Safe havens for investors are downright scary these days.
Since Detroit's record bankruptcy in July, investors have been more skittish than ever about municipal bonds, once a strong strand in the safety net of boring investments for Americans investors.
Debt issued by Puerto Rico is particularly of concern; large investment houses are busy warning their brokerage sales forces to steer clients away from Puerto Rican debt in an effort to avoid potentially disastrous losses.
Meanwhile, the financial services industry is doing its damndest to block new rules that would make investments in money markets funds safer. Indeed, the new rules requiring money market funds to carry more capital are essential to protecting investors and the industry simply doesn't want them.
Let's start with the climate of fear around Puerto Rican muni bonds.
According to the Wall Street Journal last month, the nation's largest brokerage firms, including household brand names
With my experience in insurance there are yet two additional ways to fix money market funds under stress.
Though I think my earlier thoughts on how to fix money market funds are better that current proposals, these ideas will still work well.
I would recommend doing either of the above two strategies if there is a significant credit event, and there was a demand for withdrawals at par. These strategies would eliminate the fund, unlike my earlier strategy, but would hand over the the remaining assets equitably,
To set the stage for this article, we will first look at three periods of rising interest rates within the last 20 years. Using these past periods will allow us to analyze the predictability of moves in the treasury yield curve during a rising interest rate environment. Understanding the strain of projecting yield curve shifts allows us to comprehend the importance of fixed-income portfolio construction. To further expand the importance of fixed-income portfolio construction, we will review what has happened to the European fixed-income market over the past 10 years.
We will analyze how a conservative, passive investor's portfolio has shifted from a high-quality bond allocation toward a basket of low credit quality bonds over the past 10 years. Examining this portfolio will help us to demonstrate the importance of active management for fixed-income portfolios. Finally, we will explore the current fixed-income opportunities available due to the recent changes discovered