, a mortgage REIT that specializes in skilled nursing and senior living facilities, will help diversify the firm's portfolio. Annaly is the largest holding of iShares Mortgage Real Estate Capped ETF.

SEE ALSO: A Dozen Great REITs for Income AND Diversification

If you think interest rates are low in the U.S., note that most developed foreign countries have even lower rates because their economies are growing slowly and inflation is low. The U.K.'s 10-year bond pays just 1.2%; Germany's 10-year bond yields 0.1%; Japan's yields –0.03%. There's no reason to accept those yields for a day, much less a decade. You can, by contrast, find decent yields in some emerging countries. Emerging-markets bonds typically yield roughly four to five percentage points more than comparable U.S. Treasury bonds, which would put yields on some 10-year EM debt at about 7%, says Pramol Dhawan, emerging-markets portfolio manager at bond fund giant Pimco.

The risks: You need a healthy tolerance for risk to invest in emerging-markets bonds. U.S. investors tend to be leery of them because they remember massive defaults and currency devaluations, such as those that occurred in Asia in the late 1990s. But in the wake of such debacles, many emerging countries have learned to manage their debt and their currencies better than in the past. But currency is still a key consideration. When the U.S. dollar rises in value, overseas gains translate into fewer greenbacks. When the dollar falls, however, you'll get a boost in your return. A higher dollar can also put pressure on foreign debt denominated in dollars -- because as the dollar rises, so do interest payments. How to invest: Dodge & Cox Global Bond ( DODLX , 4.5%) can invest anywhere, but lately it has favored U.S. bonds, which were recently 48% of the portfolio. The fund's major international holdings show that it isn't afraid to invest in dicey areas -- it has 11% of its assets in Mexican bonds and 7% in United Kingdom bonds. Fidelity New Markets Income ( FNMIX , 5.6%), a Kip 25 fund, has been run by John Carlson since 1995. That makes him one of the few emerging-markets debt managers who ran a portfolio during the currency-triggered meltdown in 1997-98. He prefers debt denominated in dollars, which accounts for 94% of the portfolio. But he can be adventurous: About 6.5% of the fund's assets are in Turkey, which is currently struggling with a 19% inflation rate and a 14.7% unemployment rate. IShares Emerging Markets High Yield Bond ETF ( EMHY , $46, 6.2%) tracks emerging-markets corporate and government bonds with above-average yields. The holdings are denominated in dollars, so there's less currency risk. But this is not a low-risk holding. It's more than twice as volatile as the U.S. bond market, although still only half as volatile as emerging-markets stocks. SEE ALSO: 39 European Dividend Aristocrats for International Income Growth

Junk bonds -- or high-yield bonds, in Wall Street parlance -- aren't trash to income investors. Such bonds, which are rated BB+ or below, yield, on average, about 4.7 percentage points more than the 10-year T-note, says John Lonski, managing director for Moody's Capital Markets Research Group. What makes a junk bond junky? Typical high-yield bond issuers are companies that have fallen on hard times, or newer companies with problematic balance sheets. In good times, these companies can often make their payments in full and on time and can even see their credit ratings improve. The risks: You're taking an above-average risk that your bond's issuer will default. The median annual default rate for junk bonds since 1984 is 3.8%, according to Lonksi. In a recession, you could take a big hit. In 2008, the average junk bond fund fell 26%, even with reinvested interest.

How to invest: RiverPark Strategic Income ( RSIVX , 4.8%) is a mix of cash and short-term high-yield and investment-grade bonds. Managers choose bonds with a very low duration, to cut interest rate risk, and a relatively low chance of default. Vanguard High-Yield Corporate ( VWEHX , 5.5%), a Kip 25 fund, charges just 0.23% in expenses and invests mainly in the just-below-investment-grade arena, in issues from companies such as Sprint and Univision Communications. SPDR Bloomberg Barclays High Yield Bond ETF ( JNK , $36, 5.8%) charges 0.40% in expenses and tracks the Barclays High Yield Very Liquid index -- meaning that it invests only in easily traded bonds. That's a comfort in a down market because when the junk market turns down, buyers tend to dry up. The fund may lag its peers in a hot market, however, as some of the highest-yielding issues can also be the least liquid. Investors who are bullish on the economy might consider Northern High Yield Fixed Income Fund ( NHFIX , 7.0%). The fund owns a significant slice of the junkier corner of the bond market, with about 23% of its holdings rated below B by Standard & Poor's. These bonds are especially vulnerable to economic downturns but compensate investors willing to take that risk with a generous yield.

SEE ALSO: 12 Dividend Stocks That May Be Income Traps //www.dianomi.com/smartads.epl?id=4908

You might be surprised to learn how much income you can generate from moving hydrocarbons from one place to another. Most MLPs are spin-offs from energy firms and typically operate gas or oil pipelines. MLPs pay out most of their income to investors and don't pay corporate income taxes on that income. Those who buy individual MLPs will receive a K-1 tax form, which spells out the income, losses, deductions and credits that the business earned and your share of each. Most MLP ETFs and mutual funds don't have to issue a K-1; you'll get a 1099 form reporting the income you received from the fund.

The risks: In theory, energy MLPs should be somewhat immune to changes in oil prices; they collect fees on the amount they move, no matter what the price. In practice, when oil gets clobbered, so do MLPs -- as investors learned in 2015, when the price of West Texas intermediate crude fell from $53 a barrel to a low of $35 and MLPs slid an average 35%. Oil prices should be relatively stable this year, and high production levels should mean a good year for pipeline firms. How to invest: Magellan Midstream Partners ( MMP , $62, 6.5%) has a 9,700-mile pipeline system for refined products, such as gasoline, and 2,200 miles of oil pipelines. The MLP has a solid history of raising its payout (called a distribution) and expects a 5% annual increase in 2019. The giant of MLP ETFs, Alerian MLP ETF ( AMLP , $10, 7.2%), boasts $9 billion in assets and delivers a high yield with reasonable expenses of 0.85% a year. Structured as a C corporation, the fund must pay taxes on its income and gains. That can be a drag on yields compared with MLPs that operate under the traditional partnership structure. EQM Midstream Partners ( EQM , $46, 10.1%) is active in the Appalachian Basin and has about 950 miles of interstate pipelines. The firm paid $4.40 in distributions per unit last year and expects to boost that to $4.58 in 2019.

SEE ALSO: 7 High-Yield MLPs to Buy as Oil Prices Climb

Closed-end funds (CEFs) are the forebears of mutual funds and ETFs. A closed-end fund raises money through an initial stock offering and invests that money in stocks, bonds and other types of securities, says John Cole Scott, chief investment officer, Closed-End Fund Advisors. The fund's share price depends on investors' opinion of how its picks will fare. Typically, the fund's share price is less than the current, per-share value of its holdings -- meaning that the fund trades at a discount. In the best outcome, investors will drive the price up to or beyond the market value of the fund's holdings. In the worst case, the fund's discount will steepen.

The risks: Many closed-end income funds borrow to invest, which can amplify their yields but increase their price sensitivity to changes in interest rates. Most CEFs have higher expense ratios than mutual funds or ETFs, too.

How to invest: Ares Dynamic Credit Allocation Fund ( ARDC , $15, 8.5%) invests in a mix of senior bank loans and corporate bonds, almost all of which are rated below investment grade. Borrowed money as a percentage of assets -- an important indicator for closed-end funds known as the leverage ratio -- is 29.6%, which is a tad lower than the average of 33% for closed-end funds overall. The fund's discount to the value of its holdings has been narrowing of late but still stands at 12.1%, compared with 11.2%, on average, for the past three years.

Advent Claymore Convertible Securities and Income Fund ( AVK , $15, 9.4%), run by Guggenheim Investments, specializes in convertible bonds, which can be exchanged for common stock under some conditions. The fund also holds some high-yield bonds. Currently, it's goosing returns with 40% leverage, which means there's above-average risk if rates rise. For intrepid investors, the fund is a bargain, selling at a discount of 10.6%, about average for the past three years.

Clearbridge Energy Midstream Opportunity ( EMO , $9, 9.7%) invests in energy master limited partnerships. It sells at a 12.1% discount, compared with a 6.6% average discount for the past three years. Its leverage ratio is 33% -- about average for similar closed-end funds.

SEE ALSO: The 10 Best Closed-End Funds (CEFs) for 2019

[Mar 31, 2019] The Bond Market Shadow Over Donald Trump's Re-Election

Mar 31, 2019 | medium.com

While the president celebrated the end of the Mueller inquiry this week, the risk of a recession is rising

[Mar 31, 2019] Global Bond-Market Revelers Cast Sober Eye Toward Cycle's End

Mar 31, 2019 | www.bloomberg.com

The global bond market's soaring performance has left investors queasy about the ride ahead.

The Bloomberg Barclays Global Aggregate index has earned 2.3 percent through March 28, its best quarter since mid-2017. But with yields sinking across major sovereign markets, investors now face a dilemma. Buying government bonds at these levels is perilous because economic data may improve, while taking more risk could leave investors nastily exposed to a global downturn.

[Mar 26, 2019] New Fed stance is a life saver for shale

Notable quotes:
"... In the ongoing desire on their part to be transparent they have, until Wed., projected their expectations for increases to short-term rates over the next two years to be 4 increases this year and 4 next year. ..."
"... As of Wednesday, that's all gone. The new dot chart says zero increases this year and at most 1 next year. The 10-year treasury immediately cratered its yield to 2.5something percent. ..."
Mar 26, 2019 | peakoilbarrel.com

Watcher 03/24/2019 at 10:25 am

Re shale financing . . . Folks should go and read financial articles from Wednesday afternoon of this week.

The Fed basically took a sledgehammer to their dot charts. In the ongoing desire on their part to be transparent they have, until Wed., projected their expectations for increases to short-term rates over the next two years to be 4 increases this year and 4 next year.

As of Wednesday, that's all gone. The new dot chart says zero increases this year and at most 1 next year. The 10-year treasury immediately cratered its yield to 2.5something percent. Still falling. Overseas we see Germany tracking, and Japan, and more and more maturities on their yield curves return to negative. Not just real negative. Outright nominal negative.

This is something that Financial media does not talk about. Negative nominal interest rates from major country government bonds. How could they talk about it? It is utterly obvious that this specific reality demonstrates that the entirety of all analyses has no meaning. Their only defense is silence. Shale would prefer that it stay that way.

The Fed also announced an end to balance sheet normalization, which is euphemism for trying to get rid of all of those bonds and MBS that were purchased as part of QE. They are ending their purchases late this year. They dare not continue the move towards normal. I believe that leaves their balance sheet still holding in excess of 3 trillion. That's not normalization, sports fans. And it has been TEN YEARS.They havent been able to get to "normal" in ten years, and as of Wed, they will stop trying.

The Treasury notes are the underlying basis for what shale companies have to pay to borrow money. Thoughts by folks here that the monetary gravy train will shut off shale drilling need rethinking. Bernanke changed everything. Forever.

These Fed actions are indistinguishable from whimsy. Imagining that Powell is Peak Oil cognizant and is focused on shale is a tad extreme, but only a tad.

I recall a Bernanke quote during the crisis that made clear he knew what Peak would mean -- at any price.

[Mar 25, 2019] Global Bond Markets Are Flashing the Same Warning

Mar 25, 2019 | www.bloomberg.com

"Bond markets globally, along with dovish central banks, have been telling us a slowdown is on the way," said Jeffrey Halley, senior market analyst at Oanda Corp. in Singapore. "Some parts of the world will be better equipped than others to handle this. The U.S. can at least cut rates and apply monetary tools, while things could be worse for Europe and Japan, where they cannot."

[Mar 22, 2019] It Feels Eerily Like 2007 - DoubleLine's Gundlach Blasts Fed's Unprecedented Reversal

It does feel like in 2017. But that does not means much as economy changed substantially and probably nor in the right direction... Purchasing power of population probably was eroded despite growth of absolute numbers of customers because of decimation of well paying jobs. Also the market now is dominated by HFT which serves as an amplifier of pre-existing trend and can by itself course a crash or mini crash. Another factor is oil prices.
But the idea of disconnect if a very useful idea and many other analysts predicted negative year for S&P500. I see dot-com bubble No.2 here, not so much subprime mortgages problem of 2008. Subprime exists now in junk bond produced by shale oil players, but it is much less in size.
Mar 22, 2019 | www.zerohedge.com

He said the stock market, for now, "likes the fact that they (the Fed) aren't going to give them any problems."

But things could change quickly and dramatically, he said, with his final comment, the most ominous:

"It feels eerily like '07," he said.

" The stock market is near its high and the economy is noticeably weaker - and yet everyone is saying 'Everything is Great! '"

And just in case you wondered how bad the underlying is - despite equity market's enthusiasm - Citi's Economic Data Change index as its worst level since 2009...

[Mar 13, 2019] Jeff Gundlach Says We Are In A Bear Market, S P Will Take Out December Lows In 2019

Mar 12, 2019 | www.zerohedge.com

Today at 4:15pm EDT, DoubleLine founder Jeff Gundlach is holding his latest live webcast open to investors and casual listeners, titled enticingly 'Highway to Hell', and which we assume will discuss either Brexit, the US-China trade deal, the long-term US debt picture or how this, latest asset bubble finally ends.

Readers can register and follow it live at this address , or clicking on the image below

As usual, we will grab and highlight the most interesting charts from Gundlach's presentation as they come in.

* * *

Gundlach, as usual, starts with one of his favorite charts, the one showing the global central bank balance sheet level juxtaposed to the global market, as the background for the Fed's "180 degree turn" in the stock market's recent rebound, which is understandable since the "S&P was and is in a bear market."

... ... ...

If that wasn't bad enough, Gundlach also said that stocks will take out the December low during the course of 2019 and markets will roll over earlier than they did last year.

Shifting from the market to the economy, Gundlach shows that global economic momentum is getting worse across the globe... Gundlach then highlights the sudden collapse in global trade, which would suggest the world is in a global recession.

And yet at the same time, US economic data, at least in the labor market, has never been stronger as Gundlach shows:

Of course, another big red flag is the collapse in December retail sales, and despite the sharp rebound in the January print as we saw yesterday, Gundlach highlights the sharp drop in the 6 month average and highlights it as another potential recessionary risk factor.

Going back to one of his favorite topics, the relentless growth of US debt, Gundlach shows the following chart of debt by sector. Needless to say, it is troubling, and as Gundlach said.

And tied to that, the following new warning on the US interest expense: "The US interest expense is projected by the CBO to explode higher starting yesterday"

Gundlach then went on a rant against MMT, calling it a "crackpot" theory, which is based on a "completely fallacious argument", and adds that "People who have PhDs in economics actually are buying the complete nonsense of MMT which is used to justify a massive socialist program."

Gundlach also discusses the US trade deficit, which recently soared, saying that "the trade deficit is not shrinking but expanding," and the goods deficit is at "an all-time record", which according to Gundlach may hurt Trump's re-election chances.

Having predicted president Trump early, when everyone else was still mocking him, Gundlach admits that he is "not really sure what's going to happen,'' when it comes to the next election. "If you ran on promising a lesser trade deficit'' and elimination of national debt, and both have "exploded" higher, Gundlach thinks it's hard to say that you're winning.

And speaking of the next president, Gundlach suggests that if the economy falls into recession and Trump gets thrown out, we might get the chance to see how MMT, i.e. helicopter money, really works with the next, socialist, president.

Perhaps this is also why to Gundlach "the next big move for the dollar is lower."

Looking ahead, Gundlach also touches on the future of monetary policy, and once again highlights the discrepancy between the bond market, which expects half a rate cut, and the Fed's dot plot which expects three hikes in 2019-2020.

What happens? To Gundlach, "Fed expectations are likely to show capitulation to the Fed this time...the bond market is having none of the Fed's two dots that they revealed in December." He then adds that the Fed "will absolutely drop the 2019 dot," suggesting it may be dropped to 1/2 a hike.


Let it Go , 41 minutes ago link

Optimism that a new trade deal will occur between America and China has driven stock markets higher even as data continues to emerge confirming economies across the world continue to slow. It seems much of the current market fervor is based on optimism and hope falls into the category of "irrational exuberance" a term that Allen Greenspan has in the past used to describe unbridled enthusiasm. More on the realities being ignored in the following article.

https://Unbridled Market Euphoria Rooted In Optimism And Hope

themarketear , 1 hour ago link

SPX versus US 10 year continues widening. https://themarketear.com/posts/cFmMM1H8UE

GUS100CORRINA , 2 hours ago link

I think with the increasing number of DOOM scenarios issued lately, I may need to go see a therapist.

THE SKY TRULY MAY INDEED BE FALLING!! PROBABLY NOT!!! FEAR promotion is truly running wild!

cowdiddly , 2 hours ago link

Hmm....Kinda strange call there Jeffy Jeff on those higher interest rates.

Especially considering just today where the 1yr yield is higher than...get this, the 2yr, the 3yr, the 5yr aaaaand the 7year bond. Kinda strange setup for rates exploding higher isn't it? Or if you like to think of it as a belly that sumbuck is getting one BIG pot gut.

NOT BUYING IT BUDDY.

ElTerco , 2 hours ago link

When the BBBs start toppling like dominoes, you'll understand better.

https://www.zerohedge.com/news/2018-11-22/64-trillion-question-how-many-bbb-bonds-are-about-be-downgraded

Bam_Man , 3 hours ago link

This guy just REFUSES to give up with his "higher interest rates" schtick.

He was DEAD WRONG with his call for 4.00%-4.50% on the 10-year UST last year.

He simply refuses to acknowledge that short-tern interest rates will be NEGATIVE in the US within the next 18 months.

Keter , 2 hours ago link

Politicians are imbeciles and have no remedies. The US is the least ugly pig of the bunch. The EU needs major structural tax and regulatory reform; open borders with a pervasive social welfare state has proven a recipe for disaster. The US is in similar circumstances, but its tax and regulatory environment are at least rational. It requires massive entitlement and spending reforms with some minor tax hikes on the top end marginal income and capital gains brackets.

[Mar 12, 2019] Jeff Gundlach Says We Are In A Bear Market, S P Will Take Out December Lows In 2019

Mar 12, 2019 | www.zerohedge.com

Today at 4:15pm EDT, DoubleLine founder Jeff Gundlach is holding his latest live webcast open to investors and casual listeners, titled enticingly 'Highway to Hell', and which we assume will discuss either Brexit, the US-China trade deal, the long-term US debt picture or how this, latest asset bubble finally ends.

Readers can register and follow it live at this address , or clicking on the image below

As usual, we will grab and highlight the most interesting charts from Gundlach's presentation as they come in.

* * *

Gundlach, as usual, starts with one of his favorite charts, the one showing the global central bank balance sheet level juxtaposed to the global market, as the background for the Fed's "180 degree turn" in the stock market's recent rebound, which is understandable since the "S&P was and is in a bear market."

