Thoughts on Fixed Income Portfolio Positioning

Note: This article is longer than most at a little over 2,000 words. If you choose, click here for a pdf version.

A few days ago, I was asked how I would position the fixed income portion of a portfolio. In order to provide an answer in a timely fashion I basically responded that due to the currently low interest rate environment, a steep yield curve predicting higher rates and corporate credits that would be sensitive to either an improving or weakening economy I would weight the portfolio toward short duration, government debt. Longer duration credits would only be favorable as a means to speculate on falling rates in the short-term or in an economic forecast that gives a high probability to decade with very low inflation. Under any other conditions, long-term bonds are not priced to deliver adequate real returns so a strategy of rolling short-duration bonds should outperform.

Figure1

While my conclusions remain largely the same I would like to expand on this answer by looking separately at the classes of fixed income securities and exploring a few other options for a fixed income strategy. Fixed income securities include Treasury securities (bills, bonds and TIPS), corporate debt, municipal securities and mortgage back securities (MBS). We will look at each in order and then finish with conclusions and recommendations. Read more of this post

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Sentiment Update: Active Managers Betting the Rally Will Continue

Active money managers are betting the rally will continue. The NAAIM (active money managers) survey for this week showed an increase of 4.2% in bullish sentiment while the AAII (individual investors) survey showed small decrease of 2.1%.

This week, active managers have, on average, an 86% allocation to equities. This is up from 82% last week and the highest allocation since late September 2009 when the market did indeed continue to rally. The median allocation rose to 97% while the top quartile of active managers have an allocation of 100% or greater to equities with the bottom quartile having a 70% or less equity exposure. The eight week Read more of this post

Discount to the Value Investing Congress

Twice a year some of the world’s brightest value investors converge at the Value Investing Congress. Attend for yourself to find out why. Act now in order to take advantage of this large discount offered to the readers of Seeking Delta. Save big but only till February 17th so do not delay.

Past speakers have included Read more of this post

Ben Bernanke: Taking Credit for the Good and Not the Bad

With Fed Chairman Ben Bernanke testifying today before the house budget committee let’s take a look back at what has transpired since QE2 was first rumored.

Rumors of QE2 started last August at the Fed’s annual Jackson Hole meeting but didn’t officially start until November. Prior to the official announcement the New York Fed’s Brian Sack had the following to say about the intentions of QE2:

keep longer-term interest rates lower than otherwise by reducing the aggregate amount of risk that the private markets have to bear. In particular, by purchasing longer-term securities, the Federal Reserve removes duration risk from the market, which should help to reduce the term premium that investors demand for holding longer-term securities. That effect should in turn boost other asset prices, as those investors displaced by the Fed’s purchases would likely seek to hold alternative types of securities.

Basically the Fed was attempting to lower interest rates with the hope that this would boost the economy and boost other assets. As you can see in the chart below Read more of this post

Weekend Reading

Links for the Week ending Feb-06, 2011

Here are some of the better reads from the past week.