Bill Gross: Fixed income investors are dead duck!

Still, as I’ve indicated, a Sammy scheme is temporarily, but not ultimately, a bondholder’s friend. It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead-end where those prices can no longer go up. Having arrived at its destination, the market then offers near 0% returns and a picking of the creditor’s pocket via inflation and negative real interest rates. A similar fate, by the way, awaits stockholders, although their ability to adjust somewhat to rising inflation prevents such a startling conclusion. Last month I outlined the case for low asset returns in almost all categories, in part due to the end of the 30-year bull market in interest rates, a trend accentuated by QEII in which 2- and 3-year Treasury yields approach the 0% bound. Anyone for 1.10% 5-year Treasuries? Well, the Fed will buy them, but then what, and how will PIMCO tell the 500 billion investor dollars in the Total Return strategy and our equally valued 750 billion dollars of other assets that the Thanksgiving Day axe has finally arrived?

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100008351/the-feds-impending-blunder/

For a good insight into the thinking of the New Keynesian priesthood that rules our money and our lives, it is worth reading “QE2: How Much is Needed?” by Jan Hatzius from Goldman Sachs.

His argument – crudely – is that US interest rates at zero are 7pc too high given the Taylor Rule on output gaps, et cetera (not that Professor Taylor himself happens to agree, but let us not quibble).

Mr Hatzius said the Fed sees “tail-risks” in using QE to the full, but may nevertheless do another $2 trillion in the end.

we are no longer in a systemic financial crisis, and the Fed’s motives have become subtly corrupted. Having argued during the boom that it was not the business of central banks to stop asset bubbles – and specifically that any fall-out could “safely” be cleaned up later – Bernanke now seems to determined to validate this absurd doctrine, bending all the sinews of the US economic and financial system to this end. One error leads to the next.

If I may recycle a passage from a column I wrote about the book in July: “Each big inflation – whether the early 1920s in Germany, or the Korean and Vietnam wars in the US – starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. The effect is much like lighter fuel on a camp fire before the match is struck.

No doubt the Bernanke Fed views monetarism with contempt, despite paying lip service to Milton Friedman. This is a grave error. Surging M3 gave forewarning of the credit bubble from 2005-2007, and then rang alarm bells before the banking crash in late 2008. Ignore money and velocity at your peril.

The immediate effect of the Fed’s QE2 rhetoric has been to drive up commodity prices, negating much of the benefit. “How this possibly helps out the moribund US economy is anyone’s guess,” said David Rosenberg from Gluskin Sheff.

As GMO’s Jeremy Grantham argues, this policy is reducing pensioners to penury. “Lower rates always transfer wealth from retirees (debt owners) to corporations (debt for expansion, theoretically) and the financial industry. This time, there are more retirees and the pain is greater, and corporations are notably avoiding capital spending and, therefore, the benefits are reduced. It is likely that there is no net benefit to artificially low rates.”

I hate to cite Alan Greenspan but he is right this time to warn that the Fed is playing a “dangerous game”, whatever the claims of New Keynesian economic theory. Politics matter.

Bernanke is refusing to accept that the US must go through the slow painful cure of debt-deleveraging. He is trying to air-brush away the consequences of 20 years of debt creation and Fed error.

The proper role for the Fed from now on is to steer a narrow course between the Scylla of deflation and the Charybdis of inflation, for year after, for as long as it takes, until America is properly purged. AND THEN NEVER COMMIT SAME IDIOTIC MISTAKE AGAIN.

http://www.gmo.com/websitecontent/JGLetter_NightofLivingFed_3Q10.pdf

Nothing like Riversider having another conversation with himself.

At least she has the good sense not to listen to a word she says to herself.

Puerile response.

Bill Gross is a smart dude, crazy not to listen to him.

"Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary"

That's the whole idea.

The point of his discussion was that if people buy bond funds NOW they will be severely damaged when interest rates eventually rise, because the value of the bond fund will go down. That doesn't happen with a bond you hold to maturity, but bond funds don't work the same way.

It has to do with another economic relationship that Riversider refuses to believe: when interest rates go up, bond prices go down. It's called "discounting."

Interesting article by Gross.

These are such strange times. I wonder if we will look back at these low interest rates as a kind of insane time, obviously unsustainable, the way people eventually came to see the tech bubble (in retrospect). This crazy policy -- maybe Gross is right that we have no choice -- is distorting lots of things, and penalizing prudent savers, and who knows what the ultimate negative fallout will be.

