Wednesday Notes

The VXX and VXZ keep moving

the volatility of volatility is increasing. Right now the SPY is only .7% but VXX is up 5.8% and VXZ is up 2%. This means the delta (hedge ratio) or the movement in the ETNs relative to the move in the underlying is increasing as well. Of course this parallels the moves in the VIX
VIX Posts Biggest Two-Day Increase Since May as S&P 500 Tumbles
Illinois Non Taxable Munis

Is the state of Illinois close to junky ? The Wsj reports the taxable bond issue to go to market today will yiled around 2.4% above treasuries for the 2019 maturity , Based on etfs (hyg,ief,lqd) inv grade corps are +1.16% junk + 3.20%. Investor demand seems strong particularly from abroad...maybe they know something. And as I have noted it is possible to lock in the spread without locking in to current long term rtes. Purchasing a bear etn for the appropriate maturity/duration hedges out the interest rate risk and locks in the spreads.

Dumb Money chasing Performance ?

Recent data on mutual fund flows for the beginning of the year has shown (surprise) money flowing from bonds into stocks chasing past performance. And in the bond areas the money has flowed into higher risk areas of the credit market including emerging market bonds and high yield bonds. So much for the argument from some observers than investors in 2010 went from stocks to bonds in order to reduce their risk, It seems more likely they were simply chasing performance.

And as for recent flows retail money has clearly been flowing most out of emerging markets. Barron's noted on feb 17:

I'm Quoted in the WSJ Commenting on Bond Funds

I'm quotes in a Feb 8 article in the WSj on "go anywhere" bond funds

Lawrence Weinman, a fee-only financial adviser in Los Angeles, says go-anywhere bond funds may wring out a bit more return, but may be taking more risk in the process. "The problem with go-anywhere bond funds is they can do anything; they can add on all the risks that I try to control—credit risk, duration maturity risk, currency risk," he says. Some can take on equity exposure with convertible bonds or invest overseas without hedging, he says.
"You're betting on the management being able to do that. I'm pretty skeptical in terms of persistent manager skill," he says.

How to Play the Yiekd Curve With ETNs

In addition to the ETNs that focus on particular parts of the yield curve which I reviewed in my previous article, iPath has introduced instruments that allow investors to take positions on the shape of the yield curve. Specifically, these instruments allow one to take a view on the spread between 2 year and 10 year Treasuries. Institutional investors and traders have long taken positions on this relationship through futures and swaps but these instruments offer the simplest and most direct means for smaller investors to do so. The two iPath ETNs are ticker symbol STPP which increases value when the yield curve steepens (the differential between 10yr and 2 year rates increases) while the ETN with the ticker FLAT increases in value when the curve flattens

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Interesting ETNs for Fixed Income Management

Since August, Barclays iPath has introduced two sets of ETNs that make available to smaller investors bond portfolio management tools which were previously only available through the use of futures or swaps markets. They allow investors to take positions on the particular parts of the yield curve or on the shape of the yield curve. 

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