Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Corporate Bonds on the Secondary Market
Old 02-11-2006, 08:42 AM   #1
Recycles dryer sheets
 
Join Date: Feb 2004
Posts: 123
Corporate Bonds on the Secondary Market

About two years ago I realigned my portfolio and put a significant percentage into short and intermediate bond funds. Needless to say, they have not really performed up to my expectations. I was wondering if it would be possible to improve things by purchasing several quality corporates on the secondary market as somewhat of a bond ladder with maturity dates in the 1 to say 7 year horizon. This is getting into an area that I know very little. Does this idea seem somewhat reasonable? I don't hear or read about many folks doing this and would assume there are some drawbacks I'm not familiar with.
__________________

__________________
"He who speaks of dryer sheets has not seen the clothes line." Al B. Tross
Roger_R is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Corporate Bonds on the Secondary Market
Old 02-11-2006, 11:21 AM   #2
Thinks s/he gets paid by the post
 
Join Date: Dec 2003
Posts: 1,375
Re: Corporate Bonds on the Secondary Market

Quote:
Originally Posted by Roger_R
About two years ago I realigned my portfolio and put a significant percentage into short and intermediate bond funds.* Needless to say, they have not really performed up to my expectations.* I was wondering if it would be possible to improve things by purchasing several quality corporates on the secondary market as somewhat of a bond ladder with maturity dates in the 1 to say 7 year horizon.* This is getting into an area that I know very little.* Does this idea seem somewhat reasonable?* I don't hear or read about many folks doing this and would assume there are some drawbacks I'm not familiar with.
Roger: Wanted to comment on your use of short-term corps. (I also added a lot of them about two years ago). They are currently yielding about 4.41 last time I looked. The Nav because of interest rate increases in that period has dropped their total return down to about 2%. However, in the long haul, short term corps
will respond pretty well in periods of volitale interest rate changes.

Roger, I don't know your age, or why you made a large commitment to short term corps., but the reason I did was age-related. (I will have to start RMD in about a year). They are part of my game plan when I face manditory draw-down of my IRA.

I plan on using "short-term" Corps as my starting pitcher. Warming up in the Bull-Pen are TIPs, and an ultra-conservative hedge fund.

If I'm fortunate and need a "closer", I have about 30% of the total committed to equities.

I like short-term corps. because I don't expect them to rack up a lot of strike-outs, just to give me about 5 innings or so of not too many surprises.






__________________

__________________
Jarhead* is offline   Reply With Quote
Re: Corporate Bonds on the Secondary Market
Old 02-11-2006, 12:12 PM   #3
 
Posts: n/a
Re: Corporate Bonds on the Secondary Market

Bond ETF's may be a very good alternative, low MER's and their purchasing power probably gets them cheaper?

I also like to have about 10% High Yield, a.k.a Junk Bonds, to spice up the returns.('08 GMAC's for example, or buy a Fund)
__________________
  Reply With Quote
Re: Corporate Bonds on the Secondary Market
Old 02-11-2006, 12:39 PM   #4
Thinks s/he gets paid by the post
 
Join Date: Dec 2002
Posts: 3,875
Re: Corporate Bonds on the Secondary Market

Quote:
Originally Posted by Jarhead*
* The Nav because of interest rate increases in that period has dropped their total return down to about 2%.*
Hello Jarhead. Would you care to explain this? I don't get it.
(And you thought I was not paying attention)

JG
__________________
MRGALT2U is offline   Reply With Quote
Re: Corporate Bonds on the Secondary Market
Old 02-11-2006, 12:41 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: Corporate Bonds on the Secondary Market

Nobody is more surprised than I am that i'm in agreement with howard...

I wouldnt buy individual issues unless I really knew what was going on, but vanguards high yield corporate pays almost 7%, the credit quality is actually pretty good overall, and they've been improving the credit quality of the portfolio as of late. Its far from a 'sure thing', but I think it was ESRBob who checked into them last year and found they had no defaults at all over the last 5 years.

I've got ~8% of my money there, and thats about 60% of my bond holdings. The regular monthly income is nice. I dont plan to sell shares for at least 5 years so NAV fluctuations dont concern me much. My holdings have suffered a little bit of loss since I bought them, but even factoring those in i'm still seeing well over 6%.

