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Bonds, About buying Bonds
nipper
post Posted: Aug 11 2018, 09:52 AM
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QUOTE
The shifting distribution of risks across the capital structure ... creates investment opportunities.

This week Standard & Poor's published a report stating that the unwinding of housing imbalances care of the correction in credit growth and asset prices means that it may upgrade Australia's economic risk score. This would have the technical impact of lowering the risk-weightings S&P assumes for the mortgages on Australian bank balance-sheets, which will in turn lift their globally harmonised S&P risk-adjusted capital (RAC) ratios.

If this happens all four majors should report RAC ratios of 10 per cent or more, which would earn them an upgrade of their S&P stand-alone credit profiles (SACP) from "a-" to "a" (where they were rated in 2017 before S&P downgraded Australia's economic risk score). Crucially, APRA has stated that an S&P RAC ratio above 10 per cent is consistent with its goal of ensuring the majors' capital ratios are "unquestionably strong".

While the improvement in the majors' SACPs to "a" has no impact on their senior bond ratings, it would boost their hybrid ratings to BBB-, which is back in the all-important "investment-grade" (as opposed to "high yield") band. The major's subordinated bond ratings would also improve from BBB to BBB+.
https://www.afr.com/personal-finance/why-it...20180810-h13sgn



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"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne
 
nipper
post Posted: Sep 13 2016, 03:31 PM
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The Australian government has unveiled plans to issue its first ever 30-year bond as it seeks to take advantage of strong investor demand for high yielding assets even as foreign investors scale back purchases and credit rating agencies threaten downgrades.

Rob Nicholl, the chief executive of the Australian Office of Financial Management told an audience of economists in Sydney that the unit responsible for debt issuance was planning a benchmark sized 30-year bond issue in October.

The 30-year bond is part of the AOFM's long-term strategy to issue longer term debt to reduce the refinancing risk of the government debt by pushing debt maturities into the future while reducing the impact of changing interest rates on the federal government's funding cost.

The strategy has so far been successful as the government has managed to lengthen the average maturity of its debt book from five years to seven years. This has reduced funding risks over the next five years by $12 billion a year, he said.

At the same time average funding costs have fallen by 1.60 percentage points as global interest rates around the world have fallen.

"That the government can now borrow at lower cost than it could seven years ago is a consequence of global economic and financial market influences and does not in itself reflect an AOFM objective," said Mr Nichol.

But, he said, it had allowed the government to extend its debt maturities at lower than historic cost.

"It comes down to the fact that rates are low globally because of the extraordinary attempts by central monetary authorities to stimulate the economic growth through various channels."

While long-term debt constitutes more secure funding, it is more costly and Mr Nicholl said it was "debatable" how hard the unit should push to achieve this objective.




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"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne
 
nipper
post Posted: Jun 13 2013, 09:28 AM
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In Reply To: nipper's post @ Jun 13 2013, 09:12 AM

Australian Commonwealth Government Bonds

The ASX listing of Australian Commonwealth Government Bonds (ACGB) in May 2013 is a further development in the evolution of the domestic fixed income market, providing an avenue through which investors can more readily access this asset class.

What are exchange-traded bonds?

Exchange-traded ACGBs offer a convenient and accessible way to invest in debt securities issued by the Australian Government in the form of a CHESS Depositary Interest (CDI). CDIs afford the holders of the exchange-traded ACGBs all the economic benefits, including payments (or coupons), attached to owning ACGBs.

CDIs come in two forms. They include:

- Exchange-traded Treasury Bonds which represent the more traditional fixed-rate government bonds, with a face value of $100 and interest paid every six months.
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Exchange-traded Treasury Indexed Bonds, where the bond's face value is adjusted for movements in the Consumer Price Index (CPI). Interest is paid quarterly at a fixed rate on the adjusted capital value, with investors receiving the face value of the security at maturity adjusted for CPI movements over the life of the bond.

