State of the market: The bond market gets closer to an all-in bet on recession as stocks give back h...
Global Bonds Look Like a Good Bet
05/14/2008 12:00 am EST
Carlton Delfeld, editor of Chartwell Advisor Global ETF Report, finds a global government bond fund he says is a good vehicle as markets settle down,
Markets seem to have settled down a bit, but it makes me uneasy. The chances of a period of stagflation seem higher than expected by most pundits.
The Federal Reserve cut its key interest rate by a quarter of a percentage point to 2%. It is the seventh reduction in the federal funds rate since the central bank began fighting a credit squeeze and the growing possibility of a recession last September. This represents its most aggressive rate cuts in a quarter-century.
Former St. Louis Fed President William Poole said, "We have an adjustment in housing that has to take place, and I don't think rate cuts are going to solve the basic problem." [That and other remarks by] former Fed officials underscore the risk that more rate reductions may fan inflation, which is accelerating due to the weakening dollar and rising prices of food, energy, and other commodities.
The downside protection [I recommended] on most portfolios was a drag in April, but I believe is still prudent given market uncertainty. Morgan Stanley analysts recently told clients to “sell the rally” in financial stocks, slashing forecasts for big bank earnings and warning that the current credit crunch is only just beginning.
Morgan Stanley reduced its estimates for 2008 large bank earnings by $17 billion, or 26%, and reduced 2009 forecasts by $13 billion, or 15%. The analysts expect higher loan losses and expenses, offset by higher net interest income.
The next pullback could be a good time for scaling up exposure to global financials, [but] I have added a small position in UltraShort Financials ProShares (Amex: SKF) to a portfolio I manage for private clients.
Another addition to some model portfolios is the Global High Income Fund (NYSE: GHI). It invests largely in the bonds of foreign governments, which make up approximately 66% of its portfolio. Its largest position, comprising nearly 6% of assets, is in Argentinean bonds maturing in August 2012—and in total, nearly 14% of the fund's assets are presently parked in Argentina. Other government bonds in which the fund has important positions include those issued by Turkey, Russia, Brazil, the Dominican Republic, and Serbia.
The average credit quality of GHI's bond portfolio is just below investment grade (BB). Nearly a quarter of the portfolio is in investment-grade bonds, including about 10% in safe AAA and A- rated bonds. Over the past decade it has returned an average of 13.4% annually.
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