[Mar 10, 2019] Bond-Market Inflation Skeptics See Little to Fear in Coming Data by Emily Barrett

Mar 10, 2019 | finance.yahoo.com

"At this point in the cycle, a pickup in inflation will generally lead to corporate margin compression, which is potentially more supportive of maintaining a long duration stance," Bartolini, lead portfolio manager for U.S. core bond strategies, said after the jobs figures. He sees annual CPI remaining around this report's consensus of 1.6 percent -- the slowest since 2016 -- for a while.

Benchmark 10-year yields enter the week at 2.63 percent, close to the lowest level in two months. In the interest-rate options market, traders have been ramping up positions that target lower yields in five- and 10-year notes.

DougDoug,

The Fed is pretty much DONE with rate hikes, as paying the INTEREST on, 22 Trillion in Debt will get,.. UGLIER and UGLIER ! Especially with, all the new,.. Tax and SPEND Demo'Rat Liberals, coming into, Congress ! "We the People", will be,.. TOAST !!

I'm HOLDING, my "Floating Rate" senior secured, Bond CEF's and my Utility and Tech, CEF's, too ! Drawing NICE Dividends,.. Monthly !

The World is NOT ending for, the USA,.. THANKS,.. to Trump !

[Jan 21, 2019] U.S. fund investors put most cash in 'junk' since late 2016 by Trevor Hunnicutt

Jan 17, 2019 | www.nasdaq.com
NEW YORK, Jan 17 (Reuters) - U.S. fund investors charged into high-yield "junk" bonds during the latest week, pouring in $3.3 billion, the most cash flowing into that market since late 2016, Lipper said on Thursday, boosted by soothing words by Federal Reserve Chairman Jerome Powell.

Underscoring investors' appetite for some risk-taking, investors pulled $15 billion net cash from U.S.-based money market funds, according to the Refinitiv research service. For their part, U.S.-based equity mutual funds - which exclude exchange-traded funds - posted inflows of $4.8 billion, Lipper data showed.

[Jan 20, 2019] Cohan has been on a rant for years about how high risk corporate bonds are going to default in large numbers. Never happened

Jan 20, 2019 | economistsview.typepad.com

anne , January 17, 2019 at 09:35 AM

http://cepr.net/blogs/beat-the-press/does-william-cohan-s-nyt-tirade-against-low-interest-rates-make-any-sense

January 17, 2019

Does William Cohan's New York Times Tirade Against Low Interest Rates Make Any Sense?
By Dean Baker

It doesn't as far as I can tell. Cohan has been on a rant * for years about how high risk corporate bonds are going to default in large numbers and then ... something. It's not clear why most of us should care if some greedy investors get burned as a result of not properly evaluating the risk of corporate bonds. No, there is not a plausible story of a chain of defaults leading to a collapse of the financial system.

But even the basic proposition is largely incoherent. Cohan is upset that the Federal Reserve has maintained relatively low, by historical standards,interest rates through the recovery. He seems to want the Fed to raise interest rates. But then he tells readers:

"After the fifth straight quarterly rate increase, Mr. Trump, worried that the hikes might slow growth or even tip the economy into recession, complained that Mr. Powell would 'turn me into Hoover.' On January 3, the president of the Federal Reserve Bank of Dallas said the Fed should assess the economic outlook before raising short-term interest rates again, a signal that the Fed has hit pause on the rate hikes. Even Mr. Powell has signaled he may be turning more cautious."

It's not clear whether Cohan is disagreeing with the assessment of the impact of higher interest rates, not only by Donald Trump, but also the president of the Dallas Fed, Jerome Powell, and dozens of other economists.

Higher interest rates will slow growth and keep people from getting jobs. The people who would be excluded from jobs are disproportionately African American, Hispanic, and other disadvantaged groups in the labor market. Higher unemployment will also reduce the bargaining power of tens of millions of workers who are currently in a situation to secure real wage increases for the first time since the recession in 2001.

If Cohan had some story of how bad things would happen to the economy if the Fed doesn't raise rates then perhaps it would be worth the harm done by raising rates, but investors losing money on corporate bonds doesn't fit the bill.

* https://www.nytimes.com/2019/01/17/opinion/shutdown-recession.html

[Jan 13, 2019] Goldman Sachs has rolled back its call for much higher rates in U.S. government bonds in the U.S., though it still expects a gradual climb from the current muted levels in the Treasury market

Jan 13, 2019 | economistsview.typepad.com

im1dc , January 08, 2019 at 08:44 AM

Goldman's Bond Desk just called for a slower and lower US GDP in 2019

https://www.marketwatch.com/story/goldman-cuts-10-year-treasury-yield-target-for-2019-to-3-2019-01-08

"Goldman cuts 10-year Treasury yield target for 2019 to 3%"

By Sunny Oh...Jan 8, 2019...10:45 a.m. ET

"Goldman Sachs has rolled back its call for much higher rates in U.S. government bonds in the U.S., though it still expects a gradual climb from the current muted levels in the Treasury market.

In a Tuesday note, Goldman Sachs said they expect the 10-year yield TMUBMUSD10Y, +0.06% to hit 3% by year-end, a 50 basis point cut from their forecast of 3.5%. Since last week, the benchmark bond yield has steadily risen to 2.710% Tuesday, after hitting an 11-month low of 2.553% last Thursday, according to Tradeweb data.

Bond prices fall as yields climb."...

[Jan 13, 2019] Goldman Sachs Says Markets Indicate a 50% Chance of a Recession

Notable quotes:
"... However, despite the signs, Goldman Sachs assumes the indicators are wrong and that "recession risk remains fairly low, in the neighborhood of 15% over the next year." The bank has predicted that the S&P 500 will finish 2019 at 3,000, up from the current value just below 2,600. ..."
Jan 13, 2019 | finance.yahoo.com

Confidence in continued economic growth has been waning. A huge majority of chief financial officers around the world say a recession will happen by the end of 2020. Most voters think one will hit by the end of this year.

Now the Goldman Sachs economic research team says that the market shows a roughly 50% chance of a recession over the next year, according to Axios.

Goldman Sachs looked at two different measures: the yield curve slope and credit spreads. The former refers to a graph of government bond interest rates versus the years attaining maturity requires. In a growing economy, interest rates are higher the longer the investment because investors have confidence in the future. A frequent sign of a recession is the inversion of the slope, when investors are uncertain about the future, so are less willing to bet on it.

Credit spreads compare the interest paid by government bonds, which are considered the safest. Corporate bonds, which are riskier, of the same maturity have to offer higher interest rates. As a recession approaches, credit spreads tend to expand, as investors are more worried about companies defaulting on their debt.

However, despite the signs, Goldman Sachs assumes the indicators are wrong and that "recession risk remains fairly low, in the neighborhood of 15% over the next year." The bank has predicted that the S&P 500 will finish 2019 at 3,000, up from the current value just below 2,600.

[Jan 12, 2019] Gundlach Warns U.S. Economy Is Floating on 'an Ocean of Debt'

Jan 12, 2019 | finance.yahoo.com

(Bloomberg) -- Jeffrey Gundlach said yet again that the U.S. economy is gorging on debt.

Echoing many of the themes from his annual "Just Markets" webcast on Tuesday, Gundlach took part in a round-table of 10 of Wall Street's smartest investors for Barron's. He highlighted the dangers especially posed by the U.S. corporate bond market.

Prolific sales of junk bonds and significant growth in investment grade corporate debt, coupled with the Federal Reserve weaning the market off quantitative easing, have resulted in what the DoubleLine Capital LP boss called "an ocean of debt."

The investment manager countered President Donald Trump's claim that he's presiding over the strongest economy ever. The growth is debt-based, he said.

Gundlach's forecast for real GDP expansion this year is just 0.5 percent. Citing numbers spinning out of the USDebtClock.org website, he pointed out that the U.S.'s unfunded liabilities are $122 trillion -- or six times GDP.

"I'm not looking for a terrible economy, but an artificially strong one, due to stimulus spending," Gundlach told the panel. "We have floated incremental debt when we should be doing the opposite if the economy is so strong."

Stock Bear

Gundlach is coming off another year in which his Total Return Bond Fund outperformed its fixed-income peers. It returned 1.8 percent in 2018, the best performance among the 10 largest actively managed U.S. bond funds, according to data compiled by Bloomberg.

Gundlach expects further declines in the U.S. stock market, which recently have steadied after reeling for most of December since the Great Depression. Equities will be weak early in the year and strengthen later in 2019, effectively a reversal of what happened last year, he said.

"So now we are in a bear market, which isn't defined by me as stocks being down 20 percent. A bear market is determined by the way stocks are acting," he said.

Rupal Bhansali, chief investment officer of International & Global Equities at Ariel Investments, picked up on Gundlach's debt theme in the Barron's cover story. Citing General Electric's woes, she urged investors to focus more on balance-sheet risk rather than whether a company could beat or miss earnings. Companies with net cash are worth looking at, she said.

To contact the reporters on this story: James Ludden in New York at jludden@bloomberg.net;Hailey Waller in New York at hwaller@bloomberg.net

To contact the editors responsible for this story: Matthew G. Miller at mmiller144@bloomberg.net, Ros Krasny

For more articles like this, please visit us at bloomberg.com

[Jan 12, 2019] The Biggest Emerging Market Debt Problem Is in America by Carmen M. Reinhart

Notable quotes:
"... In what is still a low-interest-rate environment globally, the perpetual search for yield has found a comparatively new and attractive source in the guise of collateralized loan obligations (CLOs) within the USEM world. According to the Securities Industry and Financial Markets Association, new issues of "conventional" high-yield corporate bonds peaked in 2017 ..."
"... These CLOs share many similarities with the mortgage-backed securities that set the stage for the subprime crisis a decade ago. During that boom, banks bundled together loans and shed risk from their balance sheets. Over time, this fueled a surge in low-quality lending, as banks did not have to live with the consequences. ..."
"... A world economy geared toward increasing the supply of financial assets has hooked us into a global game of waiting for the next bubble to emerge somewhere. ..."
Dec 20, 2018 | www.project-syndicate.org

A decade after the subprime bubble burst, a new one seems to be taking its place in the market for corporate collateralized loan obligations. A world economy geared toward increasing the supply of financial assets has hooked market participants and policymakers alike into a global game of Whac-A-Mole.

A recurrent topic in the financial press for much of 2018 has been the rising risks in the emerging market (EM) asset class. Emerging economies are, of course, a very diverse group. But the yields on their sovereign bonds have climbed markedly, as capital inflows to these markets have dwindled amid a general perception of deteriorating conditions . 1

Historically, there has been a tight positive relationship between high-yield US corporate debt instruments and high-yield EM sovereigns. In effect, high-yield US corporate debt is the emerging market that exists within the US economy (let's call it USEM debt). In the course of this year, however, their paths have diverged (see Figure 1). Notably, US corporate yields have failed to rise in tandem with their EM counterparts.

What's driving this divergence? Are financial markets overestimating the risks in EM fixed income (EM yields are "too high")? Or are they underestimating risks in lower-grade US corporates (USEM yields are too low)?

Taking together the current trends and cycles in global factors (US interest rates, the US dollar's strength, and world commodity prices) plus a variety of adverse country-specific economic and political developments that have recently plagued some of the larger EMs, I am inclined to the second interpretation.

In what is still a low-interest-rate environment globally, the perpetual search for yield has found a comparatively new and attractive source in the guise of collateralized loan obligations (CLOs) within the USEM world. According to the Securities Industry and Financial Markets Association, new issues of "conventional" high-yield corporate bonds peaked in 2017 and are off significantly this year (about 35% through November). New issuance activity has shifted to the CLO market, where the amounts outstanding have soared, hitting new peaks almost daily. The S&P/LSTA US Leveraged Loan 100 Index shows an increase of about 70% in early December from its 2012 lows (see Figure 2), with issuance hitting record highs in 2018. In the language of emerging markets, the USEM is attracting large capital inflows.

These CLOs share many similarities with the mortgage-backed securities that set the stage for the subprime crisis a decade ago. During that boom, banks bundled together loans and shed risk from their balance sheets. Over time, this fueled a surge in low-quality lending, as banks did not have to live with the consequences.

Likewise, for those procuring corporate borrowers and bundling corporate CLOs, volume is its own reward, even if this means lowering standards for borrowers' creditworthiness. The share of "Weakest Links" – corporates rated B- or lower (with a negative outlook) – in overall activity has risen markedly since 2013-2015. Furthermore, not only are the newer issues coming from a lower-quality borrower, the covenants on these instruments – provisions designed to ensure compliance with their terms and thus minimize default risk – have also become lax. Covenant-lite issues are on the rise and now account for about 80% of the outstanding volume.

As was the case during the heyday of mortgage-backed securities, there is great investor demand for this debt, reminiscent of the "capital inflow problem" or the " bonanza " phase of the capital flow cycle. A recurring pattern across time and place is that the seeds of financial crises are sown during good times (when bad loans are made). These are good times, as the US economy is at or near full employment.

The record shows that capital-inflow surges often end badly. Any number of factors can shift the cycle from boom to bust. In the case of corporates, the odds of default rise with mounting debt levels, erosion in the value of collateral (for example, oil prices in the case of the US shale industry), and falling equity prices. All three sources of default risk are now salient, and, lacking credible guarantees, the CLO market (like many others) is vulnerable to runs, because the main players are lightly regulated shadow banking institutions.

And then there are the old and well-known concerns about shadow banking in general, which stress both its growing importance and the opaqueness of its links with other parts of the financial sector. Of course, we also hear that a virtue of financing debt through capital markets rather than banks is that the shock of an abrupt re-pricing or write-off will not impair the credit channel to the real economy to the degree that it did in 2008-2009. Moreover, compared to mortgage-backed securities (and the housing market in general), the scale of household balance sheets' exposure to the corporate-debt market is a different order of magnitude.

A decade after the subprime bubble burst, a new one seems to be taking its place – a phenomenon aptly characterized by Ricardo Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas as " Financial 'Whac-a-Mole .'" A world economy geared toward increasing the supply of financial assets has hooked us into a global game of waiting for the next bubble to emerge somewhere.

Like the synchronous boom in residential housing prior to 2007 across several advanced markets, CLOs have also gained in popularity in Europe. Higher investor appetite for European CLOs has predictably led to a surge in issuance (up almost 40% in 2018). Japanese banks, desperately seeking higher yields, have swelled the ranks of buyers. The networks for financial contagion, should things turn ugly, are already in place. 1

Carmen M. Reinhart is Professor of the International Financial System at Harvard University's Kennedy School of Government. Douglas Leyendecker Dec 23, 2018 The most important questions isn't when or why this bubble will burst but how we got here in the first place. It all starts with BAD economic and social policies. Now we require more and more "money" to keep the wheels on. Bubble to bubble...this is where we are in the developed world today. When the reboot finally hits there won't be any cryptocurrency because there won't be any internet. This is what happens in a fiat currency system. Read More
  • Paul Daley Dec 23, 2018 Good article. But -- do I dare say it -- this time may be different. As Reinhart points out, CLOs do not have heavily engaged public institutions, as was the case with mortgage backed securities and sovereign debt. A collapse in CLO prices would fall largely on private shoulders. And, after their first experiments with QE, central banks should have a better grip on the risks and consequences of asset price support programs in encouraging and sustaining asset price bubbles, and be prepared this time to employ income support measures to sustain real economic activity, if necessary.
  • nigel southway Dec 22, 2018 The best course of action is stop the easy movement of capital across borders that way it stops the phoney wealth transactions caused by a foolish focus on the global economy start more national centered wealth funds Jacob Alhadeff Dec 20, 2018 I had no idea any of this was going on. This was very informative, but I don't know yet exactly what to do with this information. I'm cynical about our ability to avoid such bubbles, but we can prepare for them. In terms of how low/middle income Americans can prepare what would anyone suggest? Also, I'm not looking for advice on investing decisions Read less

    [Jan 03, 2019] Is Warren Buffett Sending a Signal About the Bond Market

    Notable quotes:
    "... The 30-year U.S. yield fell to 2.91 percent on Thursday, the lowest since January 2018 ..."
    "... The other interpretation is that the company chose to refinance with long-term fixed-rate debt because it sees the big drop in 30-year yields as unsustainable ..."
    Jan 03, 2019 | finance.yahoo.com

    Berkshire, with the third-highest credit rating from both Moody's Investors Service and S&P Global Ratings, is expected to price the debt on Thursday with a spread of 150 to 155 basis points above benchmark Treasuries. The 30-year U.S. yield fell to 2.91 percent on Thursday, the lowest since January 2018.

    The other interpretation is that the company chose to refinance with long-term fixed-rate debt because it sees the big drop in 30-year yields as unsustainable. After all, if a borrower expects interest rates to rise in the future, it would prefer to lock in a fixed rate now rather than face higher payments down the road.

    [Dec 05, 2018] Contra Tim Duy, The Lack of Federal Reserve Maneuvering Room Is Very Worrisome...

    Dec 05, 2018 | www.bradford-delong.com

    Contra Tim Duy, The Lack of Federal Reserve Maneuvering Room Is Very Worrisome...

    This , by the every sharp Tim Duy, strikes me as simply wrong: Contrary to what he says, the Fed has room to combat the next crisis only if the next crisis is not really a crisis, but only a small liquidity hiccup in the financial markets. Anything bigger, and the Federal Reserve will be helpless, and hapless.

    Look at the track of the interest rate the Federal Reserve controls -- the short safe nominal interest rate:

    Month Treasury Bill Secondary Market Rate (FRED St Louis Fed)

    In the past third of a century, by my count the Federal Reserve has decided six times that it needs to reduce interest rates in order to raise asset prices and try to lift contractionary pressure off of the economy -- that is, once every five and a half years. Call these: 1985, 1987, 1991, 1998, 2000, and 2007.

    Continue reading "Contra Tim Duy, The Lack of Federal Reserve Maneuvering Room Is Very Worrisome..." "

    [Nov 19, 2018] New AI Virtual Assistant Gives Traders An Edge

    Nov 19, 2018 | safehaven.com

    Three things are certain: death, taxes, and that the already thin gap between human trader and algo is narrowing ever further.

    AllianceBernstein's new virtual assistant can now suggest to fixed income portfolio managers what the best bonds may be to purchase using parameters such as pricing, liquidity and risk, according to Bloomberg . The machine has numerous advantages to humans: "she" can scan millions of data points and identify potential trades in seconds. Plus she never needs to take a cigarette or a bathroom break.

    The new virtual assistant, dubbed Skynet 2.0 "Abbie 2.0", specializes in identifying bonds that human portfolio managers have missed. She can also help spot human errors and communicate with similar bots like herself at other firms to arrange trades, making humans redundant. This is the second iteration of AllianceBernstein's electronic assistant which debuted in January of this year, but could only build orders for bonds following precise input from humans.

