David Merkel | Sep 21, 2012 11:15AM ET
Back when I was exclusively a bond manager, 2001-2003, which I chronicled in my series The Education of a Corporate Bond Manager, I successfully struggled with one concept: when do you try to add more yield to your portfolio, and when don’t you?
That's a tough question because, in the short run, it almost always makes sense to add yield to any portfolio. Additional yield seems like free money. What’s worse, your sales coverages at the major investment banks are programmed to offer more yield, so what do you do?
I had to learn the hard way myself, with few to teach me. There are two aspects to this question: the micro and the macro.
Micro
Know how to compare bonds so that you are able to figure out what a good swap is. Thus you must understand:
This is the risk cycle. Think about:
As the Wall Street Journal noted, many bond mutual funds are reaching for yield now. This is a time to be wary, but if you are playing for the end of cycle we aren’t there yet. We have not had a significant default, or a series of small defaults.
So be on your guard. I am neutral at present but am watching for items that would make me more bullish or bearish.
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