OXSTONE FOOD FOR THOUGHT – Bond Market Commentary – November 2010


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A banker turned social finance entrepreneur. Liu-Yue built and managed two social enterprises. Liu-Yue founded Oxstones Investment Club a searchable cloud-based content platform for knowledge sharing and financial education. Oxstones.com also provides global investors with direct access to U.S. commercial real estate investment opportunities and other alternative strategies. In addition, Liu-Yue also co-founded Cute Brands, Inc. Cute Brands is a cause-oriented character-based brand licensing and social impact fund that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising ultra high net worth clients on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in emerging markets bonds and Latin American equities investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities and special situation investing at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.

By Liu-Yue (Louie) Lam, Co-Founder, CEO, Oxstone Capital Management,

Bond Market Commentary

The symptoms that led to the Great Recession (2007-2009) have not been resolved. Private sector debts were only transferred from the private balance sheet to the public balance sheet. The massive fiscal and monetary stimulus policies needed to combat the Great Recession as well as the collapse in the tax base have led to soaring budget deficits at the federal, state, and local levels. With high unemployment decimating the tax base, governments have continued to fund spending programs with increased borrowings.

These fiscal problems are also a global issue especially in the G-8 countries. This is leading to a ‘crowding out effect’ as the overhang of public debt competes vigorously with private sector debt. Higher future interest rates are a near certainty. Who is going to buy all that debt? In addition, excess liquidity driven by current low interest rates will eventually lead to inflation. Global competitive devaluations among G-8 countries and increasing sovereign default risks are creating a perfect storm where there is no longer a true safe haven in bonds. This all spells very bad news for the fixed income markets especially Munis and Treasuries, and even Corporate Bonds.

The traditional bond market has produced an annualized return of 6.1% over the past 84+years and 7.4% over the past 10 years. However, we believe the great bond bull market of the past 30 years to be over. With current interest rates at an all-time low, we expect interest rates to gradually move higher over the years due to the adverse scenario mentioned above. Are investors prepared for a long term secular bond bear market? In an environment where interest rates and sovereign risks are rising; bond valuations will most likely decline in addition to the heightened level of volatility in bond returns.

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