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fixed income volatility

Fixed income is taking some wild swings in price lately, for example in a few days wiping out equivalent of a year or two worth of future interest. I wonder what the prudent investor is supposed to do - grit your teeth and assume it is a cycle that will correct itself? I realize treasuries have been called a bubble by some, but am thinking of other fixed income.
Here is last months tactical asset allocation policy of the respected Northern Trust Bank
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(default tactics along bottom, current tweaks in green bar). Although they had throttled back from almost 40% to closer to 30%, I wonder if this months chart will shrink fixed income even more.
Some have been avoiding the danger by going to high yield, which seems to be hanging on. But corporates and TIPS and emerging market bonds have had significant swoons. It is my impression that bank loan funds and convertibles have been doing better (I don't document specific numbers because sometimes the results don't show up here).
Reply to
dumbstruck
You are talking about risk of returning principle, and I think that is what is killing emerging market bonds. Only because they have focused on "emerged" who have sovereign risk, rather than true emerging.
I was talking more about risk to present bond value due to higher inflation or interest rate environment. For these, I expect treasuries are sagging the worst, then corporates and so on. Move on up to junk, and they seem the "safest" now because they have high interest rate to begin with, and aren't thought much default risk in improving economy. I don't know where TIPS fall in this spectrum, but seem to be getting hammered even with negative interest rates.
P.S. several times I have found finance.yahoo.com featuring an article on the same exact subject I have posted here but 5 minutes behind me. It also happens after some other folks postings. Maybe coincidence, but I wonder if there is an editor there using this forum for ideas on which pre-written article to pop up. Or it could be an automatic snooper assigning the yahoo postings based on the user contributions seen here?
Reply to
dumbstruck
It appears that a very large number of fixed income investors are chasing yields by increasing the duration of their portfolios. I suspect far more than the number who are chasing yield by increasing default risk at the same duration. I suspect that most of the individual investors and some of their financial planners do not understand the correlation between bond price and duration. At some point interest rates will move up and these investors will panic and sell. That's the bubble we have to worry about and I suspect the prospect of a large price drop when rates move up is a major factor in the volitility we see now.
--
 .Bill.
Reply to
Bill
What'll happen to TIPS in this scenario. Won't inflation likely kick in to stabilize them?
Reply to
Lowrie
If I could answer that with certainty I would be getting $1,000,000 a day as a consultant to banks and governments. Past recessions clearly show that you can have increasing interest rates without excessive inflation so the answer is a definite maybe.
--
 .Bill.
Reply to
Bill
Stocks paying a dividend can be a good alternative to bonds. The risk can be reduced by the use of options.
-- Ron
Reply to
Ron Peterson

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