The benefits of the listing of ACGBs for investors include:
- Ready access to the bonds
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Greater transparency of pricing and visibility of capital values and cash flows
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Greater investing flexibility and liquidity; and
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A potential hedge against inflation through Exchange-traded Treasury Indexed Bonds Investment Considerations:

The following attributes and dynamics are ascribed to government bonds:

Credit Quality

- From a credit perspective, ACGBs are low-risk.
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The Australian Commonwealth Government is rated "AAA/Stable" and remains one of a small number of sovereign states globally that continues to enjoy the highest rating.
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ACGBs offer safety and security of regular cash flows (coupons) and redemption of capital at maturity. Low Yield to Maturity
- The issue confronting prospective investors is that most ACGBs are currently trading at a hefty premium to their $100 face value.
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While attractive annual coupons typically range between 5.25% and 6.25%, capital values are often in excess of $110 and for longer-dated instruments closer to $120.
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Should ACGBs be held to maturity the net impact of solid annual returns coupled with capital losses on maturity (as investors realise the bond's $100 face value) results in yields typically in the 2.5% to 3.5% range. An example is the ASX-listed 5-year Exchange-traded Treasury Bond (ASX code GSBA18) maturing on the 21st January 2018. It provides an attractive annual coupon of 5.5% but will cost approximately $113.60 resulting in yield to maturity of 2.8%.

Capital Value Volatility

- Aside from the lower capital values realized on maturity (following on from the example above $100 as opposed to the price paid today of $113.60), there remains the risk that in the period prior to maturity, yields will move higher as we end a 20-year bull market in government bonds. If portfolios are not actively managed a move higher in yields will translate to lower capital values (the amount received at maturity) and potentially negative returns as the value of the coupons is offset by higher capital losses. By contrast, if the investor is focused on capital preservation and looking for the safety and security of Commonwealth Government backed investment; government-guaranteed term deposits earning annualised returns that are 1.5% to 2.0% higher with no market volatility. Despite scaling back its guarantee of term deposits in early 2012, the Australian Commonwealth Government continues to guarantee deposits to the value of $250,000 per account per financial institution.

Investors need to be aware of the risks involved in investing in low-yielding fixed-rate instruments at this point in the cycle. Regardless of whether exposure is via listed or unlisted means, a clear understanding of what they are and the role in portfolios is needed. Many investment professionals believe we are at or very close to the bottom of the interest rate cycle.

· In the current market, unless government bond exposures are actively managed, or are included in a portfolio for reasons other than security of capital and cash flows, now is not the time to be adding direct exposures to listed (or unlisted) government bonds. Buying fixed-rate instruments with a view to holding to maturity will lock in historically low yields and represent a lost opportunity for higher returns.

· The vast majority of listed ACGBs are trading at premium prices (above their face value of $100), with the corresponding low yields on 2- to 10-year bonds reflective of their inflated capital values.

· Moreover, the instruments' fixed-rate nature means their capital values (and potentially the value of portfolios) are likely to be more sensitive to interest rate movements compared to those of floating-rate instruments. The potential negative impact is magnified if, as many believe, we are at or very close to the bottom of the interest rate cycle.

Government Bonds Can Still Play a Role in Portfolios:

There is a view the value of Bonds extends beyond the low yields on offer. These roles include:
-They can act as an insurance policy against further market disruptions and to provide capital value support within a wider portfolio of investments,
-act as a provider of uncorrelated returns to equity,
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provide enhanced investing flexibility and liquidity. Returns can be attractive: positive 14.3% was achieved in the 12 months to mid-2012 during which time the S&P/ASX200 Accumulation Index realized a 6.7% loss;

Further information: http://www.asx.com.au/products/exchange-traded-australian-government-bonds.htm



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"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne
 
nipper
post Posted: Jun 13 2013, 09:12 AM
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Why invest in bonds (of all kinds)?

QUOTE
Capital stability: Or safety. Bondholders sit high in a company's capital structure and have priority over equity holders in liquidation. As long as a bond issuer remains solvent, they must pay scheduled interest to the bondholder and repay principal upon maturity. As low risk investments, the capital price of bonds tends to be far less volatile than equities.

