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Hi everyone, this is my first post on the board. The discussion on Fairfax financial & interest rate risk seems a good place to start. For disclosure I hold both FFH &ORH shares & FFH through Markel also. Firstly, when the Q108 numbers came out for Fairfax I was expecting a large increase in comprehensive income from the bond portfolio. Without going through the different treasury notes/yields, I think there was around a 50 basis decline on the 10 year treasury (& bigger declines on 2yr & 5yr). Using the 07 annual report I would have expected approximately 430 mil in comprehensive income. However, when I reviewed the Q1 report it was closer to 190 mil (from 74 to 260 or so)- I appreciate they did sell some bonds but this would not make up the difference. Someone may have this realised bond gain figure. Fairfax has a mix of US & foreign bonds so this may partly explain the difference + foreign exchange rate moves. I have also emailed Odyssey re to ask IR if they are using hedging or interest rate options with their fixed income investments. So if the appreciation in the fixed income portfolio was less than what I expected, & what other msnberkshire users also expected after reading earlier posts, then it may not be appropriate to assume that the 07 annual report estimates of 200 basis point move will cause a 1.4 bil impact on comprehensive income. Since March 31st we have had a 100 basis move in interest rates - its been very volatile - particularly last week - everyone has a view on inflation & I can't say I know where its going to go. Anyway to me it would seem more appropriate at this stage to perhaps double the 190 mil + realised as being the decline from a 100 basis move in interest rates - a lotof which happened rather suddenly last week. I think some have alluded to but it is heartening to see that Fairfax's equity portfolio & investment in Abitibi Bowater have performed really well this quarter & should take some of the sting out of the fixed income portfolio movements. To me, the Treasury position of safety first & yield second has been the right strategy - its better to lose some yield to inflation rather than have loans permanently impaired - Fairfax have started to move into the high yield space with ABH . As for what strategy is right at this moment if we have high inflation - I'm sure hamblin watsa are watching things carefully - they have a 10% bond return over last 20 years I think its worth bearing in mind - I'm not suggesting it means they are right on the inflation issue as we are all human but they have a track record that makes a lot of bond investors look mediocre.
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