CD's are starting to creep into this territory now, and certainly offer a clean yield with no worry about loss of principal.

Short term bonds certainly were the darlings last year, with the concerns over interest rates. When you can do better with a 1 year CD, its time to rethink the conventional wisdom.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: Corporate Bonds on the Secondary Market
Old 02-11-2006, 12:43 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: Corporate Bonds on the Secondary Market

Quote:
Originally Posted by MRGALT2U
Hello Jarhead. Would you care to explain this? I don't get it.
(And you thought I was not paying attention)

JG
Wow, a 100% bond investor doesnt understand bond nav fluctuations due to increased interest rates?

Let me help. When interest rates go up, new bond issues usually offer higher interest rates. Older bonds with lower interest payouts are worth less on the secondary market, so their nav or sellable value drops.

When the value of the asset gets lower, that detracts from the interest rate to produce a lower rate of return if one is factoring in the value of the bond along with the income from it. Unless of course you keep it until maturity, in which case the original interest rate is intact.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: Corporate Bonds on the Secondary Market
Old 02-11-2006, 12:51 PM   #7
Thinks s/he gets paid by the post
 
Join Date: Dec 2002
Posts: 3,875
Re: Corporate Bonds on the Secondary Market

Quote:
Originally Posted by (Cute Fuzzy Bunny)
Wow, a 100% bond investor doesnt understand bond nav fluctuations due to increased interest rates?

Let me help.* When interest rates go up, new bond issues usually offer higher interest rates.* Older bonds with lower interest payouts are worth less on the secondary market, so their nav or sellable value drops.

When the value of the asset gets lower, that detracts from the interest rate to produce a lower rate of return if one is factoring in the value of the bond along with the income from it.* Unless of course you keep it until maturity, in which case the original interest rate is intact.
Well, I am not really a 100% bond investor, but I guess we
were coming at it from a different angle. As you point out,
if you hold to maturity, then you get all your money back and the coupon rate from issuance. When interest rates go up,
your NAV falls, which gives you a HIGHER rate of return because the market value of your original investment is lower
but you are still receiving the same amount of interest as
before. The part that confused me is when you said your NAV fell and that "lowered" your return to 2%. Okay?

JG
__________________
MRGALT2U is offline   Reply With Quote
Re: Corporate Bonds on the Secondary Market
Old 02-11-2006, 12:56 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: Corporate Bonds on the Secondary Market

Well actually I didnt say it, but thats alright...

Technically it DOES lower your return if you look at it on an annual basis. You just get a nice extra return when the bonds mature and you return them for your original capital.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: Corporate Bonds on the Secondary Market
Old 02-11-2006, 12:59 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Dec 2002
Posts: 3,875
Re: Corporate Bonds on the Secondary Market

Quote:
Originally Posted by (Cute Fuzzy Bunny)
Well actually I didnt say it, but thats alright...

Technically it DOES lower your return if you look at it on an annual basis.* You just get a nice extra return when the bonds mature and you return them for your original capital.
I think we're getting into semantics now.

JG
__________________
MRGALT2U is offline   Reply With Quote
Re: Corporate Bonds on the Secondary Market
Old 02-11-2006, 01:06 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: Corporate Bonds on the Secondary Market

No, we arent.

If in any given year the value of my assets drops 2% and they produce 2% in income, I have a zero return for that period. In xx years when the bonds mature and I get back my original investment, for that year I recoup the paper losses.

Shoot, I forgot, you're an expert on finances. I must be wrong :
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: Corporate Bonds on the Secondary Market
Old 02-11-2006, 01:10 PM   #11
Thinks s/he gets paid by the post
 
Join Date: Dec 2002
Posts: 3,875
Re: Corporate Bonds on the Secondary Market

Quote:
Originally Posted by (Cute Fuzzy Bunny)
No, we arent.

If in any given year the value of my assets drops 2% and they produce 2% in income, I have a zero return for that period.* In xx years when the bonds mature and I get back my original investment, for that year I recoup the paper losses.

Shoot, I forgot, you're an expert on finances.* I must be wrong :
Well, you're not necessarily wrong (for once). Just 2 different ways of looking at the same horse.

