Despite pronounced risks in certain credit instruments, people have been investing
record amounts of money into anything with a yield. For example, municipal
bond funds had bubble-like inflows in 2009 despite municipalities having well
known fiscal imbalances (Figure 1). In fact, inflows of $69 billion in 2009
were more than 4x the amount of the next highest annual inflows, which were
recorded in 2002.
Figure 1. Annual Municipal Bond Fund Flows ($ millions) Source: Bloomberg, ICI
Figure 2 shows monthly fund flows. Note that in August and September of 2009,
combined inflows of $19.1 billion were greater than inflows during any other
year.
Figure 2. Monthly Municipal Bond Fund Flows ($ millions) Source: Bloomberg, ICI
The surge in bond inflows has helped all borrowers, in part, because of diversification,
whereby funds are allocated across a large spectrum of borrowers. In a sense,
a rising tide has lifted all boats, even those with gaping leaks. This concept
is illustrated by the International Treasury Bond ETF, BWX (Figure 3). BWX
is the largest ETF of its kind and has grown from $761 million to $1.5 billion
since its inception in October 2007. BWX holds bonds issued by some of the
riskiest sovereigns in the developed world with roughly 20% invested in Italy,
Spain and Greece and another 22% in Japan. If the current sovereign problems
do not end, as equity markets seem to suggest they will, outflows from these
pooled instruments will impact the more credit-worthy countries in much the
same way that problems with subprime led to an unraveling of the entire housing
industry.
Figure 3. Top Holdings and Top Country Weights of SPDR Barclays Capital
International Treasury Bond ETF (BWX) Source: SPDR Barclays Capital International Treasury Bond
ETF (BWX) Fact Sheet
Continental Capital Advisors, LLC was formed to offset the destruction of
wealth caused by the global devaluation of currencies by central banks. The
name Continental Capital symbolizes the 1775 US Currency, "the Continental",
which was backed by nothing and quickly became devalued.
Disclaimer: The above is a matter of opinion and is not intended as
investment advice. Comments within the text should not be construed as specific
recommendations to buy or sell securities. Individuals should consult with
their broker and personal financial advisors before engaging in any trading
activities. Certain statements included herein may constitute "forward-looking
statements" with the meaning of certain securities legislative measures. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements
of the above mentioned companies, and / or industry results, to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Any action taken as a result of
reading this is solely the responsibility of the reader.
Continental Capital Advisors, LLC was formed to offset the destruction of
wealth caused by the global devaluation of currencies by central banks. The
name Continental Capital symbolizes the 1775 US Currency, "the Continental",
which was backed by nothing and quickly became devalued.
Disclaimer: The above is a matter of opinion and is not intended as
investment advice. Comments within the text should not be construed as specific
recommendations to buy or sell securities. Individuals should consult with
their broker and personal financial advisors before engaging in any trading
activities. Certain statements included herein may constitute "forward-looking
statements" with the meaning of certain securities legislative measures. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements
of the above mentioned companies, and / or industry results, to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Any action taken as a result of
reading this is solely the responsibility of the reader.
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