
The New Bond Market: Bigger, Riskier and More Fragile Than Ever - vanderfluge
http://on.wsj.com/1irbv0z
======
chollida1
This is all you need to take away from the article...

> Bond mutual and exchange-traded funds now own 17% of all corporate bonds, up
> from 9% in 2008, according to the ICI. In periods of market stress, more-
> concentrated mutual-fund ownership tends to mean larger price drops, the IMF
> said last year.

It used to be the case that stocks, bonds and other commodities like gold has
inverse correlations. Or in other terms, when stocks were down, bonds and gold
were up....

This lead to the Efficient Frontier from Markowitz where you would choose a
risk level you were comfortable with and then build a portfolio of
"uncorrelated assets" to get you optimum return for your risk level.

[http://www.investopedia.com/terms/e/efficientfrontier.asp](http://www.investopedia.com/terms/e/efficientfrontier.asp)

The issue now a days is that this no longer makes much sense as when things go
wrong everything is correlated almost to a degree of 1. Or in other terms,
when the shit hits the fan, everything (Gold, stocks and bonds) all go down
together.

TL/DR the old advice about investing in both bonds, stocks and gold for
diversivication of risk is at best much less pronounced than it used to be and
at worst just bad advice as they are now positively correlated.

~~~
tosseraccount
"everything is correlated almost to a degree of 1"

Nonsense. Evidence : [https://www.portfoliovisualizer.com/asset-class-
correlations](https://www.portfoliovisualizer.com/asset-class-correlations) (
2009-2015 time period )

Example: VTI and TLT (total stocks vs. total bonds) has -0.34 correlation.

~~~
AnimalMuppet
Sure - for the 2009-2015 time period.

But the claim was not "everything is correlated almost to a degree of 1". The
actual claim was "when things go wrong everything is correlated almost to a
degree of 1". Look at the data from 2008, not 2009-2015.

~~~
te
[https://www.portfoliovisualizer.com/asset-
correlations?s=y&n...](https://www.portfoliovisualizer.com/asset-
correlations?s=y&numTradingDays=60&endDate=12%2F31%2F2008&timePeriod=1&symbols=VTI%2C+TLT&startDate=01%2F01%2F2008)

Correlation = -0.49 for 2008.

~~~
AnimalMuppet
I see. So in 2008, what seems to have happened is a flight to safety, and
therefore bonds and the stock market were very much _not_ correlated.

I stand corrected.

~~~
Tycho
You can't use a treasury ETF as a proxy for the whole bond market.

------
bradfa
Why isn't the fact that lots of baby boomers are getting older and retiring or
getting close to retiring any part of this story?

If bonds are the safer choice for retirement investments (compared to stocks,
while cash makes no interest/dividends or gains in value, these are the only 3
choices), then clearly lots of older people who are retiring are going to be
buying into bond funds. Hence, huge upswing in bonds held by ETFs and mutual
funds, since that's mostly what working-class people have access to through
their employers or in their other reduced tax retirement accounts.

------
fitzwatermellow
"Let's keep this really simple. Since the financial crisis, how much more
dollar-denominated debt is out there in the world."

That was Rick Santelli on CNBC an hour ago. Here's the video:

[http://video.cnbc.com/gallery/?video=3000422916](http://video.cnbc.com/gallery/?video=3000422916)

As the global economy slows, borrowers will cease to earn enough to service
their debts. And the amounts are astronomical: $57T new debt at 17% debt-to-
GDP ratios.

Link to McKinsey GI report on "Debt and (not much) deleveraging":

[http://www.mckinsey.com/insights/economic_studies/debt_and_n...](http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging)

------
JackFr
> Bond mutual and exchange-traded funds now own 17% of all corporate bonds, up
> from 9% in 2008, according to the ICI.

Purely an unintended consequence of the Volcker Rule. Banks were penalized for
holding corporate bonds, and needed to sell them somewhere.

------
mapgrep
> In the U.S., household, corporate and government debt amounted to 239% of
> gross domestic product in 2014, the Bank for International Settlements
> estimates, compared with 218% in 2007.

I am not an economist, but it seems to me that if you're going to write an
article suggesting that the bond market is "intimidating," "vulnerable as
never before," and "increasingly subject to volatility," you would not want to
conflate personal credit card debt, junk bonds, and other private debt
instruments with what is widely considered the single safest investment in the
world, a bulwark of stability in the wake of the economic crisis of 2008 —
U.S. Treasury bonds.

Given the spike (now receding) in the U.S. budget deficit since 2000, it seems
likely a big portion of this supposedly alarming bond growth is in Treasuries,
no?

