I sat in a meeting with a fixed income (bond) hedge fund manager this morning. The CEO has been in the business for more than 20 years.
He uttered these words: ”The fixed income market is big and inefficient. There is NO TRANSPARENCY in the bond market.”
He added that the “Bank of Canada is afraid of the Banks.”, and does not foresee any changes forthcoming in this arena.
The CEO did point out that there is a lot of risk in bond prices. If interest rates revert to historic numbers, bond prices will inevitably fall. “It doesn’t take a lot before the pain starts”.
If the 10 year Government Bond Yield increases 113 basis points to 2.97%, bond prices will drop by 11 percent. That’s the 2011-2010 mean.
If the same yield increases 158 basis points to 3.42%, or 239 basis points to 4.23%, bond prices will fall by 15 percent and 21 percent respectively. Those are the 2009-2008 and 2007-2006 means in the 10 year Government Bond Yields.
Today, the yield is at 1.84%.
I see “strategically asset allocated” portfolios heavily weighted into bonds or fixed income. Incoming clients were not aware how risky this mix was.