Interesting article by Gross.

These are such strange times. I wonder if we will look back at these low interest rates as a kind of insane time, obviously unsustainable, the way people eventually came to see the tech bubble (in retrospect). This crazy policy -- maybe Gross is right that we have no choice -- is distorting lots of things, and penalizing prudent savers, and who knows what the ultimate negative fallout will be.

Actually, There's more.
The Fed has apparently decided not to do the whole quanitative easing in one giant step butwill be conducting Q.E 2 in consultation with the Fed's primary dealers. This means that the big banks will know the amounts and will have the opportunity to front run the Fed. This is big, because with zero short term rates the Fed has run out of tricks to transfer money to the banks. Now they can tell the big banks we plan to buy some treasuries tomorrow and the banks can buy them a day ahead of time and sell them to Uncle Ben. The whole thing sucks eggs.

And the bond holder doesnt' lose money if you only consider the "nominal" return and not the "real" return. I had no idea the Rudolph Dirks put out an economics text book.

"And the bond holder doesn't lose money if you only consider the "nominal" return and not the "real" return."

What? The real return is the return after inflation; the nominal return is the coupon rate, and the actual return is the discounted coupon rate. As soon as you discount as interest rates go up, the principal value falls (by definition). I don't know what you're talking about.

The reason that the Fed does QE in segments is easy: they are buying mortgage-backed notes, which have a prepayment risk. As mortgages are prepaid bank reserves fall, decreasing the money supply as the Fed gets repaid. So they have to start the process all over again.

Do you even know what quantitative easing is, Riversider?

Any chance Gross is massively short the bond market and is getting squeezed?

Bill Gross is short CPI floors. His funds cannot really short the bond market. They're long by definition. The short cpi floors is basically a covered call.

I doubt he is massively shorting since the funds are valued daily. If he was short the funds would have been down during this rally. But I guess he can hedge the rates by doing swaps and other instruments. He has been right with the investments so far.

Bill Gross does not short the market. His strategy tends to be one of choosing what part of the yield curve to be in, or to decide on Treasuries vs spread products(i.e mortgages)

"His funds cannot really short the bond market."

HAHAHAHA!

RS, kindly explain the mechanics behind "shorting a bond." It is virtually impossible to do - there is no central bond market, per se, where you could borrow a bond with an agreement to purchase it back again. Bonds aren't liquid enough to do that, either - they're very heterogeneous,and the chances of finding a willing counterparty is just about nil.

The best you can do is short a bond ETF, which is, in effect, a derivative traded on the stock market as a security. Its value rises and falls with interest rates, and the shares are homogeneous. However, depending on the nature of the ETF - which types of bonds it can hold - it might not be such a sure-fire deal.

Bet you didn't know that, either.

You got me STevejhx, You are right, there is no way to short the bond market. I guess I'll unwind all my mbs hedges now.

http://www.ritholtz.com/blog/wp-content/uploads/2010/10/GREENSPAN-PEPPER3.jpg

"mbs" is not a bond.

http://www.sec.gov/answers/mortgagesecurities.htm

And a "hedge" is not a short (necessarily).

Nonetheless, RS, how do "hedge" your mbs's. Against what? Treasuries? The TBA market? How do you get into that market, not being a primary dealer?

Let us know, RS - let us know.

clearly, redbaiter, you have no knowledge of fixed income sales and trading, and the activities of PIMCO

stick to wearing your pasties on other matters you have actual knowledge of

woops i guess that means: say little or nothing

Poor RS - there is no "Bond Market," unless he's dealing with the New York Bond Exchange.

HAHAHAHAHA!

Moreover, RS, trading in mortgage-backed securities is not something you are doing. I can tell you now, because it's one of the most difficult set of products there is to trade in. Every MBS is bespoke; they are divided into tranches, and each tranche has a different rating. They are traded against treasuries, but let me ask you: how do you account for the prepayment risk in your MBS hedge position?

HAHAHAHAHA!

Really, Riversider, you are pretty much of a fool. You think that money is made in exploding stars (gold), you deny that commercial banks create money, and you claim MBS's are a) bonds, and b) you have a "hedge" against them (or for them, I'm not sure) when you've picked THE ABSOLUTELY MOST COMPLICATED PRODUCT IN THE WORLD to trade in.

