James Grant, founder and editor of Grantās Interest Rate Observer, and an editor of the newly published sixth edition of "Security Analysis,ā by Benjamin Graham and David L. Dodd, has published a column at FT.com and been the subject of a 24-minute Bloomberg audio interview (below) about the new nature of the market and government securities.
Click Play for James Grant's December 5, 2008 Bloomberg Audio Interview Here
Grant very succinctly redefines the bond market as providing Return-Free Risk, rather than the old standby, Risk-Free Return. Here are a few excerpts:
The truth is that no investment asset is inherently safe. Risk or safety is an attribute of price. At the right price, a lowly convertible bond is a safer proposition than an exalted Treasury. Watching the government securities market zoom, many mistake price action for price.
Yes, Treasuries might conceivably redeem the hopes of their besotted admirers. Maybe a deflationary chasm is about to swallow us all. Never before has the US been so leveraged. And-just possibly-never before were lending standards so reckless as the ones that brought joy to so many astonished mortgage applicants in 2005 and 2006.
In their magnum opus Security Analysis Benjamin Graham and David L. Dodd advise that "bonds should be bought on their ability to withstand depression". They wrote that in 1934. So far is that rule from being honoured by today's financiers that not a few bonds-and boxcars full of mortgages - could hardly withstand prosperity. Two urgent questions present themselves. One: does something far worse than recession loom? Two: does that certain something definitely spell much lower interest rates?
On non-Treasury and corporate bonds:
The non-Treasury departments of the credit markets have crashed. No surprise then that prices and values are deranged. Market makers have closed up shop for the year, while hedge funds cower in fear of redemptions. Youād suppose that professional investors ā doughty seekers of value ā would be combing through the debris for bargains. Alas, no. Most seem content to lend money to Henry Paulson (subsequently to Timothy Geithner) at 2 per cent or 3 per cent.
In corporate debt and mortgages, anomalies and non sequiturs abound. They are especially prevalent in convertible bonds. More so than even the average stressed-out fund manager, convertible arbitrageurs have been through the mill. It was theyāand almost they aloneāwho owned convertibles. Now many of these folk must sell them.
Few buyers are presenting themselves, however, though extraordinary bargains keep popping up.
"Riskāfree return" is the standard tag attached to the government's solemn obligations. An investor I know, repulsed by prevailing government yields, has a timelier description - "returnāfree risk".
Read the complete article here.