    Sourcing bonds that are easy to trade is done by Abbie 2.0 reaching out to another AB system called ALFA, which stands for Automated Liquidity Filtering and Analytics. The AFLA system gathers bids and asks from dealers and electronic trading venues to work out the best possible trades.

    For now, humans are still required: Jeff Skoglund, chief operating officer of fixed income at AB told Bloomberg that "humans and machines will need to work closer than ever to find liquidity, trade faster and handle risks. Our hope is that we grow and use people in ways that are more efficient and better leverage their skills."

    What he really means is that his hope is to fire as many expensive traders and PMs as possible to fatten the company's profit margins. Which is why the virtual assistant already helps support a majority, or more than 60 percent of AllianceBernstein's fixed income trades. The "upgrades" that are coming for the new assistant will help it include high-yielding investment grade bonds, before expanding to other more complex markets in the coming months. AB says that they will still rely on humans to make the final decisions on trades. For now. Related: IBM Launchs Global Payments System With New Stablecoin

    While the original version of the assistant had to be told how much a portfolio manager wanted of a specific bond, the new version now mines data pools to be proactive, making sizing suggestions to portfolio managers. Among other things, the assistant looks at ratings of companies, capital structure and macro data such as social and geopolitical risks.

    This is just another step in the industry becoming machine oriented in order to help cut costs, save time and avoid errors, especially in relatively illiquid bond markets. Liquidity could become even more of a factor if the economy slips into recession over the next couple of years.

    Electronic trading in general is becoming more pronounced in fixed income as banks act more like exchanges instead of holding bonds on their balance sheet. All the while, regulations have encouraged the shifting of bond trading to exchanges. More than 80 percent of investors in high-grade bonds use electronic platforms, accounting for 20 percent of volume, according to Bloomberg.

    Skoglund concluded, "We expect to be faster to market and capture opportunities we otherwise would not have caught by using this system. There's a liquidity problem right now that could become significantly more challenging in a risk-off environment."

    By Zerohedge

    [Nov 15, 2018] Our new Vanguard Global Credit Bond Fund puts our experts to work for you

    Notable quotes:
    "... An actively managed bond fund that focuses on U.S., nongovernment exposure. ..."
    Nov 15, 2018 | investornews.vanguard

    Fund news

    link to comment section

    We're introducing a new active bond fund that allows you to take advantage of Vanguard's extensive global investment management capabilities and expertise. Vanguard Global Credit Bond Fund ( Admiral™ Shares: VGCAX ; Investor Shares: VGCIX ) gives you unique access to the global credit market, which includes both U.S. and international investments. The fund will be managed by the Vanguard Fixed Income Group, which has more than 35 years of experience managing active bond portfolios.

    Key potential benefits of the fund include:

    Which bond fund is right for you?

    We've recently expanded our bond offerings to provide more options for diversification and income. While more choices can help you build a better portfolio, they can also make it tricky to decide which funds are right for you.

    Here's a chart that shows, at a glance, the main differences between 3 similar bond funds:

    Global or U.S.-only Investment type Bond issuer types It might be right for you if you want:
    Vanguard Global Credit Bond Fund Global Actively managed mutual fund Investment-grade corporate and government-related entities An actively managed bond fund that provides global exposure to nongovernment bonds.
    Vanguard Total World Bond ETF Global Index ETF (exchange-traded fund) Broad investment-grade market coverage of Treasuries and government-related, securitized, and corporate debt An all-in-one, low-cost global bond ETF.
    Vanguard Intermediate-Term Investment-Grade Fund U.S. Actively managed mutual fund Investment-grade corporate and government-related entities An actively managed bond fund that focuses on U.S., nongovernment exposure.
    Making the most of Vanguard's management resources

    Vanguard Global Credit Bond Fund will complement Vanguard's existing suite of 25 actively managed fixed income funds, not including Vanguard's actively managed money market funds.

    Vanguard launched its first internally managed active fixed income fund in 1982 and the world's first bond index fund in 1986. Vanguard is one of the world's largest fixed income fund managers with approximately $1.3 trillion in assets under management.** Over $600 billion of those assets are in actively managed fixed income funds (including money markets).

    The Vanguard Fixed Income Group has more than 175 global fixed income professionals, 90 of whom are part of the active taxable fixed income team, including over 30 global credit research analysts around the world.

    Vanguard Global Credit Bond Fund is the first Vanguard fund of its kind. This globally diversified, actively managed bond product capitalizes on Vanguard's extensive global investment capabilities and global credit expertise.

    *Source: Morningstar, Inc., as of September 30, 2018.
    **Data as of September 30, 2018.

    [Oct 12, 2018] Jim Rickards The Bull Market In Bonds Still Has Legs

    Oct 12, 2018 | www.zerohedge.com

    Yields to maturity on 10-year U.S. Treasury notes are now at their highest level since April 2011. The current yield to maturity is 3.21%, a significant rise from 1.387% which the market touched on July 7, 2016 in the immediate aftermath of Brexit and a flight to quality in U.S. dollars and U.S. Treasury notes.

    The Treasury market is volatile with lots of rallies and reversals, but the overall trend since 2016 has been higher yields and lower prices.

    The consensus of opinion is that the bull market that began in 1981 is finally over and a new bear market with higher yields and losses for bondholders has begun. Everyone from bond guru Bill Gross to bond king Jeff Gundlach is warning that the bear has finally arrived.

    I disagree.

    It's true that bond yields have backed up sharply and prices have come down in recent months. Yet, we've seen this movie before. Yields went from 2.4% to 3.6% between October 2010 and February 2011 before falling to 1.5% in June 2012.

    Yields also rose from 1.67% in April 2013 to 3.0% in December 2013 before falling again to 1.67% by January 2015. In short, numerous bond market routs have been followed by major bond market rallies in the past ten years.

    To paraphrase Mark Twain, reports of the death of the bond market rally have been "greatly exaggerated." The bull market still has legs. The key is to spot the inflection points in each bear move and buy the bonds in time to reap huge gains in the next rally.

    That's where the market is now, at an inflection point. Investors who ignore the bear market mantra and buy bonds at these levels stand to make enormous gains in the coming rally.

    The opportunity is illustrated in the chart below. This chart shows relative long and short positions in ten major trading instruments based on futures trading data. The 10-year U.S. Treasury note is listed as "10Y US."

    As is shown, this is the most extreme short position in markets today. It is even more short than gold and soybeans, which are heavily out of favor. It takes a brave investor to go long when the rest of the market is so heavily short.

    [Jul 09, 2018] As the Yield Curve Flattens, Threatens to Invert, the Fed Discards it as Recession Indicator

    From comments "Tough to ween an entire community off its generational addiction to financial heroin"
    Notable quotes:
    "... The Feds behaviour over the last decade has demonstrated institutional capture in its' purest form. Everything for the financial sector and nothing for the "Main Street" sector. ..."
    Jul 09, 2018 | www.nakedcapitalism.com

    So this has become a popular recession indicator that has cropped up a lot in the discussions of various Fed governors since last year. Today, the two-year yield closed at 2.55% and the 10-year yield at 2.84%. The spread between them was just 29 basis points, the lowest since before the Financial Crisis.

    The chart below shows the yield curves on December 14, 2016, when the Fed got serious about raising rates (black line); and today (red line). Note how the red line has "flattened" between the two-year and the 10-year markers, and how the spread has narrowed to just 29 basis points:

    ... ... ...

    So just in the nick of time, with the spread between the two-year and the 10-year yields approaching zero, the Fed begins the process of throwing out that indicator and replacing it with a new indicator it came up with that doesn't suffer from these distortions.

    And I have to agree that the Fed's gyrations over the past 10 years have distorted the markets, have muddled the calculations, have surgically removed "fundamentals" as a consideration for the markets, and have brainwashed the markets into believing that the Fed will always bail them out at the smallest dip. And the yield curve, reflecting all those distortions to some extent, might have become worthless as an indicator of anything other than those distortions.


    ambrit , July 7, 2018 at 5:22 am

    Isn't the Fed theoretically independent? Why then should they take cognizance of what the President, or, for that matter, any politician wants? The Feds behaviour over the last decade has demonstrated institutional capture in its' purest form. Everything for the financial sector and nothing for the "Main Street" sector.

    The Fed is carrying out a grand experiment. Do these 'Quaint Quant Quotients' have a measurable relationship to the 'Real World' or do they not? My criteria for how well this 'realignment' amongst the 'Financial Stars' works out is going to be the severity of the next "Recession."

    Skip Intro , July 8, 2018 at 1:32 am

    To be fair, Obama himself was provided by Citigroup.

    jrs , July 8, 2018 at 1:53 am

    I guess a possibility is the Fed let's the economy get really bad (not that we haven't seen that recently even but it could be worse) in order to punish Trump. Yea but people are going to suffer and die in the next recession, they not only already do in recessions anyway, but there is literally no economic slack in most people's lives anymore. Yea this whole economic system is screwy as can be, but if they produce mass unemployment we need a guaranteed income at that point just to keep people from dying.

    skippy , July 8, 2018 at 2:33 am

    Please jrs read about the broader ideological opinions of those that forwarded a UBI or GI, same mob wrt the Chicago plan.

    Jim Haygood , July 7, 2018 at 9:08 am

    "(Don't Fear) the Yield Curve" is the title of the staff paper, riffing on "(Don't Fear) the Reaper" by Blue Oyster Cult which evidently still exerts a powerful sway on the Fed's balding eggheads 42 years on.

    What distinguishes this model is its use of an interest rate dear to the hearts of economists but absent from bond market quotes: the forward rate . Or as the Blue Oyster Cult fanboys explain:

    The current level of the forward rate 6 quarters ahead is inferred from the yields to maturity on Treasury notes maturing 6 quarters from now and 7 quarters from now. In particular, it is the rate that would have to be earned on a 3-month Treasury bill purchased six quarters from now that would equate the results from two investment strategies: simply investing in a Treasury note that matures 7 quarters from now versus investing in a Treasury note that matures 6 quarters from now and reinvesting proceeds in that 3-month Treasury bill.

    Not a big deal to calculate -- so voracious is Big Gov's appetite for borrowing as we approach the promised land of "trillion dollar deficits forever" that 2-year T-notes are auctioned monthly, meaning there's always a handy pair of notes with maturities 18 and 21 months ahead whose yields can be used to derive the 6q7q forward rate for the long end of the spread.

    The joke is likely to be on the Fed, though. As their chart shows, the 0-6q forward spread is volatile, and could well lurch down to meet the 2y10y spread any time. Moreover, despite the June 28th date on the staff paper, the chart is stale, showing a 0.5%-plus value for the 2y10y spread which last existed several months ago.

    In other words, prepare to hoist the Fedsters on their own forward-rate petard.

    And they ran to us
    Then they started to fly
    They looked backward and said goodbye
    They had become like we are

    -- (Don't Fear) the Reaper

    Jim Haygood , July 7, 2018 at 9:38 am

    From the WSJ's Treasury page, the yield on a note due 12/31/2019 is 2.470%, while the 3/31/2020 note yields 2.511%. Yield on the current 3mo T-bill is 1.951%.

    http://wsj.com/mdc/public/page/mdc_bonds.html?mod=topnav_2_3020

    Doing a little exponential maff, we can derive a 6q7q forward rate of 2.76%, for a spread of 0.81% over the current 3mo T-bill. This compares to a 2y10y spread of only 0.28%.

    So according to the Fed's shiny new moved goalpost, there's room for three more rate hikes, whereas the old goalpost would've allowed just one.

    Carry on, lads

    Synoia , July 7, 2018 at 1:31 pm

    If the policy is not supported by the understanding of the evidence, change the understanding.

    Seems very reasonable. For witchcraft.

    See -- she floats = A Witch! Kill her.
    See– she sinks = Not a witch. Dies.

    Outcome -- as desired.

    aka: Tell the Boss what he wants to hear.

    Jim Haygood , July 7, 2018 at 2:14 pm

    We're gonna hold the Boss responsible with our own data. Here are the traditional 2y10y and new 6q7q fwd yield curves for 2018:

    https://ibb.co/iNtXNT

    First one to hit the x-axis is the crack of doom.

    Note that the two curves almost coincided on Feb 9th, and could do again one day soon. :-)

    Chauncey Gardiner , July 7, 2018 at 3:04 pm

    It is well within the Fed's capabilities to sell Treasury and Agency bonds with maturities concentrated in the long end of the yield curve. Were the Fed to do that, particularly against a backdrop of deep corporate tax cuts and the resultant increased supply of Treasury debt, what is likely to happen to mortgage rates, real estate and collateral values?

    I suspect the people complaining loudest about this emergent Fed policy are those who have benefited most from both longtime negative real interest rates and a positively sloping yield curve. Those were lucrative monetary policy features for them over the past nine years.

    Jim Haygood , July 7, 2018 at 4:13 pm

    One more note in the Fed's chart, the new 6q7q fwd spread dips below zero during the Russia/LTCM crisis in 1998, whereas the 2y10y spread didn't.

    So it's not quite as reliable. When both go negative, it's " game ovahhhhh "

    bruce wilder , July 7, 2018 at 10:49 am

    I have long been annoyed by the way Fed staff / hobbyists blithely treat the yield curve as just another "indicator", as if they were forecasting the weather from changes in barometric pressure or temperature.

    Seeking a forecasting crystal in a calculated "forward" rate, supposedly mirroring "expectations" of (a representative?) investors reflects a world view that imagines economic actors confidently act on expectations that they believe will be fulfilled. It is not taking uncertainty seriously.

    The yield curve has worked not thru magic, but because it reflects a fundamental mechanism of sorts that drives credit and the transformation of maturities: that some key institutions borrow short and lend long, to coin a phrase, in the creation of credit that typically drives the expansion of business activity. Inverting the yield curve forces the contraction of credit by institutions that hedge a borrow short, lend long strategy with Treasuries.

    It probably is not lost on those with a memory of past cycles that speculation about whether things will be different this time with regard to the yield curve qua indicator emerges regularly from Fed hobbyshops near the end of very long expansions. If memory serves the Cleveland Fed research shop circulated such speculation in the 2005-7 period.

    Blue Pilgrim , July 7, 2018 at 12:12 pm

    Admittedly, I haven't had my coffee yet, but I think I may have reached a conclusion: a country whose economic system can't be understood in an hour is doomed to failure.

    [Dec 27, 2015] This Junk Bond Derivative Index Is Saying Something Scary About Defaults

    Bloomberg Business

    Citigroup analysts led by Anindya Basu point out that spreads on the CDX HY, as the index is known, are currently pricing in an expected loss of 21.2 percent, which translates into something like 22 defaults over the next five years if one assumes zero recovery for investors. That is a pretty big number once you consider that a total of 41 CDX HY constituents have defaulted since the index really began trading in 2005, equating to about 3.72 defaults per year. A big chunk of those defaults (17) occurred in 2009 in the aftermath of the financial crisis.

    What to make of it all? Actual recoveries during corporate default cycles tend to be higher than the worst-case scenario of zero percent. In fact, they average somewhere in the 26 percent range, which would imply 29 defaults over the next five years instead of 41.

    So what? you might say. The CDX HY includes but one default cycle, and those types of analyses tend to underestimate the peril of tail risk scenarios (hello, subprime crisis). Citi has an answer for that, too. Using spreads from the cash bond market going back to 1991, they forecast the default rate over the next 12 months to be something more like 5 percent to 5.5 percent. (For comparison, the rating agency Moody's is currently forecasting a 3.77 percent default rate.)

    [Dec 22, 2015] A Milestone For Vanguard: New Fund Could Include Junk Bonds

    blogs.barrons.com

    ,,,,The Vanguard Core Bond Fund, unveiled in a filing with regulators on Monday, is being billed as an actively managed alternative to index funds like the Total Bond Market fund (VBMFX, VBTLX, BND). Its launch, slated for the first three months of 2016, would coincide with a period of great uncertainty in the bond markets. The Fed could mull its next interest-rate hike as soon as March.

    ... ... ...

    Daniel Wiener, editor of the Independent Adviser for Vanguard Investors newsletter and a close watcher of all things Vanguard, was quick to note that the fund could invest in bonds of "any quality." The new fund's fine print shows leeway for Vanguard's portfolio managers to plunk up to 5% of the portfolio in junk bonds. Some 30% of the fund could fall into "medium-quality" bonds.

    Vanguard's existing offering in junk debt, the Vanguard High-Yield Corporate Fund (VWEHX, VWEAX), is managed by Wellington Management Company.

    Says Wiener: "Vanguard has never offered lesser-quality bond funds run by its internal group. The junk portion of the Core Bond product will be a first."

    [Dec 13, 2015] While redemptions are elevated, particularly in high-yield bond funds, there doesn't seem to be a rush to for the exits

    For the last several year buying "junkest junk" was a profitable strategy. Now it came to abrupt end.
    Notable quotes:
    "... The rest of the industry has been quick to say that while redemptions are elevated, particularly in high-yield bond funds, there doesn't seem to be a rush to for the exits. ..."
    "... Goldman Sachs, for one, put out a note Friday warning Franklin Resources "is most at risk" given the large high-yield holdings of its funds, poor performance and large outflows. On Friday, its shares fell sharply. Meanwhile, there were unusually large declines Friday in the value of exchange-traded funds that track high-yield debt. ..."
    "... The idea of a "run" on mutual funds might sound strange. Typically, runs are associated with highly leveraged banks engaged in maturity transformation, funding long-term loans with short-term debt. Nearly all the programs designed to avoid destabilizing runs-from deposit insurance to the Fed's discount window to liquidity requirements-are built for banks. But unleveraged investors, including mutual funds, can also give rise to runs. That is because there is a liquidity mismatch in mutual funds that hold relatively illiquid assets funded by investors entitled to daily redemptions. ..."
    peakoilbarrel.com
    Jeffrey J. Brown, 12/13/2015 at 4:06 pm
    Interesting WSJ article (do a Google Search for the title, for access). Last week, the Journal noted that Chesapeake bonds that traded at 80’ on the dollar a few months ago were currently trading at 30’ to 40’ on the dollar. I suspect that there are some huge losses on the books of a lot of pension funds.

    WSJ: The Liquidity Trap That's Spooking Bond Funds
    The specter of a destabilizing run on debt is haunting markets

    The debt world is haunted by a specter-of a destabilizing run on markets.

    Last week, this took on more form even if there weren't concrete signs of panic. Only one mutual fund manager, Third Avenue Management, has said it would halt redemptions to forestall having to dispose of assets in a fire sale. The rest of the industry has been quick to say that while redemptions are elevated, particularly in high-yield bond funds, there doesn't seem to be a rush to for the exits.