Please.

Shorting the bond market is simple.

Just sell bond futures.

Not a big deal.

Sure, simple Topper. a) How are you going to do it?; and b) that's not shorting; and c) you still need a counterparty.

shorting any number of liquid fixed income products is beyond simple--shorting mbs, and hedging with a reliable degree of correlation can in many cases be impossible

and if one thinks PIMCO is essentially "long only" and doesnt use leverage and various "yield enhancement" strats, and doesnt hedge, that belies a serious cluelessness re the fixed income business

"shorting any number of liquid fixed income products is beyond simple"

Agreed. But MBS's don't trade as tradable securities, and there's no liquid market for them. Just trading them and making a profit is hard enough, because of all of the risks involved.

Sure, simple Topper. a) How are you going to do it?; and b) that's not shorting; and c) you still need a counterparty

Sell Treasury futures that trade very actively on the Chicago Mercantile Exchange

Counterparty is their clearinghouse.

Yes, it is shorting. If bond prices decline, you make money if you have sold futures. Institutional investors are incredibly active in this market. In short, it is a very convenient and inexpensive way to adjust the overall duration of your fixed income portfolio rather than selling your actual physical positions.

The market is dominated by big institutions. But individual investors can trade as well.

#
3

Short only treasuries where there is an ample supply of bonds available. You must cover (buy back) the exact same maturity and coupon that you shorted. It is a good idea to short preceding the government auction for a bond because the bond does not settle for a few days after the auction. This means that no accrued interest cost begins until the settlement date. This is called 'trading on a when issued basis.'
#
4

Open a futures account and short the government 10 year treasury bond contract. There is no accrued interest to be paid. Margin on bond futures is less than 10 percent of market value. In addition, there will be no need to cover the account short with a specific bond. Simply buy back the contract in the open futures market.
#
5

Short the relationship of the different maturities in the yield curve by buying what you think will be the best performing maturity and shorting the expected weaker maturity. The interest on the long maturity will help offset or even exceed the interest on the short maturity and you will still profit if the short strategy is correct. For small investors shorting securities in less than $100,000 amounts is not cost effective due to commissions.

Read more: How to Short U.S. Treasury Bonds | eHow.com http://www.ehow.com/how_4914529_short-treasury-bonds.html#ixzz13gxePWOG

Also writing an interest rate swap is essentially going short.

On behalf of Steve, thanks for the great insights, RS!

LOL,
If you re-read, Steve was of the opinion that PIMCO was a retail account!

Now the government really is selling bonds that deserve the label “certificates of confiscation.”

This week the United States Treasury sold bonds for a price that may be greater than the total amount of cash an investor will get from holding the bond to maturity in 2015.

That appears to be a first for this or any other government. When all is done, the Treasury may have managed to borrow money at a negative interest rate. Put another way, buyers of the bonds might have done better if they stuffed the money in their mattresses.

The term “certificate of confiscation” was coined in the late 1970s, when inflation was rising. “If you took the coupon payment, adjusted for inflation and taxes, you had a negative real return,” said Leon Cooperman, who may have been the first to use the term. Mr. Cooperman now runs Omega Advisors, a hedge fund manager, but then was a strategist for Goldman Sachs.

Here’s how this bond will work for the four and a half years until it matures. Every six months, the holder of a $100 bond will get one-quarter of 1 percent of whatever the principal value is at that point. That value will rise, or perhaps fall, with the Consumer Price Index. When the bond matures, in April 2015, the bondholder will get the principal value back.

And how much will the principal value be? The government will use a combination of the C.P.I. figures, before seasonal adjustments, for January and February 2015. If that figure is below 228.65, the investor will get back less than the $105.50 he or she paid for the bond this week. The C.P.I. in September was 218.44, so cumulative inflation of 4.7 percent, or a little over 1 percent a year, is needed for the investor to break even. If the 2015 C.P.I. is higher, there will be a profit.

http://www.nytimes.com/2010/10/29/business/economy/29norris.html?pagewanted=1&_r=1&ref=high_and_low_finance

"Steve was of the opinion that PIMCO was a retail account"

HAHAHAHA! I know exactly what PIMCO is. And yes, you can short treasuries - they're homogeneous, and there's lots of them. As a retail investor, though, it's more common and efficient to do it through an ETF.

