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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: Mark Adams who wrote (24160)	10/13/2002 2:40:46 PM
From: energyplay	Read Replies (1) \| Respond to of 74559

Hi Mark - The increased exposure to T-bonds and GSE looks like a smart move on Vanguard's part. If the narrowing of yield spreads is all or mostly on the Treasury side moving up ,and not the corporates moving down, then the value of my news item is MUCH less - it's not a sign of a turning point YET. >>>Thank you for the useful correction, as I was about to start moving funds for the Treasury & GSE funds to high quality Corporate bond funds. Grant's Interest Rate Observer note that you can now get a little higher yield on Tax free municipal bonds than on Treasuries. This has only happened about 4 times in the last 25 years, and doesn't last more than 2-6 months. Another indication that Treasuries are too high priced. Also an opportunity for those in high tax brackets. Does anyone have a site which shows charts of yields and spreads ? (not just yield curves)

To: Mark Adams who wrote (24160)	10/13/2002 2:56:44 PM
From: energyplay	Respond to of 74559

Convergence play - Tracking High Yield very close as I think it will outperform if recovery becomes apparent. If I had to identify which segment might outperform given macros, I think HY is it. If I knew more, I'd be short 10yr treas and long HY/IC at this point, maybe via a call or put on TNX. A 'spread' play. BWDIK? The short treasuries /long high yield is a classic convergence play which has made hedge funds tons of money - also killed LTCM when it went the wrong way. See the book "When Genius Failed" for a pretty good explanation. Note also on this trade you have a positive "carry" you pay 4% on the shorted T's, and get say 9% on the High yield. 5% positive carry on the borrowed money... So why aren't hedge funds doing this now ? Well, I think they see more defaults and bad news on the Corporate side, and more buying of T-bonds by Fanny, Freddie, and the average American investors as thay flee stocks. Also, possibly Japanesse fleeing the Yen. During the 1930's T-bills were bid up to nominal Negative interest rates, breifly. When corporates start to get better, and Treasuries have peaked (may not happen at the same time) hedge funds will start to do this trade. Their buying of Corporates will push prices up and yields down. With yields down, many corporations will be able to refinance and roll over their debts. This will improve their credit ratings and give them money to spend on on growth, which becomes income for other corpprations. You get a virtuous cycle which tends to snowball. On the Treasury side, sales of Treasuries will depress the prices. This helps the profit from the short side. This could all happen very quickly, like the 6-9 months after the Russia crisis / LTCM crisis. This is why I'm watching for yield spread tea leaves, and straws in the wind... Best Regards, energyplay