    Still, growing angst comes as the oil-price rout continues and the U.S. Federal Reserve appears ready to raise rates. This has investors worried-and starting to ask the fearful question: "Who's next?"

    Goldman Sachs, for one, put out a note Friday warning Franklin Resources "is most at risk" given the large high-yield holdings of its funds, poor performance and large outflows. On Friday, its shares fell sharply. Meanwhile, there were unusually large declines Friday in the value of exchange-traded funds that track high-yield debt.

    The idea of a "run" on mutual funds might sound strange. Typically, runs are associated with highly leveraged banks engaged in maturity transformation, funding long-term loans with short-term debt. Nearly all the programs designed to avoid destabilizing runs-from deposit insurance to the Fed's discount window to liquidity requirements-are built for banks. But unleveraged investors, including mutual funds, can also give rise to runs. That is because there is a liquidity mismatch in mutual funds that hold relatively illiquid assets funded by investors entitled to daily redemptions.

    [Dec 12, 2015] David Dayen Is This The Beginning of the Crackup in High-Yield Corporate Debt

    Notable quotes:
    "... It cuts two ways. Junk ETFs such as JNK and HYG have badly underperformed their benchmarks, owing to buying and selling in an illiquid market to replicate an index. Whereas actively managed junk mutual funds have the flexibility to deviate from index holdings in ways that can add a couple of hundred basis points a year. ..."
    "... Your apology is flawed because it assumes equal access to information among investors as well as assuming all investors have the same objective. Institutional investors have different goals than hedge funds for example. The people you refer to have been fleeced that's just ok with you. As to tea leaves the people have been steeped in recovery stories for years. ..."
    "... Wait, so speculators are shorting big bond positions of distressed funds? No way, hope they aren't doing this to ETF's. Jeez, didn't see this coming. I guess having the positions of big ETF's published daily might assist the speculators. ..."
    "... What I do remember (and I can't remember whether it was Spring of 2008 or earlier), was that HY spreads had gapped out at least a couple of hundred bps, and equities were still at or near all-time highs. I remember sitting in a meeting with a couple I-bankers, who chuckled ruefully "equities haven't a clue". ..."
    "... The received wisdom on the Street is that the bond market is smarter than the equity market. And, at last in my career, it was true, at least as far as downturns went. ..."
    naked capitalism
    MikeNY December 12, 2015 at 6:41 am

    Yes, junk is usually the canary in the coal mine. The HY market melted in the Summer of 2008, months before equities noticed what was going on. The question really is how much contagion there will be: how many CDS have been written on the distressed names, who holds them, etc. My instinct tells me that there are considerably less CDS on junk than were written on MBS, due to the smaller market, the lower liquidity and (supposed) credit quality. But how much has that changed since 2008? I dunno.

    One thing I do know: it's like the movie "Groundhog Day". The Fed always overstimulates, and there always follows a crash. Are there any bubbles left to blow, to 'reflate' assets next time?

    timmy December 12, 2015 at 9:39 am

    Your remark on written CDS is important. While it may be difficult to get liquidity on distressed names, it is less so on credit tiers above that or on indices. I'm sure there is some on junk, yes, but the real opportunity for spec CDS is (perhaps, was) on the BBB space which is the largest category in the investment grade market and is more liquid. While it may take awhile for distressed trading to creep up the credit ratings to the larger and more liquid names (specifically, since the definition of liquidity seems to be important on NC: the size of the specific issues' float, approximated with average daily volume), they will also have larger moves because potential fallen angels are repriced aggressively in an unstable market. The other thing about CDS is that they are most often delta-hedged which requires dealers to sell proxy's as the CDS go deeper into the money. The one restraining factor is that once a crisis is in motion, I think its going to be difficult for specs to get more CDS on their books. This strategy is purely directional (this is not an ETF NAV arb), essentially owning out of the money puts with minimal cost of carry.

    Jim Haygood December 12, 2015 at 1:39 pm

    'Their investing strategy – putting high-risk investments into a mutual fund – seems like exactly what not to do.'

    It cuts two ways. Junk ETFs such as JNK and HYG have badly underperformed their benchmarks, owing to buying and selling in an illiquid market to replicate an index. Whereas actively managed junk mutual funds have the flexibility to deviate from index holdings in ways that can add a couple of hundred basis points a year.

    That said, both junk ETFs and junk mutual funds are offering daily liquidity, while holding underlying securities that may trade once a week, or have no bids at all. As David Dayen observes, this sets up the risk of a bank run when investors get spooked.

    Take a look at the "power dive" chart of TFCIX (Third Avenue Focused Credit Fund) - Aiieeeeee!

    http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=tfcix&insttype=&freq=&show=

    Now the question is contagion. Morningstar shows that 48% of TFCIX's portfolio was below B rating, and 41% had no bond rating. Most junk funds don't have THAT ugly a portfolio. But when the herd starts to stampede, fine distinctions can get lost in the dust cloud from the thundering hooves.

    Over to you, J-Yel. Do you feel lucky, cherie? Well, do you?

    Mike Sparrow December 12, 2015 at 3:48 pm

    There is no CDS. There just isn't less, there is none. The stock market has pretty much ignored it as well except that its move from 13000 to 18000 has temporarily stalled. I suspect by the spring, this will be old news.

    I think we make errors here, not understanding this particular type of financial speculation is "anti-growth" in general. This would probably blow most of the minds on this board.

    Keith December 12, 2015 at 7:27 am

    Many years ago when Alan Greenspan first proposed using monetary policy to control economies, the critics said this was far too broad a brush.

    After the dot.com crash Alan Greenspan loosened monetary policy to get the economy going again. The broad brush effect stoked a housing boom.

    When he tightened interest rates, to cool down the economy, the broad brush effect burst the housing bubble. The teaser rate mortgages unfortunately introduced enough of a delay so that cause and effect were too far apart to see the consequences of interest rate rises as they were occurring.

    The end result 2008.

    With this total failure of monetary policy to control an economy and a clear demonstration of the broad brush effect behind us, everyone decided to use the same idea after 2008.

    Interest rates are at rock bottom around the globe, with trillions of QE pumped into the global economy.

    The broad brush effect has blown bubbles everywhere.

    "9 August 2007 – BNP Paribas freeze three of their funds, indicating that they have no way of valuing the complex assets inside them known as collateralised debt obligations (CDOs), or packages of sub-prime loans. It is the first major bank to acknowledge the risk of exposure to sub-prime mortgage markets. Adam Applegarth (right), Northern Rock's chief executive, later says that it was "the day the world changed"

    10th December 2015 – "Moments ago, we learned courtesy of the head of Mutual Fund Research at Morningstar, Russ Kinnel, that the next leg of the junk bond crisis has officially arrived, after Third Avenue announced it has blocked investor redemptions from its high yield-heavy Focused Credit Fund, which according to the company has entered a "Plan of Liquidation" effective December 9."
    When investor's can't get their money out of funds they panic.

    Central Bank low interest rate policies encourage investors to look at risky environments to get a reasonable return

    Pre-2007 – Sub-prime based complex financial instruments
    Now – Junk bonds

    The ball is rolling and the second hedge fund has closed its doors, investors money is trapped in a world of loss.

    "Here Is "Gate" #2: $1.3 Billion Hedge Fund Founded By Ex-Bear Stearns Traders, Just Suspended Redemptions"

    We know the world is downing in debt and Greece is the best example I can think of that shows the reluctance to admit the debt is unsustainable.

    Housing booms and busts across the globe ……

    Those bankers have saturated the world with their debt products.

    Keith December 12, 2015 at 7:29 am

    Links (which will probably require moderation)

    Skippy December 12, 2015 at 7:41 am

    Quality of instruments impaired by corruption has a more deleterious effect than quantities of could ever imagine…

    David December 12, 2015 at 10:33 am

    "Those bankers have saturated the world with their debt products."

    I'm no apologist for Banksters but people bought this "stuff" as the Stuffies.

    whether you call it greed or desperation in the face of zero yield – at the end of the day the horizon was short since the last debacle.

    getting 2 & 20 or whatever the comp arrangement was for those who are motivated by greed – 2% of $2 Billion yields at least $40 million a year for 5 years or $200 million – not bad for ten guys or less – obviously not fiduciaries – bouncing from Bear to Tudor to Third Ave with no change in the model yields predictable results

    I put forth the proposition the "people" deserve their fate – the tea leaves were all there to see

    tegnost December 12, 2015 at 10:52 am

    Your apology is flawed because it assumes equal access to information among investors as well as assuming all investors have the same objective. Institutional investors have different goals than hedge funds for example. The people you refer to have been fleeced that's just ok with you. As to tea leaves the people have been steeped in recovery stories for years.

    Ian December 12, 2015 at 2:24 pm

    Also fails to recognize the collateral damage caused towards the people that did not directly participate. It is very hard to say that they deserve their fate in this context, in that they were largely powerless to stop it to begin with, at a reasonable level.

    Ian December 12, 2015 at 2:29 pm

    I guess you qualified that with focusing solely on the people who bought it. Did not read fully.

    Timmy December 12, 2015 at 8:34 am

    Wait, so speculators are shorting big bond positions of distressed funds? No way, hope they aren't doing this to ETF's. Jeez, didn't see this coming. I guess having the positions of big ETF's published daily might assist the speculators.

    Jim Haygood December 12, 2015 at 4:25 pm

    Yesterday HYG closed at a 0.76% discount to NAV, while JNK closed at a 0.68% discount (values from Morningstar). These are wider discounts than ETF managers like to see.

    The arbitrage mechanism of buying the discounted ETF shares, redeeming them for the underlying, and then selling the bonds at full value for an instant 0.76% gain is supposed to kick in now.

    But sell … to whom?

    Timmy December 12, 2015 at 4:51 pm

    The misperception is that the ETF junk trade is an arb right now. Its not, its directional. The discipline to bring NAV's in line with underlying value will only kick in at much wider levels because traders are still long (and putting on more of) the "widener" because they anticipate higher levels of vol going forward.

    tegnost December 12, 2015 at 9:15 am

    Actually have already been bracing myself as demand for labor fell off a cliff at the end of sept., and I'm guessing it's stories such as this that makes my customers tighten their belts....

    nat scientist December 12, 2015 at 9:55 am

    "Some say the world will end in fire
    Some say in ice
    From what I've tasted of desire
    I hold with those who favor (fire) INFLATION
    But if it had to (perish) REFINANCE twice,
    I think I know enough of (hate) ZIRP RATES
    To say that for destruction (ice) NO BID
    Is also great
    And would suffice."

    Marty Whitman now gets Robert Frost.

    craazyboy December 12, 2015 at 4:26 pm

    All those junk companies could just declare bankruptcy and start over. That's the way it's supposed to work. Just ask The Donald. Then it would be like that movie where Bruce Willis saved the earth from an asteroid strike. 'Course there was only one asteroid in that movie. Instead, we have World War Z with zombies all over the place!

    But maybe JYell will buy all the junk bonds, burn them, and then the dollar will crash and we can all get jobs?

    Christer Kamb December 12, 2015 at 1:44 pm

    MikeNY said;

    "The HY market melted in the Summer of 2008, months before equities noticed what was going on."

    Not really. HYG market were in a downtrend during summer of 2007, together with the stockmarket. Also in the 2008 summer both markets were in a severe meltdown. This time around the HYG΄s started their downtrend from summer 2014 with the 1:st leg down to dec same year. 2:nd leg is now running in which the stockmarket joined.

    Your right, HYG΄s seems to be the canaries here! But, from august this year they seems to go in different directions. Or are they?

    MikeNY December 12, 2015 at 4:25 pm

    You're right, it was earlier than Summer 2008, now I think about it.

    What I do remember (and I can't remember whether it was Spring of 2008 or earlier), was that HY spreads had gapped out at least a couple of hundred bps, and equities were still at or near all-time highs. I remember sitting in a meeting with a couple I-bankers, who chuckled ruefully "equities haven't a clue".

    The received wisdom on the Street is that the bond market is smarter than the equity market. And, at last in my career, it was true, at least as far as downturns went.

    [Dec 04, 2015] Wolf Richter "Distress" in US Corporate Debt Spikes to 2009 Level

    Notable quotes:
    "... By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street ..."
    "... Other high-risk credits, such as those backed by subprime mortgages, will follow. And the irony? Just in the nick of time, subprime is back – but this time, it's even bigger. Read… Subprime "Alt"-Mortgages from Nonbanks Run by former Countrywide Execs Backed by PE Firms Are Booming ..."
    www.nakedcapitalism.com

    December 3, 2015 | naked capitalism

    By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street

    nvestors, lured into the $1.8-trillion US junk-bond minefield by the Fed's siren call to be fleeced by Wall Street and Corporate America, are now getting bloodied as these bonds are plunging.

    Standard & Poor's "distress ratio" for bonds, which started rising a year ago, reached 20.1% by the end of November, up from 19.1% in October. It was its worst level since September 2009.

    It engulfed 228 companies at the end of November, with $180 billion of distressed debt, up from 225 companies in October with $166 billion of distressed debt, S&P Capital IQ reported.

    Bonds are "distressed" when prices have dropped so low that yields are 1,000 basis points (10 percentage points) above Treasury yields. The "distress ratio" is the number of non-defaulted distressed junk-bond issues divided by the total number of junk-bond issues. Once bonds take the next step and default, they're pulled out of the "distress ratio" and added to the "default rate."

    During the Financial Crisis, the distress ratio fluctuated between 14.6% and, as the report put it, a "staggering" 70%. So this can still get a lot worse.

    The distress ratio of leveraged loans, defined as the percentage of performing loans trading below 80 cents on the dollar, has jumped to 6.6% in November, up from 5.7% in October, the highest since the panic of the euro debt crisis in November 2011.

    The distress ratio, according to S&P Capital IQ, "indicates the level of risk the market has priced into the bonds. A rising distress ratio reflects an increased need for capital and is typically a precursor to more defaults when accompanied by a severe, sustained market disruption."

    And the default rate, which lags the distress ratio by about eight to nine months – it was 1.4% in July, 2014 – has been rising relentlessly. It hit 2.5% in September, 2.7% in October, and 2.8% on November 30.

    This chart shows the deterioration in the S&P distress ratio for junk bonds (black line) and leveraged loans (brown line). Note the spike during the euro debt-crisis panic in late 2011:

    The oil-and-gas sector accounted for 37% of the total distressed debt and sported the second-highest sector distress ratio of 50.4%. That is, half of the oil-and-gas junk debt trades at distressed levels! The biggest names are Chesapeake Energy with $7.4 billion in distressed debt and Linn Energy LLC with nearly $6 billion.

    Both show how credit ratings are slow to catch up with reality. S&P still rates Chesapeake B- and Linn B+. Only 24% of distressed issuers are in the rating category of CCC to C. The rest are B- or higher, waiting in line for the downgrade as the noose tightens on them.

    The metals, mining, and steel sector has the second largest number of distressed issues and sports the highest sector distress ratio (72.4%), with nearly three-quarters of the sector's junk debt trading at distressed levels. Among the biggest names are Peabody Energy with $4.7 billion in distressed debt and US Steel with $2.2 billion.

    These top two sectors account for 53% of the total distressed debt. And now there are "spillover effects" to the broader junk-rated spectrum, impacting more and more sectors. While some sectors have no distressed debt yet, others are not so lucky:

    The biggest names: truck maker Navistar; off-road tire, wheel, and assembly maker Titan International; specialty chemical makers The Chemours Co. and Hexion along with Hexion US Finance Corp.; Avon Products; Verso Paper; Advanced Micro Devices; business communications equipment and services provider Avaya; BMC Software and its finance operation; LBO wunderkind iHeart Communications (Bain Capital) with a whopping $8.9 billion in distressed debt; Scientific Games; jewelry and accessory retailer Claire Stores; telecom services provider Windstream; or Texas mega-utility GenOn Energy (now part of NRG Energy).

    How much have investors in distressed bonds been bleeding? S&P's Distressed High-Yield Corporate Bond Index has collapsed 40% from its peak in mid-2014:

    US-SP-distressed-high-yield-corp-bond-index

    In terms of investor bloodletting: 70% of all distressed bonds are either unsecured or subordinated, the report notes. In a default, bondholders' claims to the company's assets are behind the claims of more senior creditors, and thus any "recovery" during restructuring or bankruptcy is often minimal.

    At the lowest end of the junk bond spectrum – rated CCC or lower – the bottom is now falling out. Yields are spiking, having more than doubled from 8% in June 2014 to 16.6% now, the highest since August 2009:

    US-CCC-or-below-rated-yields-2011_2015-12-01

    These companies, at these yields, have serious trouble raising new money to fund their cash-flow-negative operations and pay their existing creditors. Their chances of ending up in default are increasing as the yields move higher.

    And more companies are getting downgraded into this club of debt sinners. In November, S&P Ratings Services upgraded only eight companies with total debt of $15.8 billion but downgraded 46 companies with total debt of $113.7 billion, for a terrible "downgrade ratio" of 5.8 to 1, compared to 1 to 1 in 2014.

    This is what the end of the Great Credit Bubble looks like. It is unraveling at the bottom. The unraveling will spread from there, as it always does when the credit cycle ends. Investors who'd been desperately chasing yield, thinking the Fed had abolished all risks, dove into risky bonds with ludicrously low yields. Now they're getting bloodied even though the fed funds rate is still at zero!

    Other high-risk credits, such as those backed by subprime mortgages, will follow. And the irony? Just in the nick of time, subprime is back – but this time, it's even bigger. Read… Subprime "Alt"-Mortgages from Nonbanks Run by former Countrywide Execs Backed by PE Firms Are Booming

    BrianM, December 3, 2015 at 11:09 am
    It is interesting that "distressed" in this article pretty much refers to pricing alone and says little about whether it actually represents a significant change in the ability of companies to repay/refinance their debts. The charts show a similar spike that happened in 2012 without any real consequence to default rates. Of course we are right to not trust the rating agencies as they are lagging indicators and there is a prima facie case for oil being a potential disaster area, but the article give no evidence as to why the markets are right this time. They've been wrong before.

    The definition of distress is also somewhat arbitrary – 1000bps stinks of being a round number rather than any meaningful economic measure. 900bps sounds pretty distressed to me. Or, as a bull might put it, a bargain!

    tegnost, December 3, 2015 at 1:07 pm
    Question: What mechanism brought distress down after the euro crisis in late 2011, and is it possible that mechanism, whatever it was, will work again?
    susan the other. December 3, 2015 at 1:43 pm

    It's kinda like the post above on German domestic banks looking for profit from any rotten source. We are on the cusp of a new economy; keeping alive the old consumer/manufacturing economy is a dead end. ...