As I stated about shorting bonds in general, this is the problem: "Short only treasuries where there is an ample supply of bonds available. You must cover (buy back) the exact same maturity and coupon that you shorted."

I'm glad you see the light, I'm sad that you're not yet willing to admit that you can't short an individual MBS as they are all bespoke. Just trading them is tough enough.

Don't try to change the subject, RS - how are you doing with those short MBS positions that you claim?

Topper: "Yes, it is shorting."

No. Shorting is borrowing a security with an agreement to purchase it back later. You're discussing a forward contract, which are also bespoke and not centrally cleared. Futures contracts ARE standardized and centrally cleared.

Sorry.

You can short mortgage TBA'S.

redbaiter is a primary dealer--he's also a netting member of DTCC--carte blanche credit to clear any mbs tsy corp, whatever

he's a big futures player, short all sort of rates contracts, exchanged-traded and otc, perfectly correlated to hedge his mbs portfolio

what's clear is redbaiter's living a fantasy, cuz, with his brains, we'd part his ass from his money lickety split!!!!

Of course this all started with Steve's quote about PIMCO not being able to short the bond market. Nobody ever brought up the retail investor doing this on his own. But I guess when you are losing an argument you change what the arguent is about.... I'm done here after the jump
---------------------

His funds cannot really short the bond market."

HAHAHAHA!

RS, kindly explain the mechanics behind "shorting a bond." It is virtually impossible to do - there is no central bond market, per se, where you could borrow a bond with an agreement to purchase it back again. Bonds aren't liquid enough to do that, either - they're very heterogeneous,and the chances of finding a willing counterparty is just about nil.

The best you can do is short a bond ETF, which is, in effect, a derivative traded on the stock market as a security. Its value rises and falls with interest rates, and the shares are homogeneous. However, depending on the nature of the ETF - which types of bonds it can hold - it might not be such a sure-fire deal.

"Of course this all started with Steve's quote about PIMCO not being able to short the bond market."

No it didn't. The first time I ever mentioned PIMCO was responding to your "PIMCO retail" comment.

"Nobody ever brought up the retail investor doing this on his own."

The first person to mention the word "retail" was you. The person who claimed "I guess I'll unwind all my mbs hedges now" was YOU.

OMG. You're deluded.

You don't have any MBS hedges; you don't even know what they are. What you "hedge" in an MBS transaction is a shift in the risk-free treasury rate. If you own an MBS, which treasury you short against it will depend on the specific tranche of the MBS that you're trying to hedge, depending on its anticipated repayment date - that is, which treasury bond more or less equals the anticipated repayment date of your tranche of the MBS. It's not possible to hedge against mortgage prepayments, however, because it is an unknown; therein lies the risk.

Now then, RS: is any of what I just said true? Since you know so much about the subject....

delta mismatch--the best mbs desks chase this shit around all the day long--redbaiter's got it all figured out tho...for his PA!!!

time to go back to the roy cohn-inspired pasties

That's right, WB - they sit there at screens all day long, calling, calling, calling.

Except for RS, who bought his MBS hedge at Woolworth's.

"You can short mortgage TBA'S"

You can, RS? R U actively involved in the synthetic derivatives market now, too?

HAHAHAHAHA!

Speaking of PIMCO, one of the great things about having an account at Vanguard is that you can buy PIMCO Institutional funds for a minimum of only $25 K. Big savings as the expense ratios are far lower than their retail funds. (Vanguard is treated as a single institutional client - hence the great savings for individual investors.)

Really, Topper, you should ask Riversider for his opinion before shooting your mouth off.

HAHAHAHA! :0

Topper, I suspect Bill Gross having decided that the Treasury Market offers no real value, will purchase more spread products(MBS OR CORPS and if they decide that the market is headed for declines, might reduce duration via interest rate swaps. They can't be too aggressive considering their size and their mandate is total return and preservation of capital.

So, RS, like LICC before you, you completely ignore your own ignorance.

Topper: do you appreciate RS's take on life?

vanguard the best--their custodial structure is the safest

and redbaiter, you should give bill gross a call--im sure hed benefit from your investment advice
i doubt he's ever thought about moving duration or instrument mix around

feel free to provide us more comic relief with an explanation of the workings of interest rate swaps
youre over your head dude...youre drowning

it's pasty time redbaiter--

Riversider: please define "duration" for us, please.

he's searching for just the right pasty--maybe something with propellers and glitter!!

macauley is a leftwing columnist from the sixties

the black hole model is an astrology based tachnical analysis system for predicting teaparty election results

RS: "Duration is how long something lasts."

