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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: yard_man who wrote (2436)	11/19/2003 4:38:05 PM
From: NOW	Read Replies (1) \| Respond to of 110194

"What is a bond investor to make of all this? Why is it necessary to describe the different worlds of “Lehman Index” and “absolute duration” space? Several conclusions come to mind. First of all, the double-digit returns from the “absolute duration” portfolios give you a peephole into the future of our finance based economy. For investors, corporations, and financial entities that believe they have a birthright to the high returns typical of the 90s, the amount of duration, leverage, and therefore risk required to attain it is considerable if not egregiously excessive. 42-year duration portfolios can provide returns of 13-20+% in this yield environment but a 50 basis point rise in rates across the curve erases them over a 12-month span and a 250 basis point rise wipes out all of their capital – gonzo, kaput, no money left in the bank. While our economy is undoubtedly not levered to a 42-year duration, it is levered. The banks are levered 10 parts assets to one part capital to begin with. The hedgies the same. Agencies even more. As their asset durations move higher, the more susceptible we become as an economy to going kaput as well should interest rates rise. All the levered players mentioned above are making hay while the short borrowing rate is at 1%. Change that borrowing rate by much Alan Greenspan and you risk another bubble popping – this time the U.S. economy." Bill Gross