    [Jul 29, 2015] Bill Gross Explains (In 90 Seconds) How Its All A Big Shell Game

    07/29/2015 | zerohedge.com

    "There is no doubt that the price of assets right now is a question mark... and ultimately when Central Banks stop manipulating markets where that price goes is up for grabs... and probably points down"

    As Gross tweeted...

    Gross: All global financial markets are a shell game now. Artificial prices, artificial manipulation. Where's the real pea (price)?

    - Janus Capital (@JanusCapital) July 29, 2015

    This clip carries a public wealth warning...

    Jim Shoesesta

    He is short, he is a loser, shell game or not.

    ebworthen

    Very rich loser.

    And the markets are a .gov sanctioned and supported three card monti scamming folks all day, every day.

    [Jul 29, 2015] Bill Gross Explains (In 90 Seconds) How It's All A Big Shell Game

    07/29/2015 | zerohedge.com

    "There is no doubt that the price of assets right now is a question mark... and ultimately when Central Banks stop manipulating markets where that price goes is up for grabs... and probably points down"

    As Gross tweeted...

    Gross: All global financial markets are a shell game now. Artificial prices, artificial manipulation. Where's the real pea (price)?

    - Janus Capital (@JanusCapital) July 29, 2015

    This clip carries a public wealth warning...

    Jim Shoesesta

    He is short, he is a loser, shell game or not.

    ebworthen

    Very rich loser.

    And the markets are a .gov sanctioned and supported three card monti scamming folks all day, every day.

    [Jul 27, 2015]Watching Yields Rise Are Treasuries a Buy

    "...It's very conceivable for short-term rates to rise but long-term yields to decline if the market becomes convinced that Fed hikes will slow the economy. There's even a recent hint of that possibility looking at the action in treasuries since mid-July (the yield on 5-year treasuries has risen faster than yield on 10- and 30-year treasuries."
    .
    "...Finally, even if economic data is weak, there is a chance yields rise if inflation picks up. Thus, one needs to keep inflation in mind, especially over longer time-frames."
    Jul 22, 2015 | Safehaven.com

    Setting aside the often-heard "certificates of confiscation" phrase, treasuries are a reasonable buy if one believes yields are going to stay steady or decline. They are to be avoided if the expectation is for yields to rise.

    Part of the question is whether or not the Fed hikes, and by how much. But it's more complicated than the typical "yes-no when" analysis that we see in the media.

    It's very conceivable for short-term rates to rise but long-term yields to decline if the market becomes convinced that Fed hikes will slow the economy. There's even a recent hint of that possibility looking at the action in treasuries since mid-July (the yield on 5-year treasuries has risen faster than yield on 10- and 30-year treasuries.

    I am still not convinced the Fed is going to hike this year. Much will depend on retail sales, housing, and jobs.

    A good retail sales report will send yields soaring, likely across the board.

    Finally, even if economic data is weak, there is a chance yields rise if inflation picks up. Thus, one needs to keep inflation in mind, especially over longer time-frames.

    That said, the recent decline in crude, commodities in general, does not lend much credence to the notion the CPI is going to take big leaps forward any time soon.

    All things considered, the long end of the curve seems like a reasonable buy here provided one believes as I do, that economic data is unlikely to send the Fed on a huge hiking spree, and that if and when the Fed does react, yields on the long-end of the curve may not rise as everyone seems to expect.

    Anonymouse

    Agreed ... any Fed rate hike will slow the economy, but they won't (can't) raise rates.

    We have entered the black-hole of zero-interest, squarely caused by the incestuous relationship between the Fed and the Treasury whereby check-kiting and theft have become our central bankers' legal and institutional 'right.'

    Through debt monetization, bond speculation has been made risk-free .. an anomaly in nature yet over 34 years in its bull cycle.

    Risk-free bond speculation creates and maintains a falling interest rate structure which destroys the capital of virtually every market player. This is the greater danger .... which can only result in broad-based serial bankruptcies unless the parasitic system is abandoned for one that embraces sound money.

    [Jun 12, 2015] Disaster Risk and Asset Pricing

    Jun 11, 2015 | Economist's View
    anne said...
    https://personal.vanguard.com/us/funds/vanguard/all?sort=name&sortorder=asc#hist=upperTB%3ApyldTBI%3A%3AlowerTB%3AdailyTBI

    June 11, 2015

    * Vanguard yields are after cost. Federal Funds rates are no more than 0.25%.

    [Jun 04, 2015] There is 'sheer panic' in the bond market

    According to Bloomberg, bonds wiped out all their gains for the year. The benchmark US 10-year treasury yield pushed higher to about 2.42% overnight, a level it hadn't touched since October. German bund yields rose to about 0.99%.

    There is chaos in global markets. Bonds sold off sharply on Thursday morning for a second day in a row. They've reversed the decline, but stocks are still lower, after the chaos spilled over.

    ... ... ...

    The International Monetary Fund slashed US growth forecasts, and urged the Federal Reserve to delay its first interest rate hike until 2016, in a statement that crossed as the stock market opened.

    In a speech last month, Fed chair Janet Yellen said it would be appropriate to raise interest rates "at some point this year" if the economy continues to improve.

    In a morning note before the open, Brean Capital's Peter Tchir wrote: "It is time to reduce US equity holdings for the near term and look for a 3% to 5% move lower. The Treasury weakness is NOT a 'risk on' trade it is a 'risk off' trade, where low yields are viewed as a risk asset and not a safe haven."

    The sell off in global bonds started Wednesday, as European Central Bank president Mario Draghi gave a news conference in which he said markets should get used to episodes of higher volatility.

    Draghi also emphasized that the ECB had no intention to soon end its €60 billion bond-buying program, called quantitative easing, before its planned end date of September 2016.

    Bond yields, which move in the opposite direction to their prices, spiked across Europe on Wednesday, and on Thursday this move is continuing, with German bund yields and US Treasury yields hitting new 2015 highs and continuing to climb overnight.

    According to Bloomberg, bonds wiped out all their gains for the year.

    ... ... ...

    The benchmark US 10-year treasury yield pushed higher to about 2.42% overnight, a level it hadn't touched since October. German bund yields rose to about 0.99%.

    [May 12, 2015] An Open Letter to Bill McNabb, CEO of Vanguard Group

    Economist's View
    Stephen G. Cecchetti and Kermit L. Schoenholtz (sort of a follow up on the claim that financial reform is working -- perhaps -- but as noted in the post below this one there is more to do):
    An Open Letter to Bill McNabb, CEO of Vanguard Group: Dear Mr. McNabb,
    We find your WSJ op-ed (Wednesday, May 6) misleading, short-sighted, self-serving, and very disappointing.
    Vanguard has been in the forefront of providing low-cost, reliable access to U.S. and global capital markets to millions of customers, including ourselves. Following the financial crisis of 2007-2009, the firm naturally should be a leader in promoting a more resilient financial system. Your op-ed sadly goes in the opposite direction.
    Let's start with the most stunning example: your defense of money market mutual funds. MMMFs are simply banks masquerading as professionally managed investment products. Like banks, they engage in liquidity and maturity transformation. Like banks, they faced runs in 2008 that ended only when the federal government provided a guarantee that put taxpayers at risk. Even with that guarantee, the government still had to support many healthy U.S. corporations with household names that – having previously relied on MMMF purchases of their commercial paper – suddenly faced a severe credit crunch. And, to limit a fire sale amidst the crisis, the Federal Reserve had to provide special funding to buyers to help MMMFs unload their assets.
    Unsurprisingly, fund sponsors and their clients – both creditors and borrowers – want to keep these opaque federal subsidies (especially the implicit guarantees that only become explicit and transparent in a crisis). Like them, you make the false, but popular claim that power-hungry regulators (who wish to limit the subsidies that make future crises more likely) are attacking (taxing!) Main Street instead of Wall Street.
    In fact, the investment company industry captured its primary regulator long ago, and hasn't let go. The Securities and Exchange Commission's 2014 "reform" of MMMFs is exhibit A. It almost surely makes these funds more, not less, liable to runs (see here and here). And – what a surprise – Congress seems to find protecting U.S. taxpayers from contingent liabilities (like implicit financial guarantees to your industry) less attractive than the largesse of financial lobbyists. Even the voluminous Dodd-Frank Act didn't address MMMFs! :

    After quite a bit more, they conclude with:

    As the CEO of one of the largest mutual fund companies in the world that is dedicated to serving and protecting small investors, you should be in the vanguard of advocating reforms that enhance stability.
    Instead of complaining about regulation under the guise of protecting Main Street, you should highlight the vulnerabilities in our financial system and make the case for efficient regulation that treats all activities equally. You should also promote investment vehicles that are likely to prove robust in a crisis, while warning about existing products that probably won't be.
    Only greater resilience in the system can make investors confident that capital markets here and elsewhere will remain strong. That is in Vanguard's interest, too.
    Sincerely,
    Stephen G. Cecchetti and Kermit L. Schoenholtz
    anne -> anne:

    Stephen Cecchetti and Kermit Schoenholtz are intent on undermining the most important stock and bond investment vehicle for moderately wealthy investors. Vanguard sets the finest of examples for the entire investment industry.

    pgl -> anne:

    Maybe you are being paid by Vanguard but you are wrong. You are not qualified to comment on financial economics. Stephen Cecchetti and Kermit Schoenholtz are.

    And they are not trying to undermine anyone. They are simply telling the truth. Repeat your garbage all you want but it is garbage.

    mulp -> anne:

    Anne, unless you call the FDIC bailout of the money market funds, and the Fed providing liquidity to them in 2008-9 totally wrong and you should have suffered losses in your holding in MMMF as they marketed to market (breaking the buck) and froze withdrawals until they could liquidate their holdings, or alternatively, declared bankruptcy, then you are totally bought into the free lunch economics of Friedman, Reagan, and all the bank lobbyists dependent on government handling the losses while they reap the profits.

    I remember the debate in the late 60s and early 70s on money market funds. We (the People) were assured that MMFs would never be seen as banks by any one investing in them because everyone would know the MMF would someday lose value and in the process freeze the assets for some length of time until the fund could be liquidated.

    In other words, not one person putting money in a MMF would see it as a bank that pays higher interest. More importantly, no business or corporation would ever confuse a MMF with a bank.

    In 2008, it is clear that the promises made four decades earlier to allow unsophisticated investors access money market funds without lengthy notice of intent to withdraw funds was all a lie, or a belief in tinker bell, pixie dust, and free lunches.

    The money market funds should have been left to collapse in 2008 to destroy all faith in them as safe for individuals to use, and in the process, "destroy trillions in wealth" held by tens of millions of upper middle class workers.

    I would have lost more than I did in 2008, but the demand for greater government control of the financial sector plus greater social safety nets would have followed.

    This is the first time I've seen someone besides me state that mutual funds are banks as we knew them in the 60s, except they pay nothing for the protection of FDIC and Federal Reserve membership.

    anne:

    http://www.nytimes.com/2015/05/10/your-money/fees-on-mutual-funds-fall-thank-yourself.html

    May 9, 2015

    Fees on Mutual Funds Fall. Thank Yourself.
    By JEFF SOMMER

    Wall Street is reaping mounting revenue from mutual funds and exchange-traded funds, yet investors are paying lower fees.

    That sounds like a good deal for the millions of people who use the funds to invest their savings, and a great deal for the companies that run and sell the funds.

    But that win-win situation is not quite as benign as it would seem. Many investors are still - often unwittingly - paying huge fees that cut into retirement savings.

    A new Morningstar study offers an excellent explanation of what is happening. The report, "2015 Fee Study: Investors Are Driving Expense Ratios Down," found that, by one measure, mutual fund and E.T.F. fees paid by individual investors had dropped significantly - 27 percent - over the last 10 years. But it isn't mainly because Wall Street fund managers have been reducing fees. The study found that investors have been voting with their feet, moving money from expensive funds into cheaper ones, like index funds. That drives down the asset-weighted cost of mutual funds, skewing the statistics.

    "It's not mainly thanks to the efforts of the fund companies," Michael Rawson, an author of the Morningstar study, said in an interview. "It's mainly because people have gravitated toward lower-cost funds."

    There's a good reason for the migration to lower-cost funds: They tend to outperform higher-cost ones. As I've written recently, most actively managed mutual funds don't beat the market; those that do beat it rarely manage the feat consistently. Many consumers have gotten the message. Of the 100 lowest-cost funds on the market in March, 95 were index funds that merely try to match the market, not beat it, according to an unpublished study by the Bogle Financial Markets Research Center. Many investors have chosen index funds.

    Yet because of the peculiar economics of the asset management industry, fund companies are still doing great. The companies that run the funds have been reaping outsize rewards because as fund assets have grown - thanks in part to the market's terrific performance over the last six years - the companies' own costs have declined.

    That's because of economies of scale that the companies don't share fully with customers. "The cost of individual funds has dropped, but the assets have gotten so much bigger that the companies' revenue from fees has grown tremendously," Mr. Rawson said. "They could be sharing more of those revenues with consumers, but they're not."

    Using publicly available documents, the Morningstar researchers estimated that in 2014, fee revenue from all stock and bond mutual funds and E.T.F.s reached a record high of $88 billion, up from $50 billion a decade earlier. Assets under management grew 143 percent, and industry fee revenue surged more than 75 percent. The asset-weighted expense ratio - the funds' publicly declared expenses divided by the actual money that investors put into them - declined, too, but only by 27 percent. "The industry - rather than fund shareholders - has benefited most," the report said. Mr. Rawson, a Morningstar analyst, wrote the report with Ben Johnson, director of global E.T.F. research at the company.

    The details are fresh, but the economic machine that propels the asset management business has been whirring along for decades. In a telephone interview last week, John C. Bogle, the founder of Vanguard, the industry's low-cost leader, said that in some ways, running a fund company is like operating a factory. As you ramp up production, it becomes cheaper to produce additional items because important costs - fixed costs - don't rise.

    For an asset management company, he said, a stock or bond portfolio is the core product and the intellectual exercise of selecting stocks and bonds for it is a fixed cost. "When you set up and run the portfolio, it's not much more expensive to do it when your fund has, say, $1 billion in assets, than when it had only $30 million," Mr. Bogle said.

    "Unless you cut your fees drastically, you're going to generate a lot more money for your company as assets grow," Mr. Bogle said. "But do you think the industry wants you to understand that? Absolutely not. Most fund companies aren't passing those savings on to investors."

    Vanguard, which is owned by shareholders of its funds, passes along most of the savings. Morningstar found that Vanguard's average asset-weighted expense ratio in 2014 was 0.14 percent, lower than any of the other top asset management companies and lower than 0.64, the current asset-weighted expense ratio for all funds.

    Mr. Bogle says companies should charge a modest, flat fee for setting up a portfolio - not a percentage of assets, charged annually, which is the current practice - and give fund investors the rest of the money. That would not generate the splendid profits that asset management companies and their owners have enjoyed, however.

    No wonder that in a rising market, shares of publicly traded asset management companies tend to outperform their own stock portfolios. For example, since the beginning of March 2009, the start of the current bull market, through April, the stock of BlackRock, the giant E.T.F. company, returned 27.1 percent, annualized, compared with 20.8 percent annualized in the iShares Core S&P 500 E.T.F., a BlackRock fund that tracks the Standard & Poor's 500-stock index, according to Bloomberg. You would have been better off investing in BlackRock, the company, than in its own S.&.P. 500 index fund.

    Why should mutual fund and E.T.F. investors care about the economics of fund expenses? Because it's the dark side of compounding, a force that can be magical when it works in your favor:.

    anne:

    https://personal.vanguard.com/us/funds/snapshot?FundId=0040&FundIntExt=INT#hist%3A%3Atab=1&tab=1

    Vanguard 500 Stock Index Fund

    Average annual returns as of 3/31/2015

    3/31/2014 ( 12.56%)
    3/30/2012 ( 15.93)
    3/31/2010 ( 14.29)
    3/31/2005 ( 7.89)

    08/31/1976 ( 11.05)


    https://personal.vanguard.com/us/funds/snapshot?FundId=0028&FundIntExt=INT#hist%3A%3Atab=1&tab=1

    Vanguard Long-Term Investment-Grade Bond Fund

    Average annual returns as of 3/31/2015

    3/31/2014 ( 14.54%)
    3/30/2012 ( 8.42)
    3/31/2010 ( 10.34)
    3/31/2005 ( 7.49)

    07/09/1973 ( 8.71)

    anne -> anne:

    This is what Vanguard has meant for modestly wealthy conservative long term investments since the 1970s. From Warren Buffett to David Swenson, the chief investment officer at Yale, Vanguard has been the recommended vehicle for ordinary stock and bond investors.

    Harming Vanguard would be a tragedy.

    anne -> anne:

    "Harming Vanguard would be a tragedy."

    The point is harming Vanguard would be harming the ordinary investors who in effect own Vanguard since Vanguard is indeed a "mutual" fund company, a company owned by fund investors.

    Dan Kervick -> anne:

    The well-being of modestly wealthy long-term investors is only one factor to consider in relation to the well-being of the entire US and global economy. Shouldn't we broaden the discussion?

    anne -> Dan Kervick:

    Vanguard forms a model for investment well-being in the United States.

    Bob:

    Anne, having liquidity requirements is not a tax on investors. When McNabb represents it as such, he is lying. There are no new fees or taxes imposed. It just requires that stock funds hold a percentage of assets in safe bonds in order to handle redemptions in panic situation rather than rely on taxpayer bailouts.

    Investors are still entitled to 100% of the returns from the fund. Yes, it is true that the total return may be somewhat less because bond returns are typically less than stock returns. However, that isn't a tax or fee on investors.

    Almost no investors maintain a 100% stock portfolio. The typical investor my have anywhere from 20% to 80% bonds. So with the liquidity proposal, some portion of the bond assets they hold anyway will be in their stock fund. They can adjust their stock vs bond allocation accordingly, taking into account the bonds held in their stock fund. After this adjustment, they will receive exactly the same total portfolio return as previously.

    The idea that this is a tax or fee is simply a lie. Investors still receive 100% of their investment return.

    Dan Kervick -> anne:


    Well, it seems prima facie plausible that the ability of some firms to deliver very high returns at low cost is due to the amount they have invested in high-risk, high-yield assets. An economy filled with many such firms is going to be an economy with a higher level of systemic risk. If we want a financially safer world, then some rich people are going to have to get richer much more slowly than they did in the past.

    JohnH: I don't believe Vanguard needs any liquidity requirements because none of its investments use leverage. If money is needed, they would just sell the assets at the current market value and disburse the proceeds.

    MMMFs are a little different, because there is the presumption that that value of each share will always be $1, which it will be if short term treasuries are kept to term. In case of a run, the Fed could also buy the treasuries and keep them a few weeks to maturity, as they do under QE.

