Buying Bonds for Beginners?

[MercyMe]

We have some jumbo CD's maturing at the end of this month and I've been thinking about buying a half dozen or more individual bonds. I've never done this before. While I understand the basics of buying and holding bonds, I don't have a good handle on judging a bond for it's risk.

What is the best way for a caveman like me to get an education on this topic? Please don't say "experience".

Also, there is a municipal bond in my state that has a 2.94% yield to maturity. I'm in the 35% federal tax bracket and my state tax is 5.25%. If I'm doing this correctly, the tax equivalent yield on this is about 4.9%. Does that seem right?

 

[njhowie]

What is the best way for a caveman like me to get an education on this topic? Please don't say "experience".

Also, there is a municipal bond in my state that has a 2.94% yield to maturity. I'm in the 35% federal tax bracket and my state tax is 5.25%. If I'm doing this correctly, the tax equivalent yield on this is about 4.9%. Does that seem right?

You should use the bond screener tools which your broker provides, look what is available and being offered, the yields, the ratings, then do some research on bonds which look interesting. If looking at municipal bonds, if you stick to A ratings or higher, you could just throw darts blindly and do just fine. If you want to do more research, take the CUSIP, go over to emma.msrb.org and review the disclosures which the issuer has been filing. Similar to if you were reviewing the SEC filings for a corporation you were considering buying stock in. You want to review the financial statements and be comfortable that they have the financial means to pay your bonds and that they aren't headed south.

Moody's has done plenty of research on municipal bonds, default rates, and the market in general. As I mentioned above, sticking to A-rated or better the default rate is around something like 1 in 10,000 - what's the possibility that you pick that 1 in 10,000? Quite small.

For tax equivalent yield, Fidelity has a tool you can use at the following link:
https://digital.fidelity.com/prgw/digital/taxyieldcalc/

 

[MercyMe]

Thanks.

Does a "Material Event" disclosure necessarily mean trouble?

 

[Jerry1]

Thanks.

Does a "Material Event" disclosure necessarily mean trouble?

Depends what the material event is. If it’s material enough to be disclosed, it needs to be fully understood.

 

[COcheesehead]

Thanks.

Does a "Material Event" disclosure necessarily mean trouble?

You have to read what it is. Could be a financial budget update, could be a rating change, could be an defeasance, could be an outlook change - a material event is the same as saying “you’ve got mail”.

 

[MercyMe]

I'm open to any additional suggestions regarding where a newbie can get educated on buying individual bonds. Also reading Freedom56's bond thread here... but I'm slightly lost.

 

[COcheesehead]

I'm open to any additional suggestions regarding where a newbie can get educated on buying individual bonds. Also reading Freedom56's bond thread here... but I'm slightly lost.

What is your goal? Many of the major brokerages have bond desks. Tell them your goal, your budget and let them build you a ladder to meet that goal.

 

[MercyMe]

Thanks. My goal is to reduce my cash holding which is nearly 25% of my assets. I have two jumbo CD's maturing soon and two more at the end of the year. I don't want to increase my equity holdings and it seems I could do better than just putting the money back into CD's.

 

[COcheesehead]

Thanks. My goal is to reduce my cash holding which is nearly 25% of my assets. I have two jumbo CD's maturing soon and two more at the end of the year. I don't want to increase my equity holdings and it seems I could do better than just putting the money back into CD's.

Reduce your cash to what end? Are you trying to bridge to an event like the start of social security or fund X years of income or just trying to fill the fixed income part of your asset allocation? Those concrete goals will help you determine a ladder length. If you are just trying to maximize return, buy the highest yield at a quality (rating) level you feel comfortable with and ladder the maturities as a hedge.
Fixed income right now presents so many fantastic opportunities.

 

[MercyMe]

Reduce your cash to what end? Are you trying to bridge to an event like the start of social security or fund X years of income or just trying to fill the fixed income part of your asset allocation? Those concrete goals will help you determine a ladder length. If you are just trying to maximize return, buy the highest yield at a quality (rating) level you feel comfortable with and ladder the maturities as a hedge.
Fixed income right now presents so many fantastic opportunities.

Thanks again. We're just trying trying to fill the FI part of our AA.

 

[jazz4cash]

I'm open to any additional suggestions regarding where a newbie can get educated on buying individual bonds. Also reading Freedom56's bond thread here... but I'm slightly lost.

I’ve mentioned in other threads that Fido has a guest access account which you could use to review their offerings. There are also many resources in their ‘Learning Center’ including beginner and intermediate videos on buying bonds.

https://guest.fidelity.com/GA/profile

 

[daylatedollarshort]

If you want a conceptual idea of bonds, like how the pricing changes as interest rates change, and how to understand TIPS and I bonds, I found The Bond Book by Annette Thau a good read. But it is an older book so it is not a "how to" on how to buy bonds online these days. She was a former municipal bond analyst, and I found her book a more objective read than ones written by the mutual fund industry spokespeople.