WRONG!

Try again, RS.

The really surprising and pathetic fact about obama isn't his marxism or his anti-Americanism or his incompetence; it's his smallness. He is a real small little petty man.,

Oh Julia

Take your frustration elsewhere

Duration

The number of years required to receive the present value of future payments, both interest and principal, from a bond. Duration is determined by calculating the present value of the principal and each coupon and then multiplying each result by the period of time before payment is to occur. The concept of duration is used to relate the sensitivity of bond price changes to changes in interest rates. Also called mean term.

Not really knowledgeable about RS's "take on life." Not sure it's relevant, though, either.

WB is right about Macauley.

http://en.wikipedia.org/wiki/Bond_duration

It's the sensitivity of a bond to a 1% change in interest rates. Topper's first "duration" is "term."

Riversider's duration is - well, nothing at all, really.

Actually Topper,
When talking about a portfolio such as PIMCO's the duration targeted would not be Macaulay.
I don't have inside infrormation, but I suspect that for callable securities Gross uses an effective duration, for non-callable fixed rate bonds modified duration and for non-callable uncapped floaters and bonds with high caps probably a spread duration.

"the duration targeted"

Tee-hee-hee.

"but I suspect that for callable securities Gross uses an effective duration"

You "suspect"? HAHAHAHA! The duration of bonds with call options is calculated by using the effective duration - it's the definition of "effective duration," fool.

"non-callable fixed rate bonds modified duration"

HAHAHA! That's only for compound yields, silly, and again, it's the definition.

"non-callable uncapped floaters and bonds with high caps probably a spread duration"

Then how do you price in the cost of the option if you're using non-callable bonds?

Fool.

FYI you don't "use" a duration - it's merely a calculation. And you don't "target" one either.

The more you write, the funnier you get.

steve has this terrible habit of commenting on things of which he is ignorant, throwing words around to try to sound like he knows of what he speaks when he is really clueless, and then insulting everyone else who contradict him with accurate facts and knowledge. The sad part is that he has no idea how much of a fool he shows himself to be.

steve is the ignoramus who said mutual funds are derivatives.

"steve is the ignoramus who said mutual funds are derivatives."

Derivative: "A security whose price is dependent upon or derived from one or more underlying assets."

And that's EXACTLY what a mutual fund is.

LICC - sorry you have no clue about finance OR real estate, but don't take it out on me.

steve, I don't know who you think you are fooling, but you have to know that everyone who actually know what they are talking about see your comments for how moronic they really are.

In your bizarro mind, you can make up your own definitions of things, but that doesn't work in the real world. Since you went to investopia, why not copy the whole definition:

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

In fact, that definition is not accurate, since most derivatives are not securities. A better definition: A financial contract whose value is based on, or "derived" from, a traditional security (such as a stock or bond), an asset (such as a commodity), or a market index.

A mutual fund is an investment vehicle whose value is based upon the value of the assets it holds. It is not a derivative. Anyone with even basic experience in finance knows this.

steve the streeteasy clown strikes again!

Actually, LICC, thanks for publishing the rest: "Its value is determined by fluctuations in the underlying asset."

Hmm. I wonder how you calculate the net asset value...?

"The most common underlying assets include stocks, bonds, commodities, currencies...."

Hmm. Same as mutual funds....

"In fact, that definition is not accurate, since most derivatives are not securities."

So now you're telling me that according to the full definition from Investopedia, securities aren't securities?

That's one of your better ones yet, I must say!

I still don't understand why steve continues discussions in which he is so ridiculously wrong that he makes himself look more and more idiotic.

He thinks mutual funds are derivatives. Wow.

FYI you don't "use" a duration - it's merely a calculation. And you don't "target" one either.

Almost every institutional bond manager does, indeed, target a duration that they believe is appropriate. Most are benchmark-driven so the duration target is relative to the duration of their benchmark. Same goes for pension funds which are managed relative to the duration of their liabilities.

Most bond managers, in fact, tend to hug closely to the duration of their benchmark feeling that duration calls are difficult to make - and that does include PIMCO. Most prefer to make their bets on various sector over- and under-weights as well as security seleciton.

