We are entering a "Golden Period" for fixed income investing

[pb4uski]

I think this might have been mentioned at an earlier date.

Does anyone have an opinion on this? It's tempting me.

CUSIP: 958102AM7
Symbol: WDC4594056
Issue: Western Digital Corp. Callable 11/25@ Greater Of 100 OR Make Whole - Make Whole Call Exp 11/2025 - Conditional Puts - Change Of Control/Rating Downgrade
Last Trade Price: $94.00
Current Yield: 7.043%
Moody's Rating: Baa3 (12/01/2021)
S&P Rating: BB (11/07/2022)

I don't know what the boldfaced portion means.

https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C736353

Conditional Puts is when the issuer is required to buy a bond back at par when the beneficial owner of the bond dies or when there is a change of control.

In the case of this issue would the issuer be required to buy the bond back when there is a ratings downgrade as well?

 

[Freedom56]

In the case of this issue would the issuer be required to buy the bond back when there is a ratings downgrade as well?

This is an explanation of a put bond. There are many conditions that can trigger an event that are specific to the issue.

https://www.investopedia.com/terms/p/putbond.asp

You have to look at the prospectus for this issue which is here:

https://www.sec.gov/Archives/edgar/data/106040/000119312518029225/d409671d424b2.htm

The prospectus states:

“Change of Control Triggering Event” means the occurrence of both a Change of Control and a Rating Event."

Change of Control Offer

If we experience a “Change of Control Triggering Event” (as defined in “Description of Notes”), we will be required, unless we have exercised our option to redeem the notes, to offer to purchase the notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See “Description of Notes—Change of Control Triggering Event.” .

“Rating Event” means (1) the ratings of the Notes are lowered by each of the Rating Agencies and (2) the Notes are rated below the rating by such Rating Agency in effect immediately preceding the first public announcement of the Change of Control (or occurrence thereof if such Change of Control occurs prior to or concurrently with a public announcement) and are rated below an Investment Grade Rating by each of the Rating Agencies on any day during the period (which period will be extended so long as the rating of the Notes is under publicly announced consideration for a possible downgrade by any of the Rating Agencies) that (1) commences on the earlier of (x) the date of the first public announcement of the occurrence of a Change of Control or the intention of the Issuer to effect a Change of Control and the occurrence of such Change of Control and (2) ends 60 days following the consummation of such Change of Control.

Notwithstanding the foregoing, a Ratings Event otherwise arising by virtue of a particular reduction in rating shall not be deemed to have occurred in respect of a particular Change of Control (and thus shall not be deemed a Ratings Event for purposes of the definition of Change of Control Triggering Event hereunder) if the Rating Agencies making the reduction in rating to which this definition would otherwise apply do not announce or publicly confirm or inform the Issuer that the reduction was the result, in whole or in part, of any event or circumstance comprised of or arising as a result of, or in respect of, the applicable Change of Control (whether or not the applicable Change of Control shall have occurred at the time of the Ratings Event). The Trustee shall not have any obligation to monitor the occurrence or dates of any Rating Event and may rely conclusively on such Officer’s Certificate related to such Change of Control Triggering Event. The Trustee shall not have any obligation to notify the holders of the occurrence or dates of any Rating Event.

 

[latexman]

^^^^^
Hmmm, sounds complicated.

 

[pb4uski]

It sounds to me like a complicated way of saying that if a change in control results in a ratings downgrades by all rating agencies to below investment grade that the holder can put the bonds to the issuer.

 

[Freedom56]

The new bonds/notes from Philip Morris (A2/A-) are trading and have quickly sunk below par. The 10 year 5.375% notes are now trading with a yield of 5.73%. This note can be called after 9 years.

https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C1070858

The 7 year 5.125% notes have also dropped below par and are trading with a yield of 5.5%. These notes can be called in 6 years.

https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C1070853&symbol=PM5541197

Their previously issued 10 year 5.75% notes are trading close to par.

https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C1060130&symbol=PM5503240

It appears that bond funds are back to their buy high sell low mode even with new issues.


https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C1060130&symbol=PM5503240

 

[Echard]

A few random comments from the last several posts:

Regarding brokered CD's, I went down a rabbit hole several years ago regarding the FDIC insurance of brokered CD's vs CD's bought directly from banks. At the time, I recall that there was some confusion about a scenario where a broker goes bankrupt (think Lehman Brothers, etc), and whether the CD's still had the same full FDIC protection as a bank going bankrupt. One would think obviously yes the CD is fully covered, but the answers back from the brokerage indicated not necessarily. In the end, the odds of Fidelity or Vanguard or Schwab going broke are pretty low, so I ignored the issue.