    For funds that use leverage, the risk of a run is entirely different:

    Longtooth:

    My interpretation of Anne's issue is that she simply favors individualism's credo for the "moderately wealthy" over the rest of our society, and rationalizes her position by believing (in faith) that Vanguard is immune to failure and thus would not be a participant in any new liquidity meltdown, ergo the nation's taxpayers should shoulder the burden of for profit financial investors when such financial markets fail.

    I'm not sure what Anne's position is/was related to the meltdown just past.. but she's caught on the horns of dilemma --- either taxpayer's bail out private investors or they suffer an even greater financial and economic calamity.

    The whole point of Cecchetti & Schoenholtz open letter is that a) Vanguard is not immune, and b) taxpayers should NOT be placed on the horns of that dilemma again, and thus the Vanguard letter was indeed self-serving and misleading.

    EMichael -> Longtooth:

    Perfect.

    McMike:

    Well, the critiques may be technically accurate enough as far as they go.

    But I fail to see how attacking one of the last pockets of low-fee, consumer-facing investment helps anyone in the long run, except those who wish to herd all money into complex, opaque, high-fee vehicles.

    Money Market "reform" may have found some reasonable-sounding talking points on which to promote itself, but stepping back, one cannot help but see it is simply one more wave in the voracious plunder and elimination of any and all alternatives to the relentless and jealous Wall Street flim flam machine.

    anne:

    A democratic investment company is a company that is investor owned, that offers the finest quality long term stock and bond funds with minimal transactions or turnover at low management cost for investors with $10,000. For those men and women who prefer to deal with a Goldman Sachs, a suggest giving that company a call and finding the difference.

    The idea that a Warren Buffett is paid by Vanguard for recommending Vanguard only shows a failure to understand that Vanguard is owned by investors and there are no payments made to financial advisers for recommending the company.

    DeDude -> anne:

    If you think the leadership if Vanguard is controlled by and serving its investors - then you need to get out of the Ivory tower a little more.

    Leadership in any Wall Street company are always serving themselves first, second and third. It is just that some of them are better at hiding that fact than others.

    DeDude:

    As much as Vanguard is trying to sell itself as the investors friend on Wall street, their leadership is just as much a part of the Wall street vampire tribe as the rest of them. Yes, they suck less less blood from each victim, but they are still blood-suckers. When I see Vanguard offering a fund that restrict its investments to companies that compensate CEOs less than average (for that industry and size), then I will know they have left the blood-sucker tribe. The one product that would truly serve the interest of investors is not available from any investment company, because as useful as it would be for us it is dangerous for them.

    anne:

    The descent to profane and violent language on this thread, the descent to intimidation and bullying, is intolerable, horrifying, and meant only to destroy this thread and this blog.

    EMichael -> anne:

    Personally, I think the constant repetition of a Edwardian rant about language is "intolerable, horrifying, and meant only to destroy this thread and this blog."

    As Keynes said, "words ought to be a little wild".

    Syaloch -> EMichael:

    Amen to that.

    Syaloch -> anne:

    Am I missing something? Neither "vampire" nor "blood-sucker" is profanity -- unless you mean it in the sense of blasphemous, i.e. criticism of something sacred.

    Do you think that this "class of people" who work on Wall Street are holy deities and therefore beyond reproach?

    You attitudes toward Vanguard certainly seem to point in that direction:

    anne -> Syaloch:

    These very terms were used to characterize and dehumanize a class of people in the 1930s. These are terrible, fearful terms to use to describe and stereotype people.

    anne:

    The use of profanity and a metaphor from the 1930s in describing a class of people is intolerable. Paul Krugman made a serious mistake in using a 1930s metaphor in description, both for the dismissing of the decency of the humanness of an entire class of people and for setting an example as to use of the metaphor.

    Millions of people were methodically murdered during the 1930s in the wake of a campaign to stereotypically deny their decency, to deny their humanness by using dehumanizing metaphors to describe them.

    likbez -> anne:

    While behavior that you mentioned are unacceptable, a part of the blame is on you: you demonstrated a perfect example of the psychology of rentier, Anna.

    Rentier capitalism is a term used to describe the belief in economic practices of parasitic monopolization of access to any kind of property, and gaining significant amounts of profit without contribution to society.


    DeDude:

    No, I think people are just having a little fun with your stuttering failure to address the issues. However, I will stop now (before being called a Nazi again – but don't think your bullying has worked, its just that I am tired)

    DrDick -> DeDude:

    Nothing I love more than passive-aggressive bullies, but that is Anne's schtick.

    likbez

    The key question to Anne is whether Vanguard is really better for unmanaged funds then ETFs. You need to provides us with solid evidence or all your post with belong to the category that Prince Hamlet defined as:

    The lady doth protest too much, methinks.

    And for managed funds Vanguard experienced several high profile disasters such as with their flagship Primecap fund around 2008. In this sense there is not much to talk about here. Thir managed funds is just a typical example of "go with the crowd" approach.

    Issue of fees was important in 90th. But now IMHO Vanguard belongs to "also run" category: for each Vanguard fund you probably can find other fund or ETF with comparable fees.

    So why you so adamant in defending Vanguard Anne? It' just one of Wall Street sharks which was broght to the surface by establishing 401K in 1978

    P.S. I also consider Vanguard to be among more decent category of Wall Street sharks. But it is still a shark.

    [Nov 20, 2013] Paul Krugman A Permanent Slump

    November 18, 2013 | Economist's View

    anne:

    https://personal.vanguard.com/us/funds/vanguard/all?sort=name&sortorder=asc#hist=upperTB%3ApyldTBI%3A%3AlowerTB%3AdailyTBI

    November 18, 2013

    * Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.

    anne :

    We should be aware that if the analysis of Paul Krugman and Lawrence Summers is reasonable and proves correct, however sadly so far as employment matters, we can expect the sort of interest rates we have had this year to persist for years. This is already the conclusion of knowledgeable bond holders.

    [Aug 28, 2013] Vanguard's Best Bear Market Mutual Funds by Dan Culloton

    Blast from the past. At the time of writing Dan Culloton was a funds analyst at Morningstar
    Yahoo! Finance

    Vanguard LifeStrategy Income (NASDAQ:VASIX - News)

    This is a fund of funds that keeps most of its money in fixed-income portfolios: Vanguard Total Bond Market (NASDAQ:VBMFX - News) and Vanguard Short-Term Investment-Grade (NASDAQ:VFSTX - News).

    But its equity stake can vary from 5% to 30% depending on the asset-allocation calls of Tom Loeb and his team at Vanguard Asset Allocation (NASDAQ:VAAPX - News), which gets 25% of assets here (Vanguard Total Stock Market Index (NASDAQ:VTSMX - News) accounts for the rest of stock holdings).

    Loeb uses quantitative models to figure out how much of his portfolio to devote to S&P 500 stocks and the Lehman Brothers Long-Term Treasury Index, and his calls have been consistent and accurate over the years. (Currently Loeb's fund has about three fourths of its assets in stocks, so this fund's equity allocation hangs around 20%.)

    That give this conservative fund a little upside potential, but it's really designed to preserve capital and generate income. The fund's bear market rank is better than 97% of its conservative-allocation category peers and in the third quarter through Aug. 28 it eked out a small gain that put it ahead of 96% of its peer group.

    Investors who are further away from their goals or who are more risk tolerant can check out Vanguard LifeStrategy Conservative Growth (NASDAQ:VSCGX - News) and Vanguard LifeStrategy Moderate Growth (NASDAQ:VSMGX - News), which devote more money to equity funds and have done well in bear markets relative to their peers.

    Vanguard Wellesley Income (NASDAQ:VWINX - News)

    A colleague of mine recently told me that this portfolio, which keeps most of its money in bonds, was the first fund she ever bought. My first reaction was to say that it seemed awfully conservative for someone whose retirement was still decades off. She retorted that she was looking for a one-stop fund that wouldn't burn an inexperienced investor. Since then she has built a more age-appropriate asset-allocation plan around this fund, but she has never regretted her first purchase because the fund has been so reliable. It has lost money in just three of the last 20 years, has done better than 97% of its peers in bear markets, and has succeeded in delivering a steady stream of income with a portfolio of undervalued, high-yielding stocks and high-quality (mostly corporate) bonds. That the fund has held up well (better than nearly 90% of its conservative-allocation peers for the third quarter through Aug. 28) in the middle of a credit crunch with such a large corporate bond stake is testimony to the security-selection skills of long-time fixed-income manager Earl McEvoy and his team from Wellington Management. Wellington's John Ryan on the equity side is no slouch either. He's leaving the fund next year but has a seasoned understudy lined up in Michael Reckmeyer III. My colleague argues that there are worse newbie-investor mistakes than buying this fund, and I'd have to agree.

    Vanguard Short-Term Tax-Exempt (NASDAQ:VWSTX - News)

    This fund is cautious and consistent. Longtime manager Pam Wisehaupt-Tynan keeps the portfolio's duration, a measure of interest-rate sensitivity, low and its credit quality high. Low expenses allow the fund's conservative approach to work in its favor over time. Put too much of your portfolio here and you could run the risk of not keeping up with inflation or not seeing enough appreciation to meet your goals, but it can take the edge off a taxable portfolio. It's done better than 96% of its peers in bear markets and outpaced almost 80% of them in the current quarter through Aug. 28.

    Vanguard Balanced Index (NASDAQ:VBINX - News)

    Once again, simplicity and low costs work in a Vanguard fund's favor. A mix of 60% MSCI U.S. Broad Market Index (essentially Vanguard Total Stock Market Index ) and 40% Lehman Aggregate Bond Index has produced reliable absolute returns. It's done better than 86% of its peers in bear markets and has bested about four fifths of them so far in the third quarter. The fund's correlation with the overall market is higher, but it's still a solid core holding.

    Vanguard Wellington (NASDAQ:VWELX - News)

    This is another old stalwart managed by the redoubtable Wellington Management. In June, my colleague Chris Davis highlighted this one of Morningstar's favorite "sleep-at-night funds", or offerings that don't keep you awake at night wondering what they are doing. Since then the fund has acquitted itself relatively well.

    It posted a 1.9% loss for the third quarter through Aug. 28, but that was still better than 82% of its moderate-allocation peers. Its long-term bear market rank also is still better than 86% of its rivals. And like its sibling Wellesley Income it has delivered consistent absolute results, losing money in just three of the last 20 calendar years.

    Read more about Vanguard funds in our Vanguard Fund Family Report. To view a risk-free trial issue, click here.

    Dan Culloton does not own shares in any of the securities mentioned above.

    [Aug 21, 2013] Bond investing in a rising interest rate environment

    August 14, 2013 | Vanguard
    In this interview, Brian Scott, a senior investment analyst in Vanguard's Investment Strategy Group, discusses concerns about the bond market and explains why Vanguard believes bonds can play a crucial diversification role in your portfolio, even in the event of a significant downturn.

    We're getting a lot of questions about whether bonds are headed for a bear market. What is a bond bear market, and how is it different from a stock bear market?

    Listen to an audio recording of this interview "

    It's an interesting question, because there is not a commonly accepted definition for a bear market in bonds. The answer for stocks is a rather simple one. There is a widely accepted, broadly used definition for a bear market in stocks, and that's a decline of at least 20% from peak to trough in stocks.

    Now, if you tried to use that definition and apply it to bonds, we've never had a bear market in bonds. In fact, the worst 12-month return we've ever realized in the bond market was back in September of 1974, when bonds declined 13.9%. So we've never had a decline of the same magnitude as we've had in stocks, and I think that's one of the key differences between stocks and bonds.

    Back to your original question then: What is a bear market in bonds? And, judging by investor behavior and reaction to losses in bonds, I think the answer is simply any period of time wherein you realize a negative return in bonds.

    Is a bond bear market something we should be concerned about? If so, is there anything investors can do to prepare?

    We've a great deal of sympathy for the anxiety that investors feel about the bond market right now. Typically, an investor that has an allocation to bonds-particularly those that have a large allocation to bonds-tend to be more risk-averse and become more unsettled when they see negative returns in any piece of their portfolio, let alone their total portfolio.

    So we understand how unsettling this environment can be-and, in fact, we have actually realized a negative return in bonds. If you're looking at the 12-month return through the end of June 2013, bonds are now down about 0.7%-and when I say bonds, I'm referring to the Barclays U.S. Aggregate [Bond] Index. So, by that definition, and if you use the definition of a bear market I applied earlier, you could say-and some people have argued-that we are actually in a bear market in bonds.

    And so it's unsettling; but, in times like these, what we encourage investors and their advisors to do is to look at the total return of their portfolio. And I think they'll feel much more comfortable when you take that perspective. As an example, an investor in Vanguard's Balanced Index Fund that has a mix of 60% U.S. stocks and 40% U.S. bonds realized a rate of return of 12% through June 30, 2013. So a total return perspective is especially valuable in times like this.

    You recently co-wrote a research paper in which you note that in 2010, like today, investors also believed rising interest rates would cause bond losses, but that didn't happen. Does the experience of the last three years suggest anything about what investors should do now?

    I think the last three years are very instructive and really impart a lot of lessons that investors can find very valuable in times like this. So for a little bit of historical perspective, back in about April/May of 2010, the yield on a 10-year Treasury note was about 3.3%. That was a level that was probably lower than almost all investors have ever seen in their investment lifetime. And you have to go back to August of 1957 to see yields as low as they were back in May of 2010.

    And I think that perspective alone caused many people to assume that interest rates had to rise. And I think an important lesson from that environment and how the market actually reacted is that the current level of interest rates tells us absolutely nothing about their future direction. Just because yields are low doesn't mean that they can't go lower or that they must go higher. But at any point, in May of 2010, if you looked at what the market was pricing in and looking at forward yield curves, the market's expectation were that yields were going to rise, and the 10-year Treasury yield was going to rise to a level slightly over 4%.

    In fact, what actually happened is that yields fell to just over 1.4%-again, I'm referring to the 10-year Treasury note. And if you had shortened the duration of your portfolio or moved your bond portfolio entirely into cash, you lost a tremendous amount of income.

    I think another important lesson is that making knee-jerk reactions in your portfolio can be damaging over time and potentially even incur tax losses as well as higher transaction costs.

    Do you have any thoughts about how to make the case that the smartest course of action is probably no action, assuming a portfolio is already well constructed?

    That's a hard thing to do, because in the face of what you think is an impending loss in your portfolio, it's a very natural and even human reaction to feel like you have to do something. But we would argue, very strongly, that investors are best served by not changing their asset allocation unless some strategic element of their asset allocation has changed.

    And, by that, I mean if your investment time horizon has changed, your investment objective has changed, if you really have an enduring change in your risk tolerance, then perhaps it's worth altering your strategic asset allocation. However, if those circumstances have not changed, you're probably best served by maintaining the strategic asset allocation that you set.

    What are some indicators that your risk tolerance may be changing?

    If you have extreme anxiety-let's face it, if you can't sleep at night, perhaps it's worth asking yourself whether your risk tolerance has changed. What we found-and we're not unique in this-is that investors tend to have a high level of risk tolerance when times are good and then when capital markets are delivering strong, positive returns. That changes sometimes over time. Now, we're not suggesting that you should frequently change your portfolio, but if you're really having a high level of anxiety over losses, perhaps it's worth becoming more conservative.

    I think another way to react to the current environment is just to recognize the role that each asset class has in your portfolio. Stocks are designed to deliver strong capital gains-ideally, over the long term, above the rate of inflation so that you can grow your spending power over time. The role of bonds-at least the primary role of bonds, in our minds-is to act as a cushion or balance to stocks. Stocks tend to be much more volatile, much more prone to significant losses in bear markets in excess of 20%, and, when that happens, bonds tend to be an ideal cushion against equity market volatility.

    It's very paradoxical. But perhaps, if you are feeling a higher level of anxiety because of the volatility in the fixed income markets in particular, the right answer for you might actually be a higher allocation to bonds. Because we actually think that because bonds are a good cushion to equity market volatility, over the long term, a higher allocation to bonds will reduce the total downside risk in your portfolio.

    Investing can provoke strong emotions. In the face of market turmoil, some investors find themselves making impulsive decisions or, conversely, becoming paralyzed, unable to implement an investment strategy or to rebalance a portfolio as needed.

    Discipline and perspective are qualities that can help you remain committed to your long-term investment programs through periods of market uncertainty.

    Learn more "

    Well, that's certainly counterintuitive. Despite what you just said, your paper does ask the question of whether investors should consider moving away from bonds.

    Yeah, that's the most common question we're getting right now. There's a lot of interest in other instruments that we're calling bond substitutes. Now, there's not necessarily anything wrong with them. So I think the term might impose kind of a negative connotation on some of these bond substitutes, but people are viewing other higher-yielding investments as a potential substitute for the high-quality bonds in your portfolio.

    Some of those substitutes that I'm referring to are things like dividend-paying stocks, some high-yield bonds, floating-rate bonds, etc. And one of the things that we're really encouraging investors to recognize is that, while these instruments have higher yields than high-quality bonds like you get with the Barclays U.S. Aggregate [Bond] Index or certainly with Treasury bonds, they do have a very different risk profile, particularly when equities are declining. When equities are doing very poorly, many of these bond substitutes actually act a lot more like equities than bonds.

    So it sounds like attempts to reach for income could end up depressing your overall returns. Is that right?

    Over the long term, we think the answer is absolutely yes, and we've done some work around this, and we've modeled what we think will be forward-looking returns of portfolios over the long term for balanced investors. And what we found is the higher your allocation is to equities, the larger the downside risk in your portfolio is over time. And that's also true if you move away from high-quality bonds and Treasury bonds, in particular, and invest your bond allocation in some of these bond substitutes we've been talking about.

    Older investors may be worried about generating income in a low interest rate environment. Do you have any advice?

    This may be the hardest question you've asked of all, because we have a tremendous amount of sympathy for investors in this situation, those who are older-or, really, frankly, anyone who's really dependent on their portfolio to produce income for them, to meet their current spending needs, because you're absolutely right. The traditional answers to providing income-high-quality bonds-are not providing the level of income that investors have grown accustomed to. We've actually referred to these investors-and, really, maybe more appropriately call them savers-as a sacrificial lamb of current monetary policy. The very low interest rate environment we're faced with has really imposed a severe penalty on these savers.

    And our answer is that if you choose to move away from the high-quality bonds into instruments that will generate more income in your portfolio, you'll likely get more income over time, but you'll also very likely experience a much higher level of volatility in that income stream. Of course, the only other alternative is to reduce your spending, which perhaps is even harder to do than to stomach lower levels of income for your portfolio. So there really is no easy answer.

    Vanguard really emphasizes the idea of total return. Could you talk a little bit more about that and what that means in light of what's happening in the bond market?

