bond funds or CDs/Treasuries

[foxfirev5]

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Originally Posted by pb4uski Who in the world buys 30 year bonds? Not any individuals that I know. How many 30 year bonds do you own?

Who in the world knows what interest rates are going to do long term?

[audreyh1]

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Originally Posted by VanWinkle CDs and Money Markets do not act as a pure ballast to equities in a downturn. They have a place for money needed at a specific date, but bonds/funds also have a place in a portfolio. Foreign stocks have stunk this year, but I don't hear people swearing off of them forever. In a balanced portfolio, something always under performs. That is not a reason to quit using the under performer.

Exactly! Bond funds certainly do go through periods of capital gains. High quality bond funds and bonds appreciate when the SHTF whereas cash does not. Bond funds/bonds are less correlated with stocks than cash, so they do better for rebalancing against stocks/stock funds.

[njhowie]

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Originally Posted by pb4uski Who in the world buys 30 year bonds? Not any individuals that I know. How many 30 year bonds do you own?

I have some municipal bonds going out to 2040, not 30 years, but certainly what would be considered long term.

[Dtail]

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Originally Posted by njhowie I have some municipal bonds going out to 2040, not 30 years, but certainly what would be considered long term.

Do you only go "AAA" on the munis?

[jazz4cash]

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Originally Posted by pb4uski Who in the world buys 30 year bonds? Not any individuals that I know. How many 30 year bonds do you own?

If they paid 10.4% I would buy a truckload.

[audreyh1]

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Originally Posted by jazz4cash If they paid 10.4% I would buy a truckload.

Even if they were Greek 30 year bonds?

[RunningBum]

Don't forget that many bonds are callable. So you may think you have locked into a sweet rate for many years, but if the issuer can get a better deal as rates drop, you'll get paid back and won't keep getting the high interest rate. Bond funds get hit by the same thing, so it's an uncertainty that both face.

[njhowie]

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Originally Posted by Dtail Do you only go "AAA" on the munis?

The very high majority of what I buy are pre-refunded/advance refunded municipal bonds. These have already been issued calls and are refunding usually in 3 years or less. For all intents and purposes, these are AAA because they are pre-refunded, irrevocably escrowed with government/treasury securities which pay all remaining interest and principal, and there is an external escrow agent (bank) which manages it through redemption. I like these a lot because they are about as safe as you can get. The funny thing is that you can regularly find them trading at bargains where they are yielding more than munis of significantly lower quality. Like everything else where there is a market, pricing can be illogical. Last week I was able to get some with yield to maturity/redemption of 3.5% for 13 months, another for 3.32% for 10 months, and one for 4.87% for 2 years. Again, irrevocably pre-refunded and escrowed with government/treasury securities.

Of the small remainder (maybe 5% to 10%), most are not AAA, but certainly well above the cutoff for what is considered investment grade. Everything I have here is rated A or better.

[COcheesehead]

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Originally Posted by RunningBum Don't forget that many bonds are callable. So you may think you have locked into a sweet rate for many years, but if the issuer can get a better deal as rates drop, you'll get paid back and won't keep getting the high interest rate. Bond funds get hit by the same thing, so it's an uncertainty that both face.

I own dozens of bonds and have had only one called. I still made money on it. I took the proceeds and reinvested in a new one. No harm, no foul.

[HI Bill]

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Originally Posted by audreyh1 Even if they were Greek 30 year bonds?

Or Puerto Rican?

[VanWinkle]

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Originally Posted by jazz4cash If they paid 10.4% I would buy a truckload.

Most people didn't as they wondered whether the rates would go higher and they would be locked into "lower" rates. Hind sight is always 20/20.

[Freedom56]

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Originally Posted by RunningBum Don't forget that many bonds are callable. So you may think you have locked into a sweet rate for many years, but if the issuer can get a better deal as rates drop, you'll get paid back and won't keep getting the high interest rate. Bond funds get hit by the same thing, so it's an uncertainty that both face.