Cashflow: Regular and reliable income is the cornerstone of investing in bonds as they provide a known income stream through coupon (i.e. interest) payments. Investors can choose between fixed rate bonds, floating rate notes (FRN) and inflation linked bonds (ILB) depending on individual circumstances or market expectations. Fixed rate bonds provide the highest degree of certainty as they deliver a semi-annual payment that is fixed for the life of the bond. FRN and ILB typically pay quarterly coupon payments that do vary slightly depending on movements in interest rates and inflation. With a wide variety of bonds and payment types available, cashflows (and returns) can be tailored to suit any needs.

Liquidity: The over the counter (OTC) bond market is around five times larger than the global equity market and as such provides solid liquidity. Low risk, highly liquid fixed income investments like government bonds can be sold at very short notice if needed. Bank and corporate bonds are typically also liquid and easy to buy and sell.

Diversification: With a very large selection of bonds available, investors can enhance diversification in their investment portfolios. Moreover, bonds provide diversification from the two most highly cyclical asset classes, equities and property. In particular, fixed rate bonds provide a very valuable counter cyclical benefit to investment portfolios when equities are declining. Typically when an economy is struggling, equities fall in value and dividends tend to be reduced or cut entirely. This is generally matched with low growth and inflation. Regulators will try to stimulate the economy by cutting interest rates and this has the effect of increasing the value of fixed rate bonds due to their fixed, and now more valuable, income stream. This countercyclical buffer is extremely important for investors with a high weighting to equities.




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"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne
 
mullokintyre
post Posted: Jun 13 2013, 09:00 AM
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In Reply To: flower's post @ Jun 12 2013, 11:36 PM

QUOTE
To those of us who were paying attention back in 1994, it all seems quite familiar. Chairman Alan Greenspan had made it reasonably clear that the Fed was about to start raising rates. Even so, the news seemed to come as a shock. I remember being on a trip to Australia after the Fed made its move. From the scale of the sell-off in Australian bonds, you'd have thought an inflation panic was breaking out, or that the Fed had lost all credibility -- but no, it was simply that many people had invested heavily in Australian (and European and other developed-market) bonds to take advantage of the yield spread over U.S. Treasuries.


If one takes this view as gospel ( I am ambivalent, or maybe agnostic is a better word), then the last line is important in terms of the AUD. If as suggested, there is a wide departure from Oz bonds, then the AUD will be under severe pressure, and that 80 cent mark may well be a possibility.

Mick




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sent from my Olivetti Typewriter.

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flower
post Posted: Jun 12 2013, 11:36 PM
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Can Bernanke avoid a bond meltdown?---lifted from Bloomberg: (couldn't find a better thread): Watch next weeks FOMC meeting outcome.
http://www.bloomberg.com/news/2013-06-11/c...nd-market-.html

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The past few weeks have given us a hint of what might happen when the Federal Reserve starts to reverse its super-easy monetary policy. Expect turbulence in financial markets, especially for assets that have moved far above normal or reasonable valuations. A return to normality eventually implies a benchmark 10-year Treasury yield of 4 percent or more. It won't happen all at once, but that's where we're heading. With yields at roughly 2.2 percent, there's a long way to go. This transition will mark a recovery of the equity culture and the cooling of investors' protracted love affair with bonds.

Because of this prospect, markets are sensitive to the merest whiff that Fed Chairman Ben S. Bernanke might be forced by colleagues on the Federal Open Market Committee to reduce the scale of quantitative easing. This nervousness has affected asset prices across the maturity spectrum, not just at the short end of the money market as you might expect.

To those of us who were paying attention back in 1994, it all seems quite familiar. Chairman Alan Greenspan had made it reasonably clear that the Fed was about to start raising rates. Even so, the news seemed to come as a shock. I remember being on a trip to Australia after the Fed made its move. From the scale of the sell-off in Australian bonds, you'd have thought an inflation panic was breaking out, or that the Fed had lost all credibility -- but no, it was simply that many people had invested heavily in Australian (and European and other developed-market) bonds to take advantage of the yield spread over U.S. Treasuries.

etc etc.