It really does depend on the fund's objective. Some are total return based, and many do target a duration. Many funds target a duration and then try try to generate Alpha.

Absolutely true. This is another of steve's claims where he knows not of what he speaks. Fixed income managers often target a duration for funds they manage and may change their duration target based on their market outlook.

steve, don't you think you should give up posting on these boards when you are clueless?

And if you have a mortgage portfolio and the duration goes up because prepays slow the a quick and inexpensive method to shorten it is to go short treasuries. Not everyone has good swaps execution.

And tell us, Riverside and LICC, how this "target duration" is used.

"Most bond managers, in fact, tend to hug closely to the duration of their benchmark"

That would mean that there would be no need to have a bond manager - just buy the benchmark. Nonsense.

"and may change their duration target based on their market outlook."

That would be, "target duration," and please explain what it means. You guys are good at paraphrasing, but I'm not yet impressed.

"Not everyone has good swaps execution."

Yeah. Half of everybody doesn't.

http://pixhost.info/avaxhome/d8/69/000969d8_medium.jpeg

steve continues to give opinions on things in which he has NO IDEA what he is talking about . . .

You can't buy a benchmark steve. You can buy an ETF (which also is not a derivative) or an index fund.

Some investors want a benchmark-tracked return. But others want active management. A manager can match the duration of the benchmark but add alpha through security selection, sector rotation, etc.

steve has really become comical with his combination of being both ignorant and obnoxious at the same time.

An excellent suggestion, RS.

"You can't buy a benchmark steve."

Really? You can't buy a treasury bond?

Click here: http://www.treasurydirect.gov/

You can buy your benchmark right there. You can read what it means here:

http://www.investopedia.com/terms/b/benchmarkbond.asp

In fact, LICCstupid, index arbitrage is all about buying a benchmark - say, ETF, or index - and selling the basket of underlying securities, or vice versa.

Boy oh boy oh boy.

Uncle.

Topper steve has a point, he's figured out an investor can't obtain exposure to a benchmark because it's synthetic and doesn't exist. I may have to capitulate on this one.

steve is getting heated because he knows his statements are becoming more and more moronic.

An investment manager very often manages accounts or funds as measured against a benchmark index. Not a benchmark bond, but an index. You cannot buy an index. You can buy an ETF or a fund that tracks an index, but the index itself is not an investment.

Go ahead steve, respond with another obnoxious idiotic comment, so we can get another good laugh out of it.

Welcome to the crowd. I've been thoroughly wupped.

From steve's investopia source:

Benchmark: A standard against which the performance of a security, mutual fund or investment manager can be measured. Generally, broad market and market-segment stock and bond indexes are used for this purpose.

Ditto.

LICcomm sounds just like Statler and Waldorf on this thread, only not nearly as smart as they.

"You cannot buy an index"

HAHAHAHA! That's what block trades and index arbitrage are all about. That's, in fact, what index funds and index ETF's do: they buy the index.

Otherwise, how would they match it?

HAHAHAHAHA!

What a maroon.

steve, you really are a glutton. Can you be that unintelligent to think that what you say makes any sense?

You can buy the securities that constitute an index, in the same weightings, to match the index. Or you can use other strategies to track an index. Investment products do this- certain ETFs and mutual funds with the objective to track an index. But those products will never track the index perfectly due to fees and trading inefficiencies.

I can't wait for steve's next stupid comment . . .

LICC is correct, you cannot buy an index. The index funds/etfs are to "track" or "match" an index. But that gets difficult with fixed income where the holdings maybe illiquid hence the funds/etfs do sampling. And that is why you have returns that are not identical to the index even before fees.

"But those products will never track the index perfectly due to fees and trading inefficiencies."

I never said they did - if they did, index arbitrage would not exist.

hofo, the term of art is "buy the index" - of course it's not literal, but LICC can't think in derivative terms. You buy the assets that underlie the index: you "buy the index."

See how I put in quotation marks for you, LICC?!

And indeed, fixed-income instruments are illiquid, which is why it's virtually impossible to short them, which is what gave rise to this discussion with Dunce I (LICC) and Dunce II (Riversider); the former bought property in Long Island City, and the latter believes that money is made in stars.

Thanks for more stupid comments steve.

This discussion generated from your idiotic comment that investment managers don't use a target duration that is the same as their benchmark because otherwise you should just "buy the index."