~~~
jazzyk
The only "bulwark of stability" is cold, hard cash. The US government may not
default, but that does not mean you will not lose money. If you bought US
bonds at a high price/low yield (like right now :-)) chances are you won;t be
able to sell before maturity because the price will go down, and if you hold
them to maturity, the inflation will eat the measly return US bonds offer
right now.

~~~
KaiserPro
and if you hold cash, as you mean, the physical asset, it costs you money.
(bank vaults arent cheap) so no only does inflation eat away at it, so does
the monthly cost.

~~~
jazzyk
True, with cash you also lose to inflation but cash is 100% liquid, bonds -
much less so.

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kokey
are people worried about bond market liquidity?

~~~
vegabook
yes. The constant threat of a big dominating presence of the authorities in
the market, causes two-way flows to decline. You cannot rely on your macro
skill set anymore to analyze the market direction, as anything you do is
subject to policy maker event risk. Therefore faster money (read,
speculators), who are the major providers of liquidity, stay away. It doesn't
help that banks' risk taking, historically a big source of liquidity too, has
been curtailed by regulation, but that is not the only story. It's also about
the drunken elephant stomping all over the market known as QE/zero rates
policy. So paradoxically, as the stock of bonds is ballooning, the liquidity
is shrinking.

It was always the fact of course that the front end of the yield curve had
policy event risk in it, but then you also had the shape of the curve which
the market could use to intimidate the policy maker (too steep = a signal that
the market was unhappy with policy). Today, the Feds have decided not only to
guide the short end, but also to put the rest of the curve where they want it,
and that's the underlying source of the problem.

Basically, the market is rigged. Nobody likes to bet in a rigged market.

------
jgalt212
> Bond mutual and exchange-traded funds now own 17% of all corporate bonds, up
> from 9% in 2008, according to the ICI. In periods of market stress, more-
> concentrated mutual-fund ownership tends to mean larger price drops, the IMF
> said last year.

This is way better than 17% of all corp bonds being controlled by hedge funds.
Being levered money, HF selling would be way more disruptive to the
marketplace than mutual fund selling.

------
danharaj
It seems financialization is coming to its peak. What new tricks will
capitalism come up with to continue 'growing' at an exponential rate?

~~~
tosseraccount
Doesn't all growth have an exponent?

~~~
jdmichal
Your comment was meant to be witty, but is actually just uninformed.
Exponential growth is a well-defined mathematical concept [0] and distinct
from other formulas of growth. And, to specifically address your comment, the
exponent in exponential growth is time, so no you cannot just dismiss it as
being "some exponent".

[0]
[https://en.wikipedia.org/wiki/Exponential_growth#Basic_formu...](https://en.wikipedia.org/wiki/Exponential_growth#Basic_formula)

~~~
tosseraccount
Physics is not financial economics.

~~~
jdmichal
I truly do not understand your argument. First, nothing in my comment alludes
to physics, except for maybe the involvement of time, which I can assure you
is _very_ much a concept in financial economics.

Second, financial economics is in no way unfamiliar with exponential growth.
For instance, the compounding interest formula:

    
    
        p-next = p-start * (1 - rate) ^ time

~~~
phaemon
I think you mean "(1 + rate)"...

~~~
jdmichal
Yes, of course. Thanks for the correction. Looks like it's too late for me to
edit the original.

