Unbelievable! (mid-day Friday Oct 10)

The fall in the Lehman Aggregate Bond Index (all US bonds over 12 months duration and excluding municipals) is a real blow to asset allocation programs.

This 3-year weekly chart of AGG (bonds) and SPY (stocks) tells the story.

In this panic dominated market, cash is king.

Cash in Treasury Bills or T-Bill funds is most safe for amounts that exceed limits that can be insured by FDIC in banks.

click image to enlarge

After market close Oct 10:

AGG was down 5.66%, while alternate Lehman Aggregate Bond index fund BND was down 3.06%.

Both are down significantly, but something must be wrong for such a wide variance in results.

BND, the Vanguard product, holds thousands of bonds (using an index near-replication method).

AGG, the Barclays product, holds less than 200 bonds (using an index sampling method).

Was there a creation unit arbitrage failure for one of the other fund?  Or, is one exihibiting tracking error for other reasons?

We hope to learn the answer to that question and update this post about that.

Volatility:

The extraordinary market swings today probably didn’t help.  The VIX for example had a day low of 28.13 and a day high of 69.95.  That is extraordinary for its range, and also because 69.95 is the highest ever recorded level of volatility.  The 52-week low is 9.79, while the recently established  52-week high (before today) was 64.92.

* * * * *

Have a relaxing weekend and, we suppose, wait for the next Sunday announcements by governments seeking to solve the problems in the markets.

Will countries issue a coordinated plan to guarantee inter-bank loans to free up credit?  We may know by Sunday.

Richard Shaw
QVM Group LLC

This entry was posted on Friday, October 10th, 2008 at 1:12 pm and is filed under Bonds. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.