MechMan, I love your question "how can bonds lose?"
such a simple question, such depth in connotations
I could mention a thousand ways
it gives me an opportunity to main a few main points about bonds
1. the word "fund" in bond fund should give you a nightmarish clue as to their real purpose
to me it means first, leverage with the usage of futures contracts, borrowed money BEFORE the futures, thus enabling hyper-leverage often in the 400-600 to 1 range !!!
e.g. borrow money commercially at 5-10% downpaymt, use of futures 20-30:1 margin leverage, thus 400:1 to 600:1
the types of futures contracts are many
e.g. TBills, TNotes, TBonds, FedFunds, EuroBonds, EuroDollars, TED (Trez over Euro$ spread), etc
that is why they are exclusive clubs, where wealth is prereq and lawsuits dont happen
these "funds" are hedge funds, think CASINO
the leverage is simply astronomical and criminal for the unsuspecting clients
now apply to real money and trading results
a 10% error losing trade would amplify to -400% or more, offset by winning trades
2. the types of contracts involved run the gamit of craziness
they might have made profits with whitebread "missionary sex" bond long futures
they probably lost their asses in corporate bonds, as Enron and WorldCom and KMart and GlobalXing lost the whole boat
many traditional firms in mainstream businesses lost some on corp bonds, as stress to business led investors to leave in search of safety in Treasurys
other middle-road corp bonds probably made a little, treaded water, or lost a little
junk bonds have been utterly decimated, with default rates over 10-20%, not sure of exact figures, where default might give you 0cents per dollar
then you have the more exotics, and believe me when I say these funds boys love complexity, as they think their intelligence will give them an edge, just like Black, Scholes, Merriwether and the LTCM bunch
the usual suspect for derivative kills is the Spread (corp yield over treasury yield), and this spread has been rising to awfully high killer levels lately, esp for junk spreads
traditional bond holders eschew their corporates and hunker into trez, a fear response
if a fund (just like JPMorgo, Citi, GSux) want to BET that the Fed rate policy cuts will result in economic recovery, the easiest high-high leverage way to execute that BET is to go long on the Spread (buy corp bond, sell trez bond), hoping that spread rate closes toward 1-2% again
a closing spread would make a nice hefty return in the non-leveraged world, but add futures to the mix and you get 30:1 increases in returns
then you have other spreads like the maturity spread within Trez bonds, defined as 10-yr yield minus 3-month yield
similar BETS on econ recovery come with these
and even BETS that Europe will outperform the US economy in its recovery, which would lead you to TED spreads
roulette anyone? blackjack? crapps? step right up!!!
3. the rest is a bit murky to me
they can include Mortgage Backed Bonds, FannyMae stocks, Collaterized Debt Obligations, foreign sovereign debt (e.g. Argentina, Brazil, Mexico), formal securitized foreigns like remaining Brady Bonds (1980's Latin American stuff)
I dont know exactly how funds can participate in these with high leverage
I am clear about the nature of these contracts, or most of them, but not on usage of leverage with them
of course, take your standard 10% commercial loan leverage and you get a mere 10:1 leverage against returns
they can go with FNM options and other options
I know I have left out some pockets of other bonds
no, funds dont play with US Savings Bonds or CD's
so, in summary, a thousand ways for your funds money to leave their lover !!!
make sense, give you a headache?
think: CASINO CASINO CASINO
America has turned the entire finance world into a farking casino
it is sad, tragic, deadly, and ominous for the future of money and finance and investments
many so-called experts and our hairless leader Sir Alan Bumwad believe these financial engineering machinations provide sheer strength and resilience to our economy
I think the opposite, as LTCM warned in 1998
the engineering provides undisclosed risk from excessive gearing with TNT dynamite all thru the basements of our nation's banks and corporations
they usually go off in accidents when things go wrong
and the best indicator of derivative events are very wide and ever widening SPREADS, like now !!!
when they explode, they do so with leverage, hidden sources of detonation, uncertainty, and unsuspecting investors
/ jim
