Bonds

I was reading the narafa/merlin housing bubble from earlier before and I think narafa is pretty dead on with his scenario #2....

People are mortgaged up the wazoo nowadays which is fueling all this consumer spending...I think if the fed did have long term rates up to 7% the destruction of wealth would ruin the economy for years (decades?) to come. If rates did go that high, a great number of the adjustable rate mortgages would default (because I feel, borrowers don't understand the concept of how it works, just that they're getting a great low rate now). Aside from the huge destruction of wealth, the "respect" that the fed has gained throughout the Greenspan era would be wiped out by a long term feeling of resentment by homeowners everywhere (who control a large portion of wealth).

Well, sorry for the late reply, but I think something must be clear...In our discussion, I mean me and Merlin, I meant the benchmark interest rates, and he was refering to the long term yields, those for the 10 yr note and longer...If benchmark USD rates are at 5%, then normally, the long term yields will be at 7-7.5% as Merlin stated...Corporate bonds will have even higher rates than that...This is a hell high yield, it won't do any good to the housing market, but it won't do any harm as well except convincing people to stop the frenzy buying of houses, which I assume they are considering right now with rates at 4.25%...

You know what's the problem with American consumers...The main problem is that consumer sending in the US is mostly fueled by credit..It's not bad to spend on credit, but it's bad to always spend on credit...Let me tell you one good thing, do you think consumer spending numbers reveal real purchasing power in the economy?? Of course not, because most of this spending is actually debt and loans over credit cards..That's why I don't consider consumer spending too much in my fundamental analysis for the US market specifically, because it's mostly fake and not revealing the real purchasing power in the economy...

Look at someone who earns $5000 a month, he actually has a purchasing power of those $5000..But unfortunately, he has got 2 credit cards with $5000 limits each, so he can actually buy goods and services worth more than his actual purchasing power...This is so misleading when you consider what he actually pays above the original $5000 as consumer spending, it's not...It might be consumer spending for this month, but it will be a debt next month, and an increasing debt with interest and late charges and so on...Ever thought why the consumer spending numbers are so volatile, because it's not 100% purchasing power numbers...


Thanks,

Nader

Ten Year note is a great buy, the USD 10Y Treasury Note. =)

ten year note will be 5.00 % or lower this week.

http://www.pimco.com/LeftNav/Late+Br...ugust+2006.htm

I was reading at the above address that Bill Gross is calling a bottom on the bond market. I am interested if you more experience traders share this opinion and if you believe it is time to go long?
I've just begun my studies in this area and have no monoy yet invested in this arena.

I agree & don't agree at the same time....

I agree that bonds are prone to a rally...By now, they have already rallied...At first when I was watching the 30 Yr Bond, it was at 106, now it is just under 111...That's a 5 points move, not a small one...

I don't agree on the other hand that the bond market is turning bullish...I see this rally as a large correction after the huge dive this market have had earlier in 2004 & 2005...

I didn't give this market a shot for a week or so, but I believe that breaking the 110 mark in the 30 yr bond will give room for further gains to the upside...

Hey Merlin, what is your opinion about this market over the short term & over the long term?? Are you short term bullish & long term bearish like me or what ???


Thanks,

Nader

I have kind of an off-topic question for you Fixed Income experts. If one wants to purchase t-bills and t-bonds solely as a means of preserving earnings, would you recommend reading some of the books out there on Fixed Income securities, quantitative analysis, derivatives modeling, etc?

For example, say you've had a good year investing in Forex and you have $10,000, you want to "take of the table", thus preserving it from being lost, but at the same time you don't just want it sitting idlely by. You plan to buy t-bills or t-bonds as a way to earn a few percent on the money, but not as an actual trading strategy where you're planning on playing the t-bills/bonds themselves. Would you need to know advanced quant methods to do this sucessfully, or is it something that a basic investor could do? I know how to physically purchase them, but what I mean is are they like options where if you buy/sell them without a knowledge of the theory behind their pricing, and the way they behave, you'll be bent over by the market?

In my opinion, if you are looking to put your money in bonds for a short period of time, you don't need to read books & things like this...You don't need to know every single formula about pricing of bonds & so on...The short period of time is usually less than 3 months...

On the other hand, if you are looking to invest your money in bonds for longer time frames, anywhere between 3 months & 2 years, you will need to know what the whole story is about...This is because you are planning to buy a bond, get some coupons out of it & then sell it before it matures...When you go sell it, you will receive the market price, which might show you a total loss for your investment...This is a typical case if you bought a bond when the USD rates hit 3%...Bonds went further down as rates rose & your investment is showing you a loss if you want to sell now, even after you collected your coupons...

And if you are planning to invest for the long term, more than 2 years (Or if you decide that you are going to keep your bond till maturity, you don't have study anything, just know a few information about the market & that's it....Pick a time where rates are high, & go long & leave the bond till maturity & keep collecting your coupons & that's it...


Thanks,

Nader