JG
__________________
MRGALT2U is offline   Reply With Quote
Re: Corporate Bonds on the Secondary Market
Old 02-11-2006, 01:14 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: Corporate Bonds on the Secondary Market

Then please tell me the other way that one would measure unrealized annual returns on their investments that doesnt include unrealized/paper gains and losses?

Or in GaltLand do they just count the gains and forget about the losses? Just pretend they arent there? That would explain a lot.

Do they wear the mouse ears in GaltLand too?
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: Corporate Bonds on the Secondary Market
Old 02-11-2006, 01:59 PM   #13
Full time employment: Posting here.
 
Join Date: Oct 2003
Posts: 961
Re: Corporate Bonds on the Secondary Market

Quote:
Originally Posted by Roger_R
About two years ago I realigned my portfolio and put a significant percentage into short and intermediate bond funds. Needless to say, they have not really performed up to my expectations. I was wondering if it would be possible to improve things by purchasing several quality corporates on the secondary market as somewhat of a bond ladder with maturity dates in the 1 to say 7 year horizon. This is getting into an area that I know very little. Does this idea seem somewhat reasonable? I don't hear or read about many folks doing this and would assume there are some drawbacks I'm not familiar with.
Hi Roger,

Here is a paper from Vanguard on taxable bond funds vs. taxable ind bonds:

Taxable Bond Investing: Bond Funds or Individual Bonds?

- Alec
__________________
ats5g is offline   Reply With Quote
Re: Corporate Bonds on the Secondary Market
Old 02-11-2006, 05:53 PM   #14
Recycles dryer sheets
 
Join Date: Feb 2004
Posts: 123
Re: Corporate Bonds on the Secondary Market

Thanks. I'll have to print out the article to fully digest it, but it does look interesting and helpful. I also looked up what Berstein might have to say about this in the Four Pillars book. He pretty much discourages investing in individual corporates because of default risk and the impact to a portfolio with only a handful of bonds. For corporates, he prefers bond funds.

I guess my thinking is that with such a flat or inverted yield curve that the odds favor rates going up for anything longer than very short term, just because that would result in a yield curve more like things have been historically. So bond funds will continue to take a beating in loss of NAV. I know that I shouldn't try to out guess interest rate moves, but it would not really be changing an asset allocation, but just moving from one flavor of bonds to another. I keep churning over ways to eek out a bit more return from my fixed investments, but don't seem to come up with much. I already have some I-bonds and the vangard TIP fund to help round things out. Sometime I wonder if the best thing to do right now is ride things out in a good money market account or 6 month CD's?
__________________
"He who speaks of dryer sheets has not seen the clothes line." Al B. Tross
Roger_R is offline   Reply With Quote
Re: Corporate Bonds on the Secondary Market
Old 02-11-2006, 08:55 PM   #15
Full time employment: Posting here.
 
Join Date: Oct 2003
Posts: 961
Re: Corporate Bonds on the Secondary Market

Hi Roger,

If you do have a ladder of corporate bonds, you've just created your own mutual fund. For example, look at the Distribution By Maturity of Vanguard's Short-Term Investment-Grade Fund:

Under 1 Yr..........25.4%
1 - 3 Yrs............45.2%
3 - 5 Yrs............19.5%
5 - 7 Yrs..............4.6%
7 - 10 Yrs............2.1%
Over 10 Yrs..........3.2%
Total................100.0%

That looks quite a lot like a ladder, does it not?

Also remember that the value of those individual bonds you hold will fluctuate just like the bonds in the bond fund.

I took a quick look at corporate bond yields at Vanguard's bond desk and the bond yields look quite close to CD yields [at places like Pen Fed]. CD's seem a lot easier to understand and cheaper to purchase. Annette Thau's The Bond Book has lots of good info on corporates, as does The Bond Market Association.

One problem with riding things out in a good MM account or 6 month CD's is that those have much more reinvestment risk of longer term CDs/bonds. Hence they're not as "safe" for those that want to generate income for periods longer than 1 year, or are trying to match liabilities for periods longer than 1 year. I think it is a better strategy to do the CD ladder thingee, which doesn't require you to make predictions. Hence, you don't have to be right or wrong for it to work out.