 

[Sunset]

Thanks. My goal is to reduce my cash holding which is nearly 25% of my assets. I have two jumbo CD's maturing soon and two more at the end of the year. I don't want to increase my equity holdings and it seems I could do better than just putting the money back into CD's.

If you haven't already done it, I would suggest buying $10K of i-bond for yourself , and your spouse do the same.
You have about 3 weeks left to do it, before missing out on ~9.6x% for 6 months.
The money will be locked up for 1 year, and it's totally safe.
Can only be done at https://www.treasurydirect.gov/

Notice the .gov website it's the legit website.

I know how you feel, bond buying is different than buying stocks.

 

[Freedom56]

In addition to I-Bonds, consider Agency notes that are currently yielding 5-5.5% and are backed by the USG. During this "golden period", they are a great replacement for Jumbo CDs and offer slightly higher yields than treasuries and CDs.

 

[MercyMe]

In addition to I-Bonds, consider Agency notes that are currently yielding 5-5.5% and are backed by the USG. During this "golden period", they are a great replacement for Jumbo CDs and offer slightly higher yields than treasuries and CDs.

Thanks. We've been maxing out I-bonds for a few years now. Can you give me an example CUSIP for a GSE bond that is yielding 5 to 5.5%? I'm not seeing any yielding this much on my Fidelity account.

 

[Freedom56]

Thanks. We've been maxing out I-bonds for a few years now. Can you give me an example CUSIP for a GSE bond that is yielding 5 to 5.5%? I'm not seeing any yielding this much on my Fidelity account.

I see four of them at Fidelity now. The 5 year 5.5% looks like the best.

 

[MercyMe]

I see four of them at Fidelity now. The 5 year 5.5% looks like the best.

Ahh... I see them now. So I can buy these now and they will be issued on 10/27?

I see these are not exempt from federal taxes. How do I find out if they are state/local tax-exempt?

And thanks again!

 

[Freedom56]

Ahh... I see them now. So I can buy these now and they will be issued on 10/27?

I see these are not exempt from federal taxes. How do I find out if they are state/local tax-exempt?

And thanks again!

Here is everything you need to know about GSE, treasuries. See the attachment.

 

[MercyMe]

Here is everything you need to know about GSE, treasuries. See the attachment.

This is very helpful. Thank you! Good to see that 5 yr agency bond is FHLB and state/local tax exempt.


Still confused about the issue date and the dated date. Can I buy these now at Fidelity?

 

[Freedom56]

This is very helpful. Thank you! Good to see that 5 yr agency bond is FHLB and state/local tax exempt.


Still confused about the issue date and the dated date. Can I buy these now at Fidelity?

You put in the order now but it won't be executed until 2 business days of the issue date. So you have time to change your mind. But it is first come/first serve.

 

[Dash man]

If you want a conceptual idea of bonds, like how the pricing changes as interest rates change, and how to understand TIPS and I bonds, I found The Bond Book by Annette Thau a good read. But it is an older book so it is not a "how to" on how to buy bonds online these days. She was a former municipal bond analyst, and I found her book a more objective read than ones written by the mutual fund industry spokespeople.

I second The Bond Book by Annette Thau. It is clearly written and answered many questions.

 

[Chuckanut]

Is there a good indicator during the time trading is going on that would give a person an idea of how the bond market is going that day? I guess I am looking for something like the S&P500 index for bonds. ?Perhaps a bond ETF index fund??

 

[njhowie]

Is there a good indicator during the time trading is going on that would give a person an idea of how the bond market is going that day? I guess I am looking for something like the S&P500 index for bonds. ?Perhaps a bond ETF index fund??

10-year treasury

 

[Freedom56]

Is there a good indicator during the time trading is going on that would give a person an idea of how the bond market is going that day? I guess I am looking for something like the S&P500 index for bonds. ?Perhaps a bond ETF index fund??

Use the treasury yields:

https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

The 3 month tracks the current Fed funds rate. The two year treasury is where the market thinks the Fed funds rate will be 12-18 months from now. The spread between the two year and longer rates is an indication of whether traders are betting on a contraction (lower rates long duration) or expansion (higher rates with duration) of economic activity. Right now, traders are betting on a slight contraction.

 

[COcheesehead]

Is there a good indicator during the time trading is going on that would give a person an idea of how the bond market is going that day? I guess I am looking for something like the S&P500 index for bonds. ?Perhaps a bond ETF index fund??

Other than what others have posted, you can also find an ETF for whatever you want to monitor. There are whole market ETFs like AGG and others that monitor munis and such. I also watch the yield table at Fidelity. It will show the secondary market in real time across all durations.