How bond funds will react to falling market?

Discussion in 'Trading' started by SuperVolatility, Oct 27, 2009.

  1. In particular I am interested in these two bond funds.

    PIMCO Total Return Instl (PTTRX)

    PIMCO High Yield Instl (PHIYX)

    I expect market to start declining and close out at break-even for the year ... I know it's a bold statement but ... I am interested how bonds will do ...
  2. Well, if you assume 'standard' asset allocation type of behavior, bond funds should perform well when equities dump. Problem is, of course, that 'standard' correlations don't hold all the time. Specifically, this year has seen one of the longest periods during which both bonds and equities performed, which is normally quite unusual.

    These things are not rocket science and such behavior makes sense, if you think that there is a third asset, namely, cash.
  3. sjfan


    High Yield and High Grade bonds will both sell off when equity sell off (both have rallied quite a bit since March). Asset allocation will not kick in for some time (consultants will wait at least a quarter to see the results, and then fire their existing managers, and then search or do DD on existing equity managers, etc..)

    If equity tanks, I can see treasury funds do well as flight to quality kick in. Given how low the front end yields are, I'd imagine the long tsy bond funds (7-30y sectors) may benefit.

    I wouldn't expect either of the funds you listed to post positive gains.

  4. If you're in the Deflation Camp, stocks AND bonds should both go down in unison and catch everybody flat-footed. It'll be veddy veddy scary! We'll see. :cool:
  5. I thought at least the first fund was mostly treasuries/IG corps? If that's the case, wouldn't you expect it to perform in an equity selloff, under normal circumstances? Obviously, I agree that current circumstances are far from normal... This year's performance in bonds and equities both has been somewhat of a puzzle, until the consensus settled on the 'wall of cash' theory (i.e. it being asset allocation out of cash into assets of all sorts). All this makes it difficult to prognosticate, but I still expect the 'risk off' aspect to dominate and bonds to continue to do well.
    All depends on the magnitude of the dump. If the world goes to hell, like last fall, treasuries will do well, but all other assets, incl IG credit will get killed. If equities continue to get spanked relatively gently, I'd wager that treasuries get beaten down, but IG corps will perform nicely.

    At any rate, these are just my Z$2c... Take with lotsa salt.
  6. part of my concern is despite surging stock market ... gold continues to rise ... we did not see a "major" pull back in gold which suggest many expecting inflation and worries yet to come.

    If I am wrong on this please explain.

    Second - it appears treasures this week a heck of auction ... Why did they a banner auction if people were looking for the stock market returns? I think it suggest there is a huge amount of causing amonth money managers and they piled on treasuries.

    On the technical side ... if Dow breaks above 10,150 and closed at least twice above this level it'll advacate further up trend ...

    just some thoughts on this ...
  7. sjfan


    As in typical corp bond analysis, I split IG into tsy + spread. In terms of spread, IG - specially industrials - is back to where it was in mid 07. At the very best, it might not back up if equity drops (an actual drop vs down 5-10%). I expect it to back up about 50bps to 100bps depending on the sector. Of course, it could do much much worse than that.

    In such a case, I expect tsy to find support both from (1) flight to quality, and (2) further central bank QE purchase to hold down the long-end.

    I suppose I correlate a significant economic drop with a materializing double dip.

    Finally, I'm not necessarily in the deflation camp. But at the same time, given the low level of capacity utilization (and thus output gap), I'm not in the inflation (or the ET hyperinflation) camp either.

    One thing is for sure, 2010 (specially mid 2010) is going to be fun.

  8. Amen to that...

    To me, it all very much depends on the behavior of central banks. There's already all sorts of politics playing out arnd the monetary stimulus exit.

    Good luck to us all.
  9. sjfan


    The last few months were characterized by very heavy fund flow into fixed income. Asset allocation is already done. And I tend to agree with the idea that there's not a lot of cash on the side. Institutional managers (especially hy) are now practicing hedging with CDS rather than explicitly taking down their cash bonds (very high transaction cost in doing cash), so there may not even be a lot of cash to redeploy.

    #10     Oct 28, 2009