On rates above 5% for 10 year Treasuries, I don't see how that will be possible given our debt levels. Whether it's quantitative easing or some other flim flam scheme by the federal government, they can't afford debt at rates that high. So, if you believe 10 year Treasury rates are within ~.25-.5 pts of peak, then it might make sense to lock in a bond ladder at those rates, to avoid potentially building a ladder a year from now at or below current rates.

 

[Born2Fish]

Looks like Corp Note yields are sliding up. This looks tempting...

ROYAL BK CDA SUSTAINABL SER I MTN, A1/A, CUSIP:78014RLM0
5.85000%, matures 03/15/2033
2 years of call protection

Is the 10 year maturity date too long?

I already own some RBC.

(corrected call protection to 2 years)

 

[Echard]

I don't understand the willingness to buy long-dated bonds with short period call protection. You take all of the interest rate risk.

 

[Echard]

Where can we find Fed Terminal Rate projections? I can find predictions of the next rate, but not the terminal rate.

 

[COcheesehead]

Where can we find Fed Terminal Rate projections? I can find predictions of the next rate, but not the terminal rate.

Jurrien Timmer of Fidelity posts them on Twitter. That’s how I see it. Here is an example.

 

[Freedom56]

Looks like Corp Note yields are sliding up. This looks tempting...

ROYAL BK CDA SUSTAINABL SER I MTN, A1/A, CUSIP:78014RLM0
5.85000%, matures 03/15/2033
3 years of call protection

Is the 10 year maturity date too long?

I already own some RBC.

10 years is about as long as I would go. RBC is pretty safe. That yield is pretty good even if the 10 year treasury hits 5%. Correction- It has 2 years of call protection. Right now I'm just placing low ball bids on the secondary market for high grade corporate notes with coupons over 5% and 1-2 year durations but with limit orders for a YTM of about 6.5%. If they fill, great. If not, I'm waiting for higher yields.

 

[Freedom56]

Where can we find Fed Terminal Rate projections? I can find predictions of the next rate, but not the terminal rate.

Here:

https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

 

[Freedom56]

Fund flows are indicating a resumptions of outflows out of equity and bond funds.

"For the week ended 03/01/2023 ExETFs - All Equity funds report net outflows totaling -$5.987 billion, with Domestic Equity funds reporting net outflows of -$4.475 billion and Non-Domestic Equity funds reporting net outflows of -$1.152 billion...ExETFs - Emerging Markets Equity funds report net inflows of $0.248 billion...Net outflows are reported for All Taxable Bond funds of -$1.737 billion, bringing the rate of inflows for the $3.488 trillion sector to $0.127 billion/week...International & Global Debt funds posted net outflows of -$0.686 billion...Net outflows of -$0.238 billion were reported for Corp-Investment Grade funds while High Yield funds reported net outflows of -$2.310 billion...Money Market funds reported net inflows of $54.963 billion...ExETFs - Municipal Bond funds report net outflows of -$0.640 billion. "



https://www.lipperusfundflows.com/#create:home:Home:/php/signup_trial.php

 

[Car-Guy]

Regarding brokered CD's, I went down a rabbit hole several years ago regarding the FDIC insurance of brokered CD's vs CD's bought directly from banks. At the time, I recall that there was some confusion about a scenario where a broker goes bankrupt (think Lehman Brothers, etc), and whether the CD's still had the same full FDIC protection as a bank going bankrupt. One would think obviously yes the CD is fully covered, but the answers back from the brokerage indicated not necessarily. In the end, the odds of Fidelity or Vanguard or Schwab going broke are pretty low, so I ignored the issue.

Well I've learned something new here again, if that is correct. Since the money is effectively a "loan" to the specific bank(s), I would have thought it would be the bank(s) you would need to worry about, and not the broker/agent... So I wonder what good the FDIC insurance/coverage is in such a case.

 

[Fotodog]

10 years is about as long as I would go. RBC is pretty safe. That yield is pretty good even if the 10 year treasury hits 5%. Correction- It has 2 years of call protection. Right now I'm just placing low ball bids on the secondary market for high grade corporate notes with coupons over 5% and 1-2 year durations but with limit orders for a YTM of about 6.5%. If they fill, great. If not, I'm waiting for higher yields.

Freedom, sorry if you have answered this before (it’s a long thread), but what brokerage allows you to place these bids? I think it’s either Fidelity or TDA. I’m with Schwab, and I have to call their bond desk to place an order for anything not listed on their site. The order is only active for one day. You can’t place a limit order, they will call you back with the best price if the bond is trading that day. I have tried this several times with no success.