Laughably stupid!!!

So steve is clueless about investment management, derivatives, the year you report your income tax, tax rates, the rent-buy ratio, and on and on and on . . .

And let me teach you something else steve- not all fixed income instruments are illiquid. That is just another dumb statement of yours.

http://www.youtube.com/watch?v=7pCW0bd-gH0

Yes, yes, yes LICC.

Since you want to "teach me something," what is that "target duration" used for? Since you just learned the meaning of "duration" today....

I never said that "all" fixed income instruments are illiquid. Many are completely illiquid, and most are virtually illiquid. Treasuries are an exception, but even there, if it's an off-the-run issue....

Quick: Look that one up right now and tell me what it means!

HAHAHA!

AH - thanks for the LICC / Riversider youtube vignette. Very funny.

thx for the brainstorm in semantics lic

youve explained that etf's buy the securities that comprise the indices they seek to replicate performance of--congratulations

most humans are comfortable that this means the same as they buy that index

in bond-trading "benchmark" more often than not refers to specific bellwether issues in all or most classes of bonds, esp treasuries--shit trades on spread to specific benchmarks, whether across classes to specific treasuries, or within classes to specific, like issues

you should be proud that you know performance benchmarks such as indices exist as well

sadly, though, your acumen has failed you in the real estate dept.--got a bad trade in LIC strapped on, don't you?

More useless comments from steve and Wb.

We weren't talking about bond trading. We were discussing managing bond portfolios.

steve, you really think that Treasuries are the only liquid fixed income instruments??? I guess the investment grade corporate bond market doesn't exist in your bizarro world.

Ok, post something stupid again steve, this is fun . . .

hey now you should give bill gross a call too--

he can short investment grade corporates to hedge his mbs portfolio!!

it's the toxins again lic--go out for some fresh air--woops take the train somewhere first

"We weren't talking about bond trading. We were discussing managing bond portfolios."

Hmm. Then how would you manage that portfolio without trading them? What would you do to get that "target duration" that you're all on about?

"he can short investment grade corporates to hedge his mbs portfolio!!"

HAHAHAHA!

LICC - you really can only short them before the issue, because that's when they are traded. There's a term for that; do you know what it is?

Hint: "Newtown Creek" is NOT the right answer.

steve, you should know better--portfolio managers and their minions never trade---the securities in their portfolios just spontaneously appear there--

the best managers have a particular knack for allowing this appearances

LIC, you should give it a try just really concentrate and youll have a portfolio!!

Metempsychosis.

Or just plain vanilla psychosis.

Or spontaneous generation.

No news from LICC and Riversider is good news.

riversider is busy trying to figure out her various voices. can be tricky. give her a moment.

she's awake.

watch out.

Urban you were right. So I guess LBO crowd should send a thank you to Big Ben

http://3.bp.blogspot.com/_nSTO-vZpSgc/TMvJRSKs7mI/AAAAAAAAJms/CTK0hTiHfSE/s1600/JNK+Weekly.png

So RS - how dem mbs hedges doin ya?

HAHAHAHA!

Riversider, it's hard for me to believe that you and LICC post SO MUCH on economics and finance when you provably know so little about it. I guess that's what makes the Tea Party bliss.

steve continues to want to post to a public board his uninformed, stupid comments for all to see.

He has no understanding of the buy side. The decisions made and strategies used to manage a bond fund or portfolio are different than the strategy used to execute a bond trade.

steve, please keep posting dumb comments about things you do not know, because it is still fun to see you make a fool of yourself.

"He has no understanding of the buy side."

What the hell are you talking about? The "buy side" of what?

"The decisions made and strategies used to manage a bond fund or portfolio are different than the strategy used to execute a bond trade."

OMG. So now in the bizarro world of LICCdumb, bond funds aren't managed by trading bonds.

And in the bizarro world of LICCdumb, bond traders trade bonds on the New York Bond Exchange.

LMFAO.

There is no "bond exchange," LICC. The mechanics of trading bonds are completely unlike the mechanics of trading stocks. There is no central clearinghouse.

LICC - you should stick to Bottom's advice: just concentrate really, really hard, and you'll have your very own bond fund in your mind.

steve, please keep posting dumb comments about things you do not know, because it is still fun to see you make a fool of yourself.

Right on cue!