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Combining Fundamental comments with Fundamental charts.
 


nipper
post Posted: Sep 5 2012, 04:23 PM
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In Reply To: nipper's post @ Mar 21 2012, 09:20 AM

QUOTE
... economists at ANZ Bank launched a new acronym last week, the GFZ, otherwise known as the Growth Free Zone. The implication here is that the Global Financial Crisis, or GFC as we commonly know it, has accelerated the underlying problems in developed countries and has effectively pushed "growth" in any meaningful interpretation of the word out the proverbial window. Today, there is no "growth" in the UK, the European mainland, the US or in Japan. Despite a gazillion new electronic bank notes in each of these economic zones, there's no meaningful consumer price inflation either. Under "normal" market circumstances, government bond yields are a reflection of official interest rates plus inflation plus an arbitrary risk premium or discount (usually set by "the market"). But with so much necessary de-leveraging still in the pipeline and with so much government debt still waiting to be addressed, can we expect this war on costs for government debt to end anytime soon?

I have an uncomfortable feeling the answer to this question is negative and we all should, as things stand now, consider the idea that we have just embarked on a journey of low yields all over again. After all, low yields were simply the norm prior to the 1950s so it could be argued we're closing off an era that was the historic exception in the first place (it started through out of control inflation).

Low yields are not by default a blessing for the world. Think about the trillions in superannuation schemes around the world, both sovereign as well as corporate, that rely heavily on yield from (supposedly) less risky government debt. Those superannuation obligations already are well behind previously defined targets and most definitely insufficient to meet future requirements. One more problem to add to the world's list.

Also, don't forget the impact on financial services providers, including life insurers whose business models will come under some serious stress in a sustainable low yielding environment.

Investors should also note the global reduction in low risk yield has not stopped Australian bank shares from de-rating. This might seem an odd conclusion given the banks have pretty much carried the Australian equity indices into positive territory so far this year, but stocks such as Commonwealth Bank ((CBA)) and Westpac ((WBC)) at current prices are still offering forward looking yields well in excess of 6%. Prior to 2011, such yield was usually only available in the sector after a sell-off, not at peak share price levels for the year.

In other words: despite a global search for sustainable yield, investors have still priced Australian bank shares in line with the sector's low growth outlook. Can this explain why equities are not by default the go-to arena during times of low growth, even if bond yields are not offering much as an alternative? (Note that, despite a world beating performance over the past three years, US equities have continued to suffer from net funds outflows and they still are today).

In Australia, the yield on 10-year government bonds sits around 3.25% after hitting an all-time record low of 2.80% in June. This suggests bond investors are signaling further deceleration in growth ahead, with the RBA's overnight cash rate likely to be cut at least one more time from today's 3.50% (and potentially as much as another 100bp in easing yet to follow).

Last week I met up with a few hedge fund operators and I can report they are studying scenarios whereby another round of QE by the Fed (most likely in accordance with major central banks elsewhere) might push the Australian dollar a lot higher from today's already elevated level.

This, so the theory goes, will cripple the Australian economy and force official interest rates down a lot further than is being contemplated by economists today. As Australia hasn't had a decent correction in its overpriced housing market yet, and with consumer debt levels near historic highs, the odds are then that rising unemployment will trigger a lot more bad news from the "Lucky Country". Ultimately, this will force a crash in the Australian dollar, but not before we have seen a lot of bad news first from the stock market, the economy, the RBA and from the Australian government.

Of course, at this stage this is nothing but a potential scenario, but it can serve as a reminder to investors they should be careful what they wish for. There is also still the possibility that all quantitative measures (effectively: money printing) by central bankers might one day once again unleash the ugly inflation monster. This could take us all the way back to the origins as to why bond yields surged well above corporate dividend yields some sixty years ago.

Prior to the unprecedented switch in the 1950s, bond yields were at all-time lows (for that time). Today, bond yields are even lower and, in my view, likely to remain lower for longer - at least for the foreseeable future.
(from FN Arena - This story was originally written on Monday, 03 September 2012. It was published on that day in the form of an email to paying subscribers).