- Alec
__________________
ats5g is offline   Reply With Quote
Re: Corporate Bonds on the Secondary Market
Old 02-11-2006, 09:55 PM   #16
Thinks s/he gets paid by the post
charlie's Avatar
 
Join Date: Mar 2004
Location: Dallas
Posts: 1,211
Re: Corporate Bonds on the Secondary Market

Hi Roger,

The fixed income part of my IRA contains mostly individual
intermediate term corporate bonds maturing in 7-8 years
rated " A" or better. These are "floating rate" bonds that
pay year-over-year CPI + 2% (or better) monthly yield.

These bonds are like TIPS in that they pay a guaranteed real
rate above inflation, but unlike TIPS, there is no "phantom"
income. They pay the original par value at maturity.

I bought these as an inflation hedge and for the monthly
income. I figure that if inflation is north of 2.5% I will do
better than most Vanguard bond funds and the ER is zero.

So far so good.

Cheers,

Charlie
__________________
charlie is offline   Reply With Quote
Re: Corporate Bonds on the Secondary Market
Old 02-11-2006, 10:31 PM   #17
Recycles dryer sheets
 
Join Date: Feb 2004
Posts: 123
Re: Corporate Bonds on the Secondary Market

Charlie and ATS, those are examples of exacyly what I'm thinking about, thanks. I do have Thau's bond book and will have to do some further research. I guess mostly I was wondering if this type of idea sounded reasonable and if anyone else was doing something similar. And a big point being that you have control of the bond maturities and can hold onto them to maturity and so have a more predictable and possibly better return.

I suppose the details I'm curious about would be how many bonds you would want to feel like your risk was diversified, would you pay a premium for bonds on the secondary market, and whether places like Fidelity or Vangard are the best types of places to puy things like this?
__________________
"He who speaks of dryer sheets has not seen the clothes line." Al B. Tross
Roger_R is offline   Reply With Quote
Re: Corporate Bonds on the Secondary Market
Old 02-11-2006, 10:39 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,384
Re: Corporate Bonds on the Secondary Market

Quote:
Originally Posted by charlie
I bought these as an inflation hedge and for the monthly
income.* I figure that if inflation is north of 2.5% I will do
better than most Vanguard bond funds and the ER is zero.*
Charlie, what is ER in this context? I am having some wine with my dinner, and I can't figure it out.

Also, could you mention some of the bonds you hold? I need to look at these, since at least theoretically they would yield more than TIPS, and as you say, they will also work well outside of IRAs.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Re: Another perspective on Bond returns
Old 02-11-2006, 10:45 PM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,278
Re: Another perspective on Bond returns

Quote:
Originally Posted by (Cute Fuzzy Bunny)
Then please tell me the other way that one would measure unrealized annual returns on their investments that doesnt include unrealized/paper gains and losses?
I think you can make a case for ignoring bond NAV fluctuations if:

1) You buy bonds with the plan to hold until maturity.
2) You have enough liquidity to be ceretain of #1.
3) You actually do #1 and #2.

In that case, the day-day or year-year fluctuations in NAV never really affect you - so why not ignore them and just look at the dividend % return?

-ERD50

__________________
ERD50 is offline   Reply With Quote
Re: Corporate Bonds on the Secondary Market
Old 02-11-2006, 10:54 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,384
Re: Corporate Bonds on the Secondary Market

Jarhead, nice baseball analogy. I tend to think tactically also, rather than theoretically. Too many theories get gunned down as they exit the classroom door.

Right now my fixed income allocation is in 3 and 6 month t- bills. I am certainly not being penalized for holding these, and I don't think I am giving up any positive speculative exposure either

Ha
__________________

__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
A Bear Market In Bonds yakers FIRE and Money 6 03-11-2006 05:06 AM
Annuities versus money market and ST bonds Rich_by_the_Bay FIRE and Money 5 02-23-2006 12:41 PM
U.S. Government Rigging The Equity Markets? Donner FIRE and Money 57 09-15-2005 04:01 PM
How people find us... asian carp?? dory36 Forum Admin 4 05-27-2005 01:07 PM
The Scoop on High Yield Bonds Ted FIRE and Money 9 12-04-2003 01:03 PM

 

 
All times are GMT -6. The time now is 12:48 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.