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Strategies & Market Trends : Value Investing
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To: Spekulatius who wrote (32897)11/30/2008 1:15:42 PM
From: E_K_S  Read Replies (1) of 78753
 
Hi Spekulatius - Could the bond market offering such high yields be discounting for a much weaker dollar in the long term? Long term debit with yields much higher than the historical "normal" rate of return is the markets way of pricing in more risk, more potential defaults or perhaps a much weaker $US dollar in the future.

I am not sure if long term rates are similar around the world or if other countries have as much exposure as the U.S. has in domestic corporate debt but these higher yields are flashing a red flag. It seems to me that with the FED pumping so much money in the system, the net long term effect should be much higher inflation and a relative weaker $US compared to other currencies.

I suspect there are a lot of cross currents in the pricing system. These yields will only hold if there are significant defaults out in the future or the revenue streams (generated from the reals assets) significantly fall or the value of the dollar falls significantly. None of these outcomes are very good.

The only other outcome I see is if this is just a temporary miss pricing of the underlying assets by the market making the relative bond yields much higher than the norm. It's possible that the expected shortfall in the future revenue streams are not really that bad and prices will rise bringing long term yields back to historical normal levels.

As a value investor, you are always looking for the miss pricing scenario (with a minimal entry risk point). Speculating on the corporate debt may be one way to do this. Paul may be onto something looking to buy positions in long term corporate bond funds at current prices and yields.

EKS
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