Friday, December 19, 2008

Bonds beat stocks (2)

Further to my previous post, here is a chart comparing the average yield on high-yield (junk) bonds. Very interesting how yields almost double beginning last September. Investment grade yields are declining but junk yields are not yet declining. This is at odds with the strong performance of some junk bond funds (e.g., HYG) lately, but that could be due to the fact that the Lehman data cover all bonds and not all bonds trade every day, whereas the ones in the HYG fund represent very large and liquid issues. In any event, there is PLENTY of room for junk yields to come down.

8 comments:

  1. Is the 10 year Treasury yield reasonably closely tied to the home mortgage rate on 30 year fixed home mortgages?

    I have begun the process of refinancing my house. But I wonder if I should wait a few weeks to get a better rate. This assumes that rates will go even lower than they are now.

    What's the best way to watch the home mortgage market besides constantly calling up mortgage companies and asking them what their "rate" is today?

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  3. Spiral -

    I often use www.bankrate.com. You have to watch the "leader" numbers many companies put out there, but overall, the quotes are pretty close.

    Scott - what do you think of this WSJ article on money supply?
    http://online.wsj.com/article/SB122973431525523215.html

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  4. I recently came across your blog and have been reading along. I thought I would leave my first comment. I don’t know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

    Oscar

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  5. Spiral: the 10-yr Treasury is generally the reference point for mortgages, but not always. It works most of the time because it has the same duration as mortgages. Conforming mortgage rates tend to have a spread of 130-180 bps or so over the 10-yr Treasury.

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  6. Brian: James Grant has been a perma-bear, and thus wrong most of the time, but in this article he makes some good points, especially in regard to the discipline of a gold standard. The problem with the Fed is that they have "discretion" and that means they can and most likely will make mistakes. No human or group of humans can pick the right interest rate to balance all of the forces acting in the economy.

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  7. Scott,
    What do you think about being long a High yield ETF short the US 10 year treasury?

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  8. dave: there's nothing necessarily wrong with that strategy, but it is almost as if you're doubling up on your exposure rather than hedging. If HY does well, it will be because the economy has avoided a depression/deflation, and that would be very bad for Treasuries (i.e., higher yields)--so you would make money on both sides of that trade. If HY does poorly, then Treasury yields are likely to decline more and you will lose on both sides. If Treasury yields hold steady you will pay the cost of carry to be short and HY will not necessarily do well.

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