    I think it goes back to not looking at each piece of your portfolio and the returns that they're currently generating, but the return of your total portfolio overall. It's very rare that all assets in your portfolio are delivering very strong returns at any point in time. In fact, you don't want that if you're a balanced investor, because if you do have assets that are that highly correlated in good times, chances are they'll be very highly correlated in bad times as well, and you'll realize very sharp losses in declining equity markets. But ideally, if you have a balanced, diversified approach to investing, you'll realize healthy rates of total return over time.

    Vanguard research

    Risk of loss: Should the prospect of rising rates push investors from high-quality bonds? PDF

    [Aug 17, 2013] Fed Watch Fall Tapering in the Air

    August 15, 2013 | Economist's View

    anne:

    https://personal.vanguard.com/us/funds/vanguard/all?sort=name&sortorder=asc#hist=upperTB%3ApyldTBI%3A%3AlowerTB%3AdailyTBI

    August 15, 2013

    * Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.

    anne:

    January, 2013

    Ten Year Cyclically Adjusted Price Earnings Ratio, 1881-2013

    (Standard and Poors Composite Stock Index)

    August 15 PE Ratio ( 23.79)
    July PE Ratio ( 23.60)

    Annual Mean ( 16.48)
    Annual Median ( 15.89)

    -- Robert Shiller

    anne

    January, 2013

    Dividend Yield, 1881-2013

    (Standard and Poors Composite Stock Index)

    August 15 Dividend Yield ( 2.00)
    July Dividend Yield ( 1.93) *

    Annual Mean ( 4.44)
    Annual Median ( 4.37)

    * Vanguard yield after costs

    -- Robert Shiller

    [July 17, 2013] Fed Watch Bernanke Takes a Dovish Stance

    July 17, 2013 | Economist's View

    anne:

    January, 2013

    Ten Year Cyclically Adjusted Price Earnings Ratio, 1881-2013

    (Standard and Poors Composite Stock Index)

    July 17 PE Ratio ( 24.52)
    June PE Ratio ( 23.19)

    Annual Mean ( 16.47)
    Annual Median ( 15.88)

    -- Robert Shiller

    anne:

    January, 2013

    Dividend Yield, 1881-2013

    (Standard and Poors Composite Stock Index)

    July 17 Dividend Yield ( 1.91)
    June Dividend Yield ( 2.03) *

    Annual Mean ( 4.44)
    Annual Median ( 4.38)

    * Vanguard yield after costs

    -- Robert Shiller

    anne:

    https://personal.vanguard.com/us/funds/vanguard/all?sort=name&sortorder=asc#hist=upperTB%3ApyldTBI%3A%3AlowerTB%3AdailyTBI

    July 17, 2013

    * Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.

    [Jun 29, 2013] Economist's View Links for 06-29-2013

    anne:

    https://personal.vanguard.com/us/funds/vanguard/all?sort=name&sortorder=asc#hist=upperTB%3ApyldTBI%3A%3AlowerTB%3AdailyTBI

    June 28, 2013

    * Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.

    Fed Watch The Chart to Watch

    June 20, 2013 | Economist's View

    anne:

    https://personal.vanguard.com/us/funds/vanguard/all?sort=name&sortorder=asc#hist=upperTB%3ApyldTBI%3A%3AlowerTB%3AdailyTBI

    June 20, 2013

    * Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.

    Paul Krugman Bernanke, Blower of Bubbles

    Economist's View

    anne:

    https://personal.vanguard.com/us/funds/vanguard/all?sort=name&sortorder=asc#hist=upperTB%3ApyldTBI%3A%3AlowerTB%3AdailyTBI

    May 10, 2013

    The Vanguard inflation protected Treasury bond fund, with a maturity of 9.4 years and a duration of 8.3 years, is yielding - 1.14%.

    * Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.

    anne:

    https://personal.vanguard.com/us/funds/vanguard/all?sort=name&sortorder=asc#hist=upperTB%3ApyldTBI%3A%3AlowerTB%3AdailyTBI

    May 3, 2013

    * Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.

    Fed Watch Initial Jobless Claims Spiked Last Week

    Economist's View

    anne:

    https://personal.vanguard.com/us/funds/vanguard/all?sort=name&sortorder=asc#hist=upperTB%3ApyldTBI%3A%3AlowerTB%3AdailyTBI

    April 4, 2013

    * Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.

    [Mar 03, 2013] Bernanke How are long-term rates likely to evolve over coming years by Bill McBride

    If what Bernanke is saying is true, bonds are in the bubble territory. In no way interest rate on 10 year treasuries can be less then 2% with inflation over 2%. This is some kind of Fed manipulation. Long-term interest rates would be expected to rise gradually toward more normal levels over the next several years.
    3/01/2013 | Calculated Risk

    From Fed Chairman Ben Bernanke: Long-Term Interest Rates. Excerpts:

    [W]hy are long-term interest rates currently so low? To help answer this question, it is useful to decompose longer-term yields into three components: one reflecting expected inflation over the term of the security; another capturing the expected path of short-term real, or inflation-adjusted, interest rates; and a residual component known as the term premium. Of course, none of these three components is observed directly, but there are standard ways of estimating them. ...

    [H]ow are long-term rates likely to evolve over coming years? It is worth pausing to note that, not that long ago, central bankers would have carefully avoided this topic. However, it is now a bedrock principle of central banking that transparency about the likely path of policy, in general, and interest rates, in particular, can increase the effectiveness of policy. In the present context, I would add that transparency may mitigate risks emanating from unexpected rate movements. Thus, let me turn to prospects for long-term rates, starting with the expected path of rates and then turning to deviations from the expected path that may arise.

    If, as the FOMC anticipates, the economic recovery continues at a moderate pace, with unemployment slowly declining and inflation expectations remaining near 2 percent, then long-term interest rates would be expected to rise gradually toward more normal levels over the next several years.

    1 currency now -yogi:

    However, it is now a bedrock principle of central banking that transparency about the likely path of policy, in general, and interest rates, in particular, can increase the effectiveness of policy.

    Read more at Calculated Risk

    "Bend over, fixed-income bitch, I'm going to fuck you up the ass. Aren't you glad I'm telling you ahead of time?"

    adornosghost:

    1 currency now -yogi wrote:

    He was right, of course.

    "It seems somewhat ridiculous to talk of revolution . . . . But everything else is even more ridiculous, since it implies accepting the existing order in one way or another"

    Bruce in Tennessee:

    2%/year inflation is not acceptable...it means 20% inflation per decade...it means the elderly will reach a point where they will be Lucky to afford catfood....think about it. Assemble all the pieces, demographics, 2% inflation when inflation is in the throes of global debt repudiation, younger generations deeply in debt...and on top of all this our central bank thinks 2%/year is acceptable...

    ...I suspect this allows virulent inflation to get started from a "standing start"...but I guess we'll see. Maybe Chinese and Vietnamese wage inflation will be such that we'll see textile mills return to North Carolina....OR maybe we'll get an even poorer class of people that are not able to accept risk with their already insuffient funds...

    ..That's the ticket.

    sm_landlord:

    Bruce in Tennessee wrote:

    2%/year inflation is not acceptable...it means 20% inflation per decade...

    Actually worse than that, because inflation grows through the Magic of Compounding™

    REBear:

    "toward more normal levels over the next several years." Read more at Calculated Risk

    I think he is saying rates not going anywhere "over the next several years"

    [Mar 03, 2013] The 'Great Rotation'? More Like The Great Lie

    Seeking Alpha

    Stocks funds saw a large increase in assets of 5.2% from December to January but Bonds also saw in increase in assets. (Click on table to enlarge)

    Net asset table-ICI

    [Mar 01, 2013] Economist's View Fed Watch If Not For That Pesky Sequester

    anne:

    Investment markets are just fine, even investment markets in Europe, but I take the general bond market as the best indicator of the strength or weakness of the economy and bond investors just do not think that significant enough growth to make a needed difference in employment is anywhere near:

    https://personal.vanguard.com/us/funds/vanguard/all?sort=name&sortorder=asc#hist=upperTB%3ApyldTBI%3A%3AlowerTB%3AdailyTBI

    March 1, 2013

    The 3 month Treasury interest rate is at 0.07%, the 2 year Treasury rate is 0.23%, the 5 year rate is 0.75%, while the 10 year is 1.85%.

    The Vanguard A rated short-term investment grade bond fund, with a maturity of 3.1 years and a duration of 2.4 years, has a yield of 1.11%. The Vanguard A rated intermediate-term investment grade bond fund, with a maturity of 6.4 years and a duration of 5.4 years, is yielding 2.17%. The Vanguard A rated long-term investment grade bond fund, with a maturity of 24.2 years and a duration of 13.6 years, is yielding 4.14%. *

    The Vanguard Ba rated high yield corporate bond fund, with a maturity of 4.9 years and a duration of 4.4 years, is yielding 4.48%.

    The Vanguard convertible bond fund, with a maturity of 6.8 years and a duration of 7.4 years, is yielding 2.81%.

    The Vanguard A rated high yield tax exempt bond fund, with a maturity of 6.6 years and a duration of 6.1 years, is yielding 2.40%.

    The Vanguard A rated intermediate-term tax exempt bond fund, with a maturity of 5.5 years and a duration of 5.1 years, is yielding 1.51%.

    The Vanguard GNMA bond fund, with a maturity of 6.3 years and a duration of 4.3 years, is yielding 2.34%.

    The Vanguard inflation protected Treasury bond fund, with a maturity of 9.1 years and a duration of 8.5 years, is yielding - 1.17%.

    * Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.

    Not your father's IBM - I, Cringely

    [Oct 06, 2010] Vanguard cuts fees by expanding share class Mark Jewell

    Vanguard cuts fund fees by lowering entry bar for low-cost Admiral share class
    October 6, 2010 | Yahoo! Finance

    Vanguard is expanding access to its lowest-cost mutual fund share class for individual investors, a move that will bring fee reductions to nearly 2 million clients of the nation's largest fund company.

    Vanguard said Wednesday it is reducing the minimum investment amount to qualify for its Admiral share class, which charges lower investment expenses than its Investor mutual fund shares.

    The biggest cuts affect Vanguard's index funds, which the company pioneered in the late 1970s as low-cost alternatives to actively managed funds relying on human investment-picking expertise. Investors who previously needed to invest at least $100,000 to qualify for Admiral shares can now get in with just $10,000 for Vanguard index funds, which passively track stock or bond market indexes.

    For example, Admiral shares of Vanguard's Total Stock Market Index Fund will charge $7 in annual expenses for every $1,000 invested, provided an investor has at least $10,000 in the fund. That's down from $18 in annual expenses for Investor shares in the $138 billion fund, which requires a minimum of $3,000.

    For Vanguard's less-popular actively managed funds, the new investment minimum for Admiral shares is $50,000 instead of $100,000.

    A total of 52 of Vanguard's more than 170 U.S. funds offer Admiral shares with the new lower eligibility requirements, including 17 index funds and 35 actively managed funds.

    Vanguard will begin converting qualifying accounts to Admiral shares in coming months, affecting nearly 2 million clients.

    The privately held, shareholder-owned company, based in Valley Forge, Pa., has offered its Admiral share class for 10 years, along with its Investor class and institutional shares geared toward clients like 401(k)s or other workplace savings plans.

    Vanguard's Admiral share class now holds about $340 billion, or about one-quarter of the nearly $1.5 trillion in U.S. mutual fund assets that Vanguard manages. With the expanded access to Admiral shares, that class will grow to $430 billion, with the $90 billion shifted from Investor class shares.

    Wednesday's announcement is the latest in a string of cost-cutting moves this year by Vanguard, which has used its size to become more efficient and drive down expenses, challenging chief rivals Fidelity Investments and Capital Group's American Funds. In May, Vanguard began offering its brokerage clients commission-free trades in Vanguard exchange-traded funds, a fast-growing business where Vanguard is playing catch-up to rivals like BlackRock Inc.'s iShares ETFs and State Street's "SPDR" ETFs.

    Last month, Vanguard began offering an ETF share class of its Vanguard 500 Index, a $94 billion behemoth tracking the Standard & Poor's 500. The ETF version charges $6 per $1,000 in annual expenses, compared with $18 for the fund's Investor class, and $7 for the Admiral class.

    Vanguard last month also launched 19 new funds that offer traditional mutual fund shares along with ETF shares that hold the same basket of stocks or bonds as the conventional fund shares.

    ETF shares are priced throughout the trading day and can be traded like stocks. That makes it possible to lock in a preferred price without waiting for a closing price, unlike with mutual funds, whose shares are priced once a day.

    Last week, Vanguard announced expense cuts at its 529 college savings plan offered through the state of Nevada.

    [Oct 06, 2010] Nest Eggs Seem to Lack Attention and Diversity

    Vanguard Finds Investors Fail to Adequately Nurture Their Retirement Savings
    ARDEN DALE
    DOW JONES NEWSWIRES, November 28, 2005; Page C9
    http://online.wsj.com/article/SB113313361680107674.html

    December 04, 2005 | 10:00 AM | Permalink | Comments (2) |

    Comments

    Jason

    Two thoughts - first, I wonder whether Vanguard took into account that IRAs tend to feature smaller annual contributions, which makes it hard to amass enough capital to diversify across multiple funds.

    But the asset allocation is certainly troubling. It looks like the mirror image of what happened in the mid-1990s, when individuals were being told to diversify into equities (an argument that leaned heavily on Jeremy Siegel) and out of stable value/money market funds. Looks like that argument worked perhaps too well.

    Perhaps they diversify in their 401k, which has higher contribution limits and matching.

    [Sep 10, 2010] Vanguard Adds 9 S&P Equity ETFs - Yahoo! Finance

    On the bond side, Vanguard will offer three new municipal bond index funds with traditional and exchange-traded shares, tracking benchmarks in the S&P National AMT-Free Municipal Bond Index series. The expense ratio for each of Vanguard's new municipal ETFs is estimated to be 0.12%.

    Vanguard has also filed for a new real estate fund, which will be benchmarked to the S&P Global Ex-U.S. Property Index. Vanguard Global ex-U.S. Real Estate Index Fund will offer Investor Shares, Institutional Shares, Signal Shares, and ETF Shares.

    Vanguard Drops Grantham's Firm as Co-Manager of Funds By Sree Vidya Bhaktavatsalam

    That was a wrong move...
    February 26, 2008 Bloomberg.com

    Vanguard Group Inc., the second- biggest U.S. mutual-fund company, dropped the investment firm run by Jeremy Grantham as co-manager of three domestic stock funds that lagged behind peers in the past year.

    The firm, Grantham, Mayo, Van Otterloo & Co. LLC, was removed from the $10.5 billion Explorer, the $975 million Vanguard U.S. Value and the $695 million VVIF-Small Company Growth Portfolio, Valley Forge, Pennsylvania-based Vanguard said today in a statement. Vanguard replaced Boston-based GMO with its own quantitative equity group, which uses mathematical models to pick stocks.

    The Explorer fund, which invests in U.S. small-company stocks, slumped 11 percent in the past year, trailing half of its peers, according to data compiled by Bloomberg. Grantham, whose firm oversees $157 billion, said in a Jan. 23 interview that investors should avoid equities and hold cash during what he called worst U.S. financial crisis since World War II.

    ``There are plenty of bad things left in this cycle,'' Grantham, 69, said in the interview.

    Dubbed a ``perma-bear'' for his dour view on U.S. equities for more than a decade, Grantham correctly predicted a crash in technology stocks two months before the bubble burst in March 2000. GMO had managed the Vanguard fund since 2000.

    Vanguard, which has used multiple managers for its $47 billion Windsor II and other funds since 1997, reviews external advisers and fund performance every quarter.

    The quantitative group "was a good fit and it was complementary to the existing managers,'' Rebecca Cohen, a spokeswoman for Vanguard, said in an interview.

    Tucker Hewes, a spokesman for GMO, declined to comment.

    Prudential Plc

    The U.S. Value Fund slumped 8.1 percent in the past year, trailing 61 percent of rival funds that invest in stocks deemed cheap based on financial yardsticks such as earnings, Bloomberg data show. The VVIF Small Company Growth, offered to institutions and through advisers, slumped 9.9 percent in 2007, four times the pace of the benchmark Russell 2500 Index, according to data on Vanguard's Web site.

    Vanguard picked Prudential Plc's M&G Investment Management to manage a portion of its largest actively managed non-U.S. fund, the $18.3 billion Vanguard International Growth Fund and the $1.9 billion VVIF - International Portfolio. London-based M&G joins Schroder Investment Management and Baillie Gifford Overseas Ltd. in managing the non-U.S. funds.

    M&G has managed the $4.6 billion Vanguard Precious Metals and Mining Fund since its inception in 1984. The fund climbed 41 percent in the past year, beating 98 percent of competing funds that invest in specific industry groups, Bloomberg data show.

    Vanguard's quantitative group has $25 billion active equity fund assets. Vanguard manages $1.25 trillion in U.S. mutual-fund assets. It ranks second to Fidelity Investments in Boston, which manages $1.6 trillion.

    To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net;

    Vanguard Windsor II - James P. Barrow has lost his touch

    Yahoo! Message Boards

    21-Dec-07 10:35 pm

    I had yields over 4% in my Vanguard Prime MM and Fidelity Cash Reserves funds, with no risk. Unless we get a year end rally, these will beat VWNFX. Why are you defending this fund? Can't take criticism?

    I think it is ridiculous they set a high minimum initial investment ($10,000) on this fund. There is nothing premium about Windsor II anymore.

    Vanguard is a has-been investment firm. Lack of fresh ideas, marginal returns and dead interest by Yahoo subscribers should be clues enough for any new investor.

    [Sep 10, 2010] Vanguard Adds 9 S&P Equity ETFs - Yahoo! Finance

    On the bond side, Vanguard will offer three new municipal bond index funds with traditional and exchange-traded shares, tracking benchmarks in the S&P National AMT-Free Municipal Bond Index series. The expense ratio for each of Vanguard's new municipal ETFs is estimated to be 0.12%.

    Vanguard has also filed for a new real estate fund, which will be benchmarked to the S&P Global Ex-U.S. Property Index. Vanguard Global ex-U.S. Real Estate Index Fund will offer Investor Shares, Institutional Shares, Signal Shares, and ETF Shares.

    Only by signing up for electronic delivery of shareholder materials (statements, confirmations, and so on) you can avoid fees for underinvestment in a fund. Of course, you could consolidate funds to get over the minimums, or maintain $100,000 or more in total Vanguard investments. But if that's not your cup of tea, simply signing up for electronic delivery is your best bet. In our case, we actually signed up for this long ago to stem the flow of paperwork into our mailbox.

    The Big Picture Vanguard Nest Eggs Lack Attention and Diversity

    Vanguard: Nest Eggs Lack Attention and Diversity

    Sunday, December 04, 2005 | 10:00 AM

    in Investing | Psychology/Sentiment

    "Investors too often let their retirement nest eggs lie without proper attention, and don't do enough to diversify their savings, according to a study to be published by mutual-fund giant Vanguard Group."