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"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne
 
nipper
post Posted: Mar 21 2012, 09:20 AM
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In Reply To: wren's post @ Feb 2 2012, 10:44 AM

QUOTE
Since the start of the year .. (there have been changes in) bank funding spreads almost every week. A raft of new issues – including covered bonds and ASX listed subordinated and hybrid issues – have "re-priced" the market on numerous occasions.

However, the greatest impact has been the commencement of covered bond issues in the domestic A$ market by the major banks. In particularly the inaugural covered bond issue by CBA in mid- January at a hefty 175bp over five year swap threw the cat amongst the pigeons so to speak.

Where to from here?

Covered bonds have tightened a long way but prior to the first A$ issue (CBA @ 175bp above), we expected them to be around 80bps. We expect that spreads will continue to tighten towards those levels subject to the odd push wider when large volumes hit the market by way of new issues, which should be a regular occurrence over 2012.

Term deposits in the long end now appear poor value. Higher margins over swap are available in at call and short dated deposits and these appear much better places to invest if you are looking for the safety of deposits.

Senior debt is still wide by historic and recent standards and with credit spreads for European banks tightening materially over recent weeks, we expect further tightening domestically also (but the risk of another bout of European or global risk aversion does remain).

Subordinated debt is a dying breed for the major banks. Other than the new ANZ retail issue, there is very little with an expected call date past 2012.

Hybrids have been hit by a large sell off, much of which was justified. However, certain hybrids possibly have sold off too far but with further new ASX retail issues to be "funded" by the sale of old hybrids, there is a risk that the sell off could continue. The current differential of 315bp between covered bonds and hybrids is a little high but we see a circa 300bps pick up as appropriate.

However, new style bank hybrids that mandatorily convert to equity (with a likely "haircut") if the bank breaches a common equity ratio trigger (typically 5.125%), should return an extra 100bps plus on top for that additional risk. These new style hybrids include the recent ANZ CPS3 and Westpac CPS issues.
FIIG Securities



--------------------
"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne

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wren
post Posted: Feb 2 2012, 10:44 AM
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In Reply To: flower's post @ Feb 2 2012, 10:28 AM

flower,
Bill Gross is a great media star,but how well does his huge Bond Fund perform?

"Gross has been proven wrong and his fund has suffered. As of Monday, Pimco's flagship fund ranked 501th out of 589 bond funds in its category, says the FT."

 
flower
post Posted: Feb 2 2012, 10:28 AM
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Couldn't find a bond specific thread--this will suffice.
Apparantly Bill Gross (Pimco) has discovered an alternative invrestment vehicle other than bonds: (excerpt)
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When all yields approach the zero-bound, however, as in Japan for the past 10 years, and now in the U.S. and selected "clean dirty shirt" sovereigns, then the dynamics may change. Money can become less liquid and frozen by "price" in addition to the classic liquidity trap explained by "risk."

Even if nodding in agreement, an observer might immediately comment that today's yield curve is anything but flat and that might be true. Most short to intermediate Treasury yields, however, are dangerously close to the zero-bound which imply little if any room to fall: no margin, no air underneath those bond yields and therefore limited, if any, price appreciation. What incentive does a bank have to buy two-year Treasuries at 20 basis points when they can park overnight reserves with the Fed at 25? What incentives do investment managers or even individual investors have to take price risk with a five-, 10- or 30-year Treasury when there are multiples of downside price risk compared to appreciation? At 75 basis points, a five-year Treasury can only rationally appreciate by two more points, but theoretically can go down by an unlimited amount. Duration risk and flatness at the zero-bound, to make the simple point, can freeze and trap liquidity by convincing investors to hold cash as opposed to extend credit.

""Where else can one go, however? We can't put $100 trillion of credit in a system-wide mattress, can we? Of course not, but we can move in that direction by delevering and refusing to extend maturities and duration. Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.""



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Combining Fundamental comments with Fundamental charts.

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