Global Macro Trading Journal

[Daal]

Gundlach avoiding duration like a plague in his flexible fund

 

[m22au]

Here is the data
http://bvmf.bmfbovespa.com.br/indices/ResumoVariacaoAnual.aspx?Indice=IBOV&idioma=en-us

By real returns I mean inflation ajusted USD (assuming a 2-3% USD inflation rate).

The Japanese situation was a unique one, there the CAPE ratio reached over 70 points! Investment analysis worked pretty well, valuations told you returns would be terrible and well, they were terrible. There is no surprise there. Japan wasnt even that bad in terms of growth (I recall an economist article talking about how per capita GDP growth was actually decent) but what you pay for the stock market matters

In the case of Brazilian stocks, the CAPE ratio is about 10 (depending the source you look at). The current PE is 14 but that is in the middle of a depression which is not a fair look at earnings. When margins pop that PE will come down, dividends will pop as well. Thats why the market is rallying so hard, the smart money has figured out things overshot on the way down and they like the catalysts that are coming

The only real way you get a cheap market to keep getting pounded is with deflationary depressions. Kinda like what happened to Greece (where the index dropped 95% or so), but they are in a very unique situation. They are stuck in that EUR and cant ease their way out of it, and they had a banking crisis. In Brazil, you never even had a NGDP print. NGDP growth was around 5-6% even in the depths of the panic. And the banks are still posting nice profits

thank you for your reply

 

[Martinghoul]

View attachment 168128
Gundlach avoiding duration like a plague in his flexible fund

Ironically, duration has been a great winner since the election...

 

[Daal]

Ironically, duration has been a great winner since the election...

what do you mean?

 

[Martinghoul]

what do you mean?

Curves have bear flattened since last week. The higher duration, longer-dated treasuries have outperformed the lower duration, shorter-dated treasuries in the selloff.

 

[newwurldmn]

Curves have bear flattened since last week. The higher duration, longer-dated treasuries have outperformed the lower duration, shorter-dated treasuries in the selloff.

Wasn't the curve upward sloping? so a flattening would mean the back came in more? I don't really know fixed income

 

[Daal]

Curves have bear flattened since last week. The higher duration, longer-dated treasuries have outperformed the lower duration, shorter-dated treasuries in the selloff.

Hasnt the long dated paper % drops been much bigger?

sure, in terms of bps it might have been different but in terms of % declines it has been pretty bad, thats the very definition of duration, no?

 

[Martinghoul]

Wasn't the curve upward sloping? so a flattening would mean the back came in more? I don't really know fixed income

The curve has been upward sloping, but relatively flat, by historical standards. Falttening in yield terms, in this case of a selloff, meant that the back end yields went up by less than the short end yields. To be fair, not by a lot, but the fact that this has happened after what we have learned is rather amazing.

 

[Martinghoul]

Hasnt the long dated paper % drops been much bigger?

sure, in terms of bps it might have been different but in terms of % declines it has been pretty bad, thats the very definition of duration, no?

No, percentages don't tell you the whole story, since you're not taking the duration ratio into account. That's the whole point of using basis points applied to yields, since this assumes that your positions are appropriately weighted.

So in this particular case, let's take 5s and 30s, for instance (using the current 5y OTR and the o30s, Aug46s). 5s lost arnd 2.32% in price terms, while 30s lost 9.6%, which means that 30s lost 4.1379 times what the 5s lost. However, the 30s are about 4.3124 times the duration of the 5s.

 

[Daal]

No, percentages don't tell you the whole story, since you're not taking the duration ratio into account. That's the whole point of using basis points applied to yields, since this assumes that your positions are appropriately weighted.

So in this particular case, let's take 5s and 30s, for instance (using the current 5y OTR and the o30s, Aug46s). 5s lost arnd 2.32% in price terms, while 30s lost 9.6%, which means that 30s lost 4.1379 times what the 5s lost. However, the 30s are about 4.3124 times the duration of the 5s.

clients that are losing money wont find any comfort in this sort of stuff