I’ve had good returns on bonds over the last year, largely because I invested in long deflation investment grade bonds.  I took on a lot of duration risk by investing long, and it paid off.  I’ve reduced the size of my duration bet, but it is still large relative to the consensus.  That said, momentum tends to persist.

But what to do now?  Yes, rates could still go lower on the long end.  Credit spreads could still tighten on the long end and elsewhere.  Most of my credit related positions have done well, including preferred stocks of banks.

I have a positive view on conforming mortgages, though I have no position there now.

On illiquidity I have a negative view because things are volatile enough that you need flexibility.

On FX, I am long the Swiss Franc, and it has been a loser.  I suspect that with weakness in the euro, the Swissie will not break its link with the Euro.  At present, the US Dollar seems ascendant.  What can stand in its way?

I am tempted to put money into emerging markets debt, because their economies are run in a more orthodox manner than the developed economies, but not by much.

Really, I am scratching my head over all the various risks, and thinking that short-term investment grade credit is the only thing that I like.  Beyond that, I am open to suggestions.

by: alephblog