    Thats an all too true statement from mutual fund giant Vanguard. They looked at five million people with employer-sponsored defined-contribution plans or individual retirement accounts it administers. Vanguard found that during the first half 2005, only 10% of investors in the defined-contribution plans and 8% of IRA owners made any trades within the accounts.

    Thats not to suggest that people should be overtrading -- but one would have thought there would have been more assel reallocation or rebalancing going on.

    Vanguard also found that IRA holders are about twice as likely to invest in a single asset class or single fund as are those with defined-contribution plans. The typical IRA holder chooses just one fund, compared with the three funds typically held in a defined-contribution plan, such as a 401(k) retirement savings account.

    The average Vanguard-administered defined-contribution plan offered 18 funds at the end of 2004, compared with more than 70 Vanguard funds offered to IRA investors, according to the study. The plethora of choices offered to IRA investors may result in "choice overload," Vanguard said.

    Why reallocate? Consider:

    Stocks accounted for about 70% of combined assets in IRAs and defined-contribution plans held by the average investor in his late 40s, Vanguard said. But half of the IRA holders put their entire accounts into stocks, compared with 20% of the defined-contribution holders. At the other end of the spectrum, 14% of the defined-contribution investors put all of their money into fixed-income investments, compared with 8% of Vanguard IRA investors.

    "It is interesting to us that so many people do appear to take extreme positions, so 100% equity or no equity," said Ms. Young.

    Vanguard also advises investors in the plans against trying to time their moves in and out of investments and trading frequently. "Investors should be duly skeptical of their own rationales for market-timing, and instead they should consider making trading decisions based on changes in their overall circumstances rather than their short-term outlook for the financial markets," the study said.

    [May 31, 2008] Wal-Mart Sued for Not Using Vanguard by nickel

    Wall Mart is too mean and should be punished for how it handle 401K accounts. They selected the most greedy and incompetent of money managers possible ;-) ...
    fivecentnickel.com

    I just ran across an interesting article that talks about a lawsuit against Wal-Mart over their 401(k) investment selections.

    The suit claims that Wal-Mart harmed their employees by offering high-cost retail funds instead of the cheaper institutional funds for which they surely qualify, and by only offering actively-managed (and thus costly) fund options rather than choosing a company such as Vanguard that offers low-cost index funds. Overall, the suit claims that if the Wal-Mart 401(k) had been invested in Vanguard funds, it would have been worth an additional $140 million over the six year period under consideration.

    This is an interesting case. While I'm not a big fan of lawsuits of this nature, the lack of affordable investment options in many 401(k) plans is a real issue that needs to be dealt with.

    9 Comments

    [Apr 30, 2008] Vanguard Removes Annual Account Fee by nickel

    In case you didn't know, Vanguard has traditionally levied a $10 annual account fee on IRAs (traditional, Roth, or SEP) and ESAs with a balance of less than $5,000, index fund accounts with a balance of less than $10,000, and all non-retirement accounts with a balance of less than $2,500. Going forward, they've decided to levy a $20 fee for each Vanguard fund in which you have a balance of less than $10,000.

    The good news here is that you avoid these fees entire

    [Dec 5, 2005] Vanguard Group, The Vault Jobs Surveys by Jon H

    Job Title: Financial Counselor
    Location: Malvern, PA
    Submitted on: 07-May-03

    Job Title

    Workplace Survey

    Financial Counselor

    The Malvern (Valley Forge) offices of the company are still professional dress. The IT division is a little looser. The company has a very frugal culture, tends to develop systems "in-house" versus off the shelf because "we are vanguard and nobody knows how we run our ship." This tends to produce technology that is often too late and too little. Nothing original gets done. We are very proud of how little we spend to run the operation.

    The Admiral Share class was in reality a revenue give-back that has basically hamstrung the company from investing in itself recently. The pay sucks. If you come from the outside (like I did) you have to get everything you want upfront (sign-on bonus, base, etc.) because you won't get it once you are in the door. Previous work experience means nothing once you are in. The IT division loves getting the talent from the likes of Lockheed Martin, GE, Unisys, Conrail and every other large companies IT divisions that have shrunk in the easter PA area over the past 5 years. Once inside it doesn't matter because you will be outnumbered. Forget about raises.

    The company had a four scale rating system (prior to last year) where 1% of the company gets an "Exceeds" rating, 60% get "Achieves" close to 30% got "Needs..." and the rest basically don't make it till review time. Anyhow they revampted the reviews so that 1% of the 1% get "consitency exceeds, 5-10 percent get "exceeds" 80% get "achieves" and the bottom get "needs improvement." With the "redeployments" going on this past year (consitently denied in the press, and vanguard never lays off), getting a needs improve rating means you need to look elsewhere. Oh, in case you were wondering I received an "exceeds" rating this past year. That equated to a 2% raise. Sure glad

    I busted my hump to by doing more and better than the rest so that my raise could be double 60% of my coworkers who got a 1% raise. To put this in perspective, inflation was 2.2% this past year. Vanguard likes to use the phrase total compensation, which includes partnership which is to count towards your comp but shouldn't be included for its not guaranteed. Anyhow the company line is that it aligns shareholder interests with the crews. In reality it is an involuntary deferred comp that you get after the fact and is capped. Everybody knows it's capped, until it got out in the press that Brennan and other officers partnership payouts are not capped. No wonder Brennan wants to get to 100 per share by 2005. It's not really the motivation you would think since the majority of the crew is capped and all of the crew will be by then. So if you don't mind being underpaid for the next few years.....

    December 1, 2002 FundAlarm - Highlights & Commentary Archive By Roy Weitz

    Mutual fund directors are as close as we get to "insiders" in the mutual fund world, and it can be fun (and occasionally instructive) to see how insiders invest their own money.....According to recent proxy materials from Vanguard, a group of seven directors (technically, trustees) runs all 109 Vanguard funds, and each director personally owns, in total, at least $100,000 worth of Vanguard funds.....But as you might expect, the type of funds, and the amount invested, varies widely from director to director.....For example:

    You can view all of the Vanguard directors, and the funds they own, on the accompanying page

    TMF Re bond funds - Index Funds

    >> a few hundred posts back someone mentioned bond funds, and was told to avoid them (bond funds are evil)--but further along , someone asks about Vanguard bond funds and they seem acceptable to everyone. I am pretty confused actually. are they ok or not ok? <<

    Two things:

    1. Bond funds usually get a bad rap because they never "mature." For example, if you put $5,000 into a bond (or group of bonds) with a 5-year maturity, after five years, you'll get your $5,000 back plus the interest paid on the bonds (assuming no defaults). But a bond *fund* with a 5-year maturity always seeks to keep that maturity, so if interest rates rise, after five years you have less than $5,000. (Of course, if they fall, you have *more* than $5,000.)

    2. Many folks here believe that if it's Vanguard, it can do no wrong, and that if it's not Vanguard, it sucks. Vanguard is certainly one of the better fund families out there if not the best, but I don't think one can conclude that they are the solution for everyone and everything. You'll probably find that the Vanguard product family is a good choice for you, but do your own research to make sure. Vanguard is heavily hyped here -- with some good reason -- but there's much more out there as well.

    Best of luck!

    The best Vanguard funds for a 401k - MSN Money

    [Related content: 401k, funds, Vanguard, bond funds, mutual funds]

    The best Vanguard midcap funds

    My favorite Vanguard midcap funds are the Vanguard Capital Opportunity fund and the Vanguard Selected Value (VASVX) fund, though I don't think many 401k plans hold them.

    You could ask for them or simply go with an index duo: Vanguard Mid-Cap Growth Index (VMGIX) and Vanguard Mid-Cap Value Index (VMVIX).

    Of course, holding an equal weighting in these two index funds would be the same as investing in the broader Vanguard Mid-Cap Index (VIMSX), but having the two funds allows you to adjust your midcap assets to lean more heavily toward the growth or value side, depending on what's happening in the market.

    Right now, for example, you'd want to overweight the growth side of the ledger. The financial stocks that are a heavy component in the value index fund have had a healthy run of late, as have the tech stocks in the growth fund. But there's a better chance that tech stocks will continue to gain momentum in the economic recovery, while the banks will tread water until economic skies are clearer.

    Best Vanguard international funds

    I recommend you have 10% to 15% of your 401k in international funds, and Vanguard has some stellar choices. Vanguard International Growth (VWIGX) is likely to be one of your 401k offerings, and it's a fine fund to own.

    With three managers, International Growth still holds just 170 stocks or so, and close to 20% of its assets are in the top 10 stocks. That's the kind of concentration I like. The managers also aren't afraid to invest in emerging markets, something you don't always find in more-plain-vanilla offerings.

    As I said before, you'll want to spice your foreign holdings with some of the Vanguard Emerging Markets Index fund, and it's worth your while to demand your 401k administrator give you access to this fund.

    Globally, emerging economies are showing increased economic firepower, hungry consumers and the ability to take advantage of newly aggressive importers, exporters, manufacturers and entrepreneurs. Emerging Markets Index will give you nice exposure to one of the most powerful investment markets out there -- China -- with about 20% of its assets in this economic powerhouse.

    In addition, Emerging Markets has investments in Brazil (15%), Korea (13%) and Taiwan (12%).

    I'd also like to see you have some exposure to foreign small caps. Vanguard FTSE All-World ex-US Small-Cap Index (VFSVX) is a new Vanguard fund that invests in small-cap non-U.S. stocks. This fund tracks an FTSE benchmark of more than 3,000 stocks, and it will give you excellent exposure to this sector of the market.

    Best Vanguard bond funds

    If you own Wellington in your 401k, you already have exposure to high-quality corporate and government bonds, so you don't need to diversify into another bond fund in your 401k. But if not, put about 10% of your 401k money in Vanguard Short-Term Investment-Grade Bond Fund (VFSTX).

    This fund invests at least 80% of its assets in "investment-grade" or better short- and intermediate-term bonds, and that has been a good place to be lately. As banks have pulled in their lending, corporate bond issuance worldwide has gone through the roof. This fund has performed well this year and should continue to do so down the road.

    Vanguard's Intermediate-Term Investment-Grade Bond Fund (VFICX) is also a good choice, but it will be a bit more volatile when interest rates begin to rise.

    Putting it all together

    If you are able to invest in any of the Vanguard Primecap-managed funds, put most of your equity money there. If not, start with Wellington. Round out your equity holdings with Vanguard Mid-Cap Growth and Vanguard Mid-Cap Value, overweighting in one or the other depending on what's happening in the market.

    Video: Active funds can beat indexes

    You'll want 10% to 15% of your 401k money in international funds, including Vanguard International Growth, Vanguard Emerging Markets Index and Vanguard World ex-US Small-Cap Index.

    And if you don't have a balanced fund like Wellington, which already owns bonds, put 10% of your 401k money in Vanguard Short-Term Investment-Grade Bond Fund or Vanguard Intermediate-Term Investment-Grade Bond Fund.

    The chart below gives you the starting point I'd recommend, naming key funds and their focus areas. If you don't have all the choices (or, I suppose, Vanguard at all), the focus areas might still give you some guidance.

    Remember, it's your retirement. So make sure your 401k plan is designed to help you, not your benefits manager.

    Portfolios for long-term growth investors
    Fund Focus Allocation

    Using Wellington as your core

    Wellington

    Balanced (60% stock/40% bond)

    40%

    Mid-Cap Growth Index

    Stock -- midcap growth

    25%

    Mid-Cap Value Index

    Stock -- midcap value

    15%

    International Growth

    Foreign stock -- large

    10%

    Emerging Markets Index

    Foreign stock -- emerging

    5%

    World ex-US Small-Cap Index

    Foreign stock -- small

    5%

    Total

    100%

    Using Primecap-run funds as your core

    Primecap/Primecap Core/Capital Opportunity

    Stock -- Growth at a reasonable price

    44%

    Selected Value

    Stock -- mid-cap value

    20%

    International Growth

    Foreign stock -- large

    10%

    Emerging Markets Index

    Foreign stock -- emerging

    5%

    World ex-US Small-Cap Index

    Foreign stock -- small

    5%

    Short-Term Investment-Grade Bond

    Short corporate bonds

    8%

    Intermediate-Term Investment-Grade Bond

    Intermediate corporate bonds

    8%

    Total

    100%

    Dan Wiener is the editor of The Independent Adviser for Vanguard Investors. A five-time winner of the Newsletter Publishers Foundation's Editorial Excellence Award, Wiener is the founder of the Fund Family Shareholder Association and chief executive officer and chief investment strategist of Adviser Investment Management, a Newton, Mass., investment advisory firm.

    Vanguard's Best Bear Market Mutual Funds

    Thursday August 30, 7:00 am ET
    By Dan Culloton

    The increased market volatility in recent months as well as Vanguard's announcement that it will launch a market-neutral fund for institutional investors before the end of the year got me thinking (a dangerous development, to be sure). Are any of Vanguard's funds any good at reducing volatility without sacrificing the potential for capital appreciation like a market-neutral fund is supposed to do? And if market-neutral funds are such a great idea, does the typical Vanguard investor need one in his or her portfolio? To answer these questions I looked at the bear market ranks of Vanguard funds, as well as measures of their volatility, such as standard deviation. I also checked how the funds have held up relative to their peers during the tumultuous third quarter. I found that quite a few Vanguard funds looked good according to the bear market ranking (which gauges how funds have done in down markets over the past five years), so the answer to the first question is a resounding yes. That also answers the second question. With so many options with long histories of minimizing market risk while delivering some capital appreciation, most Vanguard investors could live long and happy lives without a market-neutral fund. I've highlighted below what I think are the best Vanguard funds for a bear market. Granted, they don't use the sophisticated strategies of a market-neutral fund, but they've delivered pretty good downside protection and absolute returns at less than half the projected cost of the proposed Vanguard Market Neutral Fund.

    A caveat: I'm not predicting that the end is nigh (I'll leave that to Jeremy Grantham) or urging you to dump all your holdings and buy one of these funds. I still believe that the best safeguard against a bear market is to be a long-term investor with a sound long-term plan. But if the recent undulations have been giving you panic attacks in the shower or causing you to check out the return prospects of shoeboxes and mattresses, it may be time to re-evaluate your risk profile and perhaps consider funds like these.

    Vanguard LifeStrategy Income (NASDAQ:VASIX - News)
    This is a fund of funds that keeps most of its money in fixed-income portfolios: Vanguard Total Bond Market (NASDAQ:VBMFX - News) and Vanguard Short-Term Investment-Grade (NASDAQ:VFSTX - News). But its equity stake can vary from 5% to 30% depending on the asset-allocation calls of Tom Loeb and his team at Vanguard Asset Allocation (NASDAQ:VAAPX - News), which gets 25% of assets here (Vanguard Total Stock Market Index (NASDAQ:VTSMX - News) accounts for the rest of stock holdings). Loeb uses quantitative models to figure out how much of his portfolio to devote to S&P 500 stocks and the Lehman Brothers Long-Term Treasury Index, and his calls have been consistent and accurate over the years. (Currently Loeb's fund has about three fourths of its assets in stocks, so this fund's equity allocation hangs around 20%.) That give this conservative fund a little upside potential, but it's really designed to preserve capital and generate income. The fund's bear market rank is better than 97% of its conservative-allocation category peers and in the third quarter through Aug. 28 it eked out a small gain that put it ahead of 96% of its peer group. Investors who are further away from their goals or who are more risk tolerant can check out Vanguard LifeStrategy Conservative Growth (NASDAQ:VSCGX - News) and Vanguard LifeStrategy Moderate Growth (NASDAQ:VSMGX - News), which devote more money to equity funds and have done well in bear markets relative to their peers.

    Vanguard Wellesley Income (NASDAQ:VWINX - News)
    A colleague of mine recently told me that this portfolio, which keeps most of its money in bonds, was the first fund she ever bought. My first reaction was to say that it seemed awfully conservative for someone whose retirement was still decades off. She retorted that she was looking for a one-stop fund that wouldn't burn an inexperienced investor. Since then she has built a more age-appropriate asset-allocation plan around this fund, but she has never regretted her first purchase because the fund has been so reliable. It has lost money in just three of the last 20 years, has done better than 97% of its peers in bear markets, and has succeeded in delivering a steady stream of income with a portfolio of undervalued, high-yielding stocks and high-quality (mostly corporate) bonds. That the fund has held up well (better than nearly 90% of its conservative-allocation peers for the third quarter through Aug. 28) in the middle of a credit crunch with such a large corporate bond stake is testimony to the security-selection skills of long-time fixed-income manager Earl McEvoy and his team from Wellington Management. Wellington's John Ryan on the equity side is no slouch either. He's leaving the fund next year but has a seasoned understudy lined up in Michael Reckmeyer III. My colleague argues that there are worse newbie-investor mistakes than buying this fund, and I'd have to agree.

    Vanguard Short-Term Tax-Exempt (NASDAQ:VWSTX - News)
    This fund is cautious and consistent. Longtime manager Pam Wisehaupt-Tynan keeps the portfolio's duration, a measure of interest-rate sensitivity, low and its credit quality high. Low expenses allow the fund's conservative approach to work in its favor over time. Put too much of your portfolio here and you could run the risk of not keeping up with inflation or not seeing enough appreciation to meet your goals, but it can take the edge off a taxable portfolio. It's done better than 96% of its peers in bear markets and outpaced almost 80% of them in the current quarter through Aug. 28.

    Vanguard Balanced Index (NASDAQ:VBINX - News)
    Once again, simplicity and low costs work in a Vanguard fund's favor. A mix of 60% MSCI U.S. Broad Market Index (essentially Vanguard Total Stock Market Index ) and 40% Lehman Aggregate Bond Index has produced reliable absolute returns. It's done better than 86% of its peers in bear markets and has bested about four fifths of them so far in the third quarter. The fund's correlation with the overall market is higher, but it's still a solid core holding.

    Vanguard Wellington (NASDAQ:VWELX - News)
    This is another old stalwart managed by the redoubtable Wellington Management. In June, my colleague Chris Davis highlighted this one of Morningstar's favorite "sleep-at-night funds", or offerings that don't keep you awake at night wondering what they are doing. Since then the fund has acquitted itself relatively well. It posted a 1.9% loss for the third quarter through Aug. 28, but that was still better than 82% of its moderate-allocation peers. Its long-term bear market rank also is still better than 86% of its rivals. And like its sibling Wellesley Income it has delivered consistent absolute results, losing money in just three of the last 20 calendar years.

    Read more about Vanguard funds in our Vanguard Fund Family Report. To view a risk-free trial issue, click here.

    Dan Culloton does not own shares in any of the securities mentioned above.

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