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War Room 28 March 2012 Fixed Income in 2012: Are Bonds Still En Vogue?

War Room 28 March 2012 Fixed Income in 2012: Are Bonds Still En Vogue?. War Room. Monthly macro discussion Using tools in context Update on HiddenLevers Features Your feedback welcome. Fixed Income in 2012 – Are Bonds Still En Vogue?. Market Snapshot Fixed Income Fundamentals

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War Room 28 March 2012 Fixed Income in 2012: Are Bonds Still En Vogue?

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  1. War Room 28 March 2012 Fixed Income in 2012: Are Bonds Still En Vogue?

  2. War Room • Monthly macro discussion • Using tools in context • Update on HiddenLevers Features • Your feedback welcome

  3. Fixed Income in 2012 – Are Bonds Still En Vogue? • Market Snapshot • Fixed Income Fundamentals • Outlook + Scenarios • Fixed Income Functionality

  4. HiddenLevers Fixed income in 2012:market snapshot

  5. Market Snapshot: US Benchmark Rate The New Normal US Interest Rates at all time low, and pledge from Fed extended – rates will remain here until mid 2014.

  6. Market Snapshot – Fixed Income good stories Treasuries + Emerging Markets Debt Funds have trounced the S&P 500, without the volatility

  7. Market Snapshot – Fixed Income good stories Many still haunted by Meredith Whitney comments in October 2010 for no reason Less volatility since the crisis helps folks sleep better

  8. HiddenLevers Fixed income fundamentals

  9. Fixed Income: Credit Risk Profiles Even through financial crisis, credit risk not an issue for investment grade – but CCC and below has 57% lifetime default rate.

  10. Credit spreads much narrower than crisis levels Still above 30 yr average Further narrowing = upside for HY, Munis, EM debt Widening = flight back to treasuries Credit Risk: HY Credit Spreads Sources: Citigroup + BofA Merrill Lynch

  11. How to control duration? Shorten maturities Increase yield Hold to maturity Floating rate issues Higher yield considerations Increased credit risk Higher correlation to stocks Interest Rate Risk - Duration Sources: National Associations of Realtors, Home Builders, and Wells Fargo

  12. Interest Rate Risk: Yield Curve 2003 – Last Recovery 1980 – High Inflation Avg Yield Curve 1977-2011 2006 - Last Cycle Peak 2011- What's Next? The current yield curve is significantly lower than historical averages, with seemingly little precedent to drop further. Source: Fidelity

  13. HiddenLevers Fixed income in 2012:Outlook + scenarios

  14. Interest Rates Stay Low – Deflation Worry • US Interest rates • going nowhere Bernanke’s worst fear, and the reason for QE

  15. Interest Rates Rise – What is the Driver? Consequences - Growth: Fed tightens as we get back to normalcy 2. Borrowing costs rise for financial firms, REITs Bullish for equities as bonds lose luster Precious metals not as shiny either • Consequences - Inflation: • Fed forced to tighten to contain inflation • 2014 pledge goes bye bye – Fed eats crow • Commodities keep rising – push cost of everything • Negative impact for equities and bond markets

  16. HiddenLevers Fixed income – new features

  17. HiddenLevers - New Features • Fixed Income Support • Cusips + Options now uploadable • Macro Profile for Portfolio – need feedback • Coming soon: • Scenario Hedging Wizard • Excel-type pasting for Add Portfolio

  18. CUSIPs now supported in edit portfolio or via portfolio upload You can also manually enter custom fixed-income or cash-flow investments (including real estate) How it works: Interest Rate Risk Modeling: Calculates duration and convexity to model interest rate risk Credit Risk Modeling: Uses industry/sector or proxy symbol to determine correlations, and uses ratings to determine volatility Fixed Income Functionality

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