Edscharp,
Looked through my library… I don't have any books directly related to bond investing, so what I've learned has been picked up over the years as I've investigated bond vehicles. I'm not a professional, so please use my thoughts as conversational knowledge sharing… NOT investment advice.
Okay, a further look at quality:
Message 22032610
1... Quality of the issuer -- [will your investment be returned]
There is no risk free investment in bonds...!!!
Any issuer can default, even US Treasuries. But treasuries remain the safest within our bond choices today, (gold bugs would argue here), followed by short-term CD's, then issues backed by municipal governments and perhaps certain electric and water utility companies, but this has changed with deregualtion.
The most cost effective way to purchase treasury bonds is through the US Government, which I believe can now be done directly with the Federal Reserve Banks by setting up an account either in person, by mail or internet. federalreserve.gov
Higher the yield one seeks will influence the risk on return, with high yield junk bonds being way up, along with certain government bond issues like Argentina, etc. Corporate bonds also hold their own special risks as recently shown in Enron and GM.
There are recent additions to risky bond vehicles.
1... Mutual Funds that use leverage to market time bond directions
Example:
Rydex Juno Fund (RYJUX) finance.yahoo.com
ProFunds Rising Rates Fund (RRPIX) finance.yahoo.com
2…Closed End funds that may or may not use leverage to improve returns (look carefully)
Example:
Pimco Corporate Opportunity Fund (PTY) yield: 9.6 %
finance.yahoo.com
Eaton Vance Tax Advantaged Global Dividend Income Fund (ETG) yield: 6.6 % finance.yahoo.com
Loss of Principal:
Bonds gain and lose principal based on movement of interest rates and what aftermarket buyers and sellers are willing to pay for them. By holding an individual bond for duration and delivery… you get what has been determined. By seeking to take advantage of bond price fluctuations for better returnds, one enters another world of investment concern, as bond holdings lose and gain principal value as interest rates vary. This is particularly important when buying mutual fund bond funds, one can lose lose principal if choices are wrong.
The market in buying and selling bonds based on their perceived value accounts for a significant fluctuation in bond prices due to speculation and market timing of the players, (not the only one as in carry trade). Because of this fluctuation of value, any substantive investment in bonds vehicles, beyond direct purchases, requires an ability to market time interest rate movements and the overall demand for the bonds. Even after becoming familiar with the basics in bond investing – with bond yields – and bond vehicle risks… we cannot totally eliminate the effect of macro economic impulses wrecking havoc with well laid out bond investment strategies.
Perfect example is Bill Gross the famed bond manager, who has been wrong for a couple of years, based on his well seasoned “Thoughts” on where the economy and risks lay ahead. pimco.com
pimco.com
My Best,
Chip |
