Ask Rande

» RandeS - Thru,

Thru,

I like the Vanguard GNMA because of its management. The keep the duration at a very decent level, don't use deriviatives to speak of, and manage the reinvestment risk pretty darned well. The knock on GNMAs has always been that like other bonds they lose value in a rising rate environment but also can lose value in a too-rapidly declining environment (unlike other bonds) because of mortgage refinancings which leave GNMA holders with a reinvestment problem at lower rates. This hasn't been a problem with the Vanguard fund, even in the rapidly declining rate environment of 1995-6 and 1997-8. Of course, as with other bonds, the fund has been hit a bit in 1999 with rising rates, though not as bad as some other funds. Anyway, even in a declining NAV environment, the yield is higher and reinvestment buys shares at a cheaper price. The backing of the US government (only non-Treasury security to have this) combined with a higher yield than one would get with Treasuries of similar maturity make GNMAs attractive for those seeking high-quality bonds yielding decent current income.

Having said all this, I wouldn't necessarily put all the fixed-income eggs in the GNMA basket. Also like the Short-term bond index at Schwab and the Total Bond Market Index at Vanguard for a mix of maturities. Generally prefer the taxable fixed income in the deferred accounts as well, all things being equal. For higher brackets, Vanguard has some excellent muni funds too. The CA Intermediate Insured fund has been an excellent vehicle for high-quality tax-exempt income if you live in CA. Finally, wouldn't own a short-term Treasury fund since the fees aren't worth it -- Treasury Direct is so darned convenient if you want to own the 2 and 5 year Notes directly in your own account.

-- posted by RandeS

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» RandeS - Well, CPI came in at .

Well, CPI came in at .3%, .2% at the core. Slightly below previous expectations of .4% overall, but slightly higher than recent consensus of .2% and .1%. Not great, not horrible, and not likely to change Fed policy one way or the other. Now, let's see how the bond market reacts.

-- posted by RandeS

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» RandeS - Looks like bonds are viewing the CPI report as favorable so far.

Looks like bonds are viewing the CPI report as favorable so far. And why not? Despite the fact that gasoline prices jumped sharply and airline fares went up at the fastest pace in six years, other factors kept the core rate at a low, low, low .2%. As for the overall number, given those price jumps in gas and oil .3% seems pretty amazing, especially coming off two months of little or no change in the two numbers.

Elsewhere, housing starts were slightly above expectations, but new permits came in negative. June numbers were revised downward slightly as well.

-- posted by RandeS

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» RandeS - Holy smokes!

Holy smokes! This morning's bond action keeps up we could dip below 6% before the end of the day. Incredible. Well, maybe not so incredible.

-- posted by RandeS

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» Chris3 - Thanks Rande

Thanks again, Rande for your excellent commentary and explanations of the current market developements. I always look foreward to reading your take on things. You help us alot!

-- posted by Chris3

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» RandeS - Chris,

Chris,

Thanks. With inflation at 2.1% for the 12-month period ending in July (overall and at core), and running at 2.4% on an annualized basis so far this year, Kirk's wise comment rings so true: "Inflation is the best indicator of inflation." We can fret all we want about the employment cost index and the jobs numbers and the CIBCR, etc., but until and unless it shows up in the actual inflation numbers fretting is all it is. That's not to say it doesn't pay to track these other numbers and that's not to say the recent trend is cause for some concern. More importantly, however, as long as Greenspan and company manage to stay ahead of the curve (rate hikes BEFORE the actual inflation numbers are hit), then the bond market will be less concerned. With still no visible sign of inflation in the CPI and PPI, a rate hike this month should be welcome by the bond vigilantes. We shall see.

-- posted by RandeS

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» RandeS - Industrial production came in this morning slightly below expect

Industrial production came in this morning slightly below expectations (of .8%) at .7%. Capacity utilization, followed closely by Dr. G., came in at expectations of 89.7% (highest level since end of 1998). When capacity utilization gets too high, the potential for disequilbrium in the pipeline (supply falling behind demand) leading to inflation increases. Most anlaysts claim the July numbers reflect the unusually hot weather in much of the nation. Production numbers heavily influenced by air conditioner manufacture while capacity numbers heavily impacted by increased electrical utility utilization. Makes sense to me. Seems to make sense to the bond market as well so far.

-- posted by RandeS

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» RandeS - Whoa nellie.

Whoa nellie....that's 80.7 for the capacity utilization number, NOT 89.7. 89.7 would have sent bonds so far south you'ld need an asbestos suit to go searching for them (south as in directly to hell in a handbasket).

-- posted by RandeS

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» KirkL - As my heart

......settles back where it belongs, it seems the capacity utilization number is down a good deal.

90% and we would be looking at inflation as capital expenditures would have to go inplace to increase capacity. These take awhile to hit the bottom line but are not expensed in the same year but there is still an effect as valuable cash is used. Nothing wrong with adding capacity, just it has costs.

Were we not about 82% recently?

-- posted by KirkL

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» KirkL - AC and Retail Sales

When very hot, those without AC often go to shopping malls and movie theatres if they are not lucky enough to live close to cool water to escape the heat.

Before I got my AC, I would do all my home stuff before it got hot, then do my shopping when it was hottest so I could use the free AC the stores have. I still may do this as I am close to my pennies.

IF you have AC, I think you tend to stay at home as it is too hot to go outside and drive to the shopping centers when even a car's AC is straining to work. At least that is what my friend in the midwest told me recently.

-- posted by KirkL

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