 

[finnski1]

10 years is about as long as I would go. RBC is pretty safe. That yield is pretty good even if the 10 year treasury hits 5%. Correction- It has 2 years of call protection. Right now I'm just placing low ball bids on the secondary market for high grade corporate notes with coupons over 5% and 1-2 year durations but with limit orders for a YTM of about 6.5%. If they fill, great. If not, I'm waiting for higher yields.

This is my strategy as well. I just keep trying.

 

[Echard]

Here:

https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

ah thank you. You had shared this before and I didn't realize the chart had tabs that projected out to the end of the year. Awesome.

 

[Freedom56]

Freedom, sorry if you have answered this before (it’s a long thread), but what brokerage allows you to place these bids? I think it’s either Fidelity or TDA. I’m with Schwab, and I have to call their bond desk to place an order for anything not listed on their site. The order is only active for one day. You can’t place a limit order, they will call you back with the best price if the bond is trading that day. I have tried this several times with no success.

These are new issues that are available at TDA and Fidelity. RBC issued a 6% 10 year note with two year call protection several weeks ago. I have some of that issue.



We should start to see a return to those 6%+ yields soon with longer call protection as we approach the terminal rate by June. It would be prudent to lock higher coupons at 3-5-7 and even 10 year duration. As the market prices higher rates for longer, issuers will be extending call protection. Many issuers took advantage of the drop in yields to issue lower coupon make whole call notes, but those notes are falling in price with yields increasing. The action is going to be in the secondary market over the next few months.

 

[Freedom56]

ah thank you. You had shared this before and I didn't realize the chart had tabs that projected out to the end of the year. Awesome.

Yes the tabs are the key to the forecast beyond 2023. The forecasts change frequently as we receive more economic data. The market is still pricing the "higher for longer" scenario.

 

[Montecfo]

The CME site forecasts rate cuts starting November of this year(using 50%+ probability figure). That is certainly sooner than I expect, and sooner than the last Fed dot plot.

Also forecasts Fed peak at 575 basis points using same approach (in July).

 

[Born2Fish]

The CME site forecasts rate cuts starting November of this year(using 50%+ probability figure). That is certainly sooner than I expect, and sooner than the last Fed dot plot.

Also forecasts Fed peak at 575 basis points using same approach (in July).

I agree.

Seems weird that they would be predicting 5.75% rate hike summit in July, then rate cuts in November - that's only a 4 month window to hold. Barring a "big event" that forces the Fed to back off I would not expect to see that happen.

 

[Montecfo]

Fed dot plot is also at the site, for comparison.

 

[pb4uski]

Well I've learned something new here again, if that is correct. Since the money is effectively a "loan" to the specific bank(s), I would have thought it would be the bank(s) you would need to worry about, and not the broker/agent... So I wonder what good the FDIC insurance/coverage is in such a case.

I don't think he is correct. FDIC coverage is by FDIC insured financial institution, which is by bank, not by broker.

 

[jazz4cash]

At the answers back from the brokerage indicated not necessarily. In the end, the odds of Fidelity or Vanguard or Schwab going broke are pretty low, so I ignored the issue.

I’d like to dig deeper on this. Do you have any references?
I read an FDIC press release that implied brokered CD deposits are generally covered but I could not actually understand the language describing the exceptions. I sense the recent ruling addresses fintechs and their ilk. I see plain statements from Vanguard and Etrade that their brokered CDs are covered provided you stay within limitations for a single bank. I know Fidelity tags offerings with an FDIC coverage flag. I am confident the major institutions are brokering CDs with FDIC coverage.

 

[jldavid47]

A few random comments from the last several posts:

Regarding brokered CD's, I went down a rabbit hole several years ago regarding the FDIC insurance of brokered CD's vs CD's bought directly from banks. At the time, I recall that there was some confusion about a scenario where a broker goes bankrupt (think Lehman Brothers, etc), and whether the CD's still had the same full FDIC protection as a bank going bankrupt. One would think obviously yes the CD is fully covered, but the answers back from the brokerage indicated not necessarily. In the end, the odds of Fidelity or Vanguard or Schwab going broke are pretty low, so I ignored the issue.

I would think if one of them went bankrupt it wouldn't matter since all of those companies segregate customer funds from corporate funds (unlike, ahem, FTX). If there were to be an issue I would think SIPC insurance would then kick in up to the $500,000 maximum. But for that to even kick in assets would have to be missing from customer accounts and for that to happen customer funds would have to be co-mingled with corporate funds. I'm 100% sure co-mingling is not the case with Schwab and I'd be shocked if it was different for the others.

If someone knows differently I'm all ears.