Sure many bonds are callable. I just had two with coupons of 7% and one with 7.5% called on September 4th. But I bought them about 9% below par so I got the capital gain plus the coupon payments while holding them. Nothing wrong with that. I just re-invested the proceeds. It's all part of managing a large portfolio. I have had a lot of issues called over the past 4 years. But I buy bonds at or below par to mitigate a call risk which most funds do not. I would never buy an issue with a coupon lower than 4% and YTM less than 4.5% for short term maturities. Bond funds on the other hand buy up coupons as low as .75% when even CDs pay higher rates. I prefer managing my own investments. Some people don't. To each their own. I prefer concentrating on strong companies in strong sectors such as technology, e-commerce, pharma, financial, and telecom. Some people want more diversification and buy bond funds that hold winners like ToysRus, Sears, JC Penny, Sea Drill, Frontier, Chesapeake Energy, and wonder why they lose money.

[HI Bill]

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Originally Posted by VanWinkle Most people didn't as they wondered whether the rates would go higher and they would be locked into "lower" rates. Hind sight is always 20/20.

At 10.4%, if I thought that the bonds were safe, and inflation were under control, I'd move 90+% of my assets to them. Then, instead of a 4% withdrawal rate, I could bump up to a 7% rate in perpetuity, givin me a much higher lifestyle. Unfortunately, nothing is completely safe, and the federal deficit will eventually catch up to US bonds...

[jazz4cash]

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Originally Posted by VanWinkle Most people didn't as they wondered whether the rates would go higher and they would be locked into "lower" rates. Hind sight is always 20/20.

Yeah and those bonds were issued when inflation made them look mediocre but high inflation can’t last 30 yrs.

[COcheesehead]

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Originally Posted by Freedom56 Sure many bonds are callable. I just had two with coupons of 7% and one with 7.5% called on September 4th. But I bought them about 9% below par so I got the capital gain plus the coupon payments while holding them. Nothing wrong with that. I just re-invested the proceeds. It's all part of managing a large portfolio. I have had a lot of issues called over the past 4 years. But I buy bonds at or below par to mitigate a call risk which most funds do not. I would never buy an issue with a coupon lower than 4% and YTM less than 4.5% for short term maturities. Bond funds on the other hand buy up coupons as low as .75% when even CDs pay higher rates. I prefer managing my own investments. Some people don't. To each their own. I prefer concentrating on strong companies in strong sectors such as technology, e-commerce, pharma, financial, and telecom. Some people want more diversification and buy bond funds that hold winners like ToysRus, Sears, JC Penny, Sea Drill, Frontier, Chesapeake Energy, and wonder why they lose money.

If you’re getting 4.5% YTM short term, your credit quality has to be pretty low. That would be my only concern with your methods, but to each their own.

[Freedom56]

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Originally Posted by COcheesehead If you’re getting 4.5% YTM short term, your credit quality has to be pretty low. That would be my only concern with your methods, but to each their own.

I bought Enstar group rated BBB 03/10/2022 4.5% notes at 99.60 back in July. I wouldn't call it a low rated issue.

I bought Ally Financial financial 12/15/2019 4% notes rated BB+ back in June for 98.95

The default risk is nil for those issues at those maturities.

The high yield portion of my portfolio is doing very well as it should during this part of the economic cycle.

[COcheesehead]

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Originally Posted by Freedom56 I bought Enstar group rated BBB 03/10/2022 4.5% notes at 99.60 back in July. I wouldn't call it a low rated issue. I bought Ally Financial financial 12/15/2019 4% notes rated BB+ back in June for 98.95 The default risk is nil for those issues at those maturities. The high yield portion of my portfolio is doing very well as it should during this part of the economic cycle.

Bonds are pretty fairly priced. Yield has a cost. You’re either going lower rated or longer duration. That’s just the way it is and if you think as an individual investor you are getting first crack at a “deal”, who is the bond guy going to call first? Fidelity, Vanguard or you? I keep that in mind when buying. I always think, someone with deeper pockets passed on this before me.

[Freedom56]

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Originally Posted by COcheesehead Bonds are pretty fairly priced. Yield has a cost. You’re either going lower rated or longer duration. That’s just the way it is and if you think as an individual investor you are getting first crack at a “deal”, who is the bond guy going to call first? Fidelity, Vanguard or you? I keep that in mind when buying. I always think, someone with deeper pockets passed on this before me.

Not always. When there are ratings downgrades, many funds are into a forced selling due to fund rules, at those times a retail investor have the advantage. This is also the case when there are fund outflows that cause selling to raise cash. I look at the company, earnings, and interest coverage ratio, before ratings which are backward looking. The market will sell off a bond in anticipation of a ratings downgrade and then the bond will plunge on the news and recover before resuming a downtrend. Ratings don't always dictate the yield. Consider this investment grade loser that bond funds love to diversify into - Bed Bath and Beyond:

Bonds Detail

I can find you high yield bonds with the same maturity yielding less. Personally I would never buy Bed Bath and Beyond. The stores are an empty disorganized mess with product stuffed 30 feet high where nobody can reach them without a ladder. Not to mention they have far too many empty stores and you can buy most of their crap on Ebay or Amazon for much less.

[COcheesehead]

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Originally Posted by Freedom56 Not always. When there are ratings downgrades, many funds are into a forced selling due to fund rules, at those times a retail investor have the advantage. This is also the case when there are fund outflows that cause selling to raise cash. I look at the company, earnings, and interest coverage ratio, before ratings which are backward looking. The market will sell off a bond in anticipation of a ratings downgrade and then the bond will plunge on the news and recover before resuming a downtrend. Ratings don't always dictate the yield. Consider this investment grade loser that bond funds love to diversify into - Bed Bath and Beyond: Bonds Detail I can find you high yield bonds with the same maturity yielding less. Personally I would never buy Bed Bath and Beyond. The stores are an empty disorganized mess with product stuffed 30 feet high where nobody can reach them without a ladder. Not to mention they have far too many empty stores and you can buy most of their crap on Ebay or Amazon for much less.

Happy investing.

[njhowie]

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Originally Posted by Freedom56 Not always. When there are ratings downgrades, many funds are into a forced selling due to fund rules, at those times a retail investor have the advantage. This is also the case when there are fund outflows that cause selling to raise cash. I look at the company, earnings, and interest coverage ratio, before ratings which are backward looking. The market will sell off a bond in anticipation of a ratings downgrade and then the bond will plunge on the news and recover before resuming a downtrend. Ratings don't always dictate the yield.

Let me also throw another point out there. At least in the case of the muni market, astute individual investors have some distinct advantages over funds and institutions. The big one is a byproduct of the immense illiquidity in the market. In general, the municipal bond market is not active. Brokers also have a 5 bond transaction minimum, and generally in multiples of 5 (though very rarely you will see an oddball number offered - I have acquired 2 and 3 at times which have popped up for some situational reason). This puts technical criteria in place which can cause illogical price dislocations. A block of bonds may sit for days or weeks waiting to be sold. When an institution is buying/selling municipal bonds, they basically ignore those offered in quantities of 5, 10, 20...probably anything below 50 - it's not worth the effort for them. This means for the individual retail investor, he/she is merely competing with and trading against other individual retail investors. When a block of 5 or 10 munis are offered, it is generally the result of the dealer who was able to take them with a low ball bid from the investor who irrationally gave them up on the cheap. The dealer is looking to simply flip these 5 or 10 as quickly as possible and make something on it. This results in being able to get excellent pricing for individuals who take the time to watch what is taking place, and reviewing the history of how much the bonds being offered were acquired for. Because of the illiquidity previously mentioned, 95 times out of 100, you can easily see how much the dealer paid for the bonds being offered and as long as you offer a reasonable markup it will get accepted so he can unload the piddly number of bonds sitting in inventory wasting his time.