Bonds/Fixed Income and Asset Location

[Tranquility Base]

I have been gradually reducing a large position in a bond fund (American Funds Bond Fund of Amer A (ABNDX)) that is held in a traditional IRA. I am struggling with what to invest the proceeds in and where it is best to hold fixed income.

I am currently around 69/31 for equity and fixed income. I have been at 70/30 for quite some time although that seems a bit hot for me at times (I am in my late 60s) and I don't want to go higher than 70% equities.

For some reason I decided to move some of the fixed income from the T-IRA to my taxable account. If I sold fixed income in the T-IRA and sold an equity in the taxable account, I would reinvest the proceeds in the taxable account in fixed income and reinvest the proceeds in the T-IRA in equities. So I was keeping the same approximate asset allocation but changing the asset location.

I am still trying to understand the details of asset location. I generally get the big picture, but life, day to day, consists of the details. I have been keeping a spreadsheet with columns for different types of investments and columns for the taxable account and various IRA accounts so I can put a check mark in the account columns where it is appropriate to hold that type of investment. It is a work in progress and still has gaps.

Part of the problem is that I am not comfortable with bond funds. I don't fully understand them and have decided to get rid of my remaining bond fund positions. Frankly, it is less stressful for me to read about the current state of national politics or the global wars than it is to read articles about the pros and cons of bond funds and how they work. So I have stopped spending any more of my free time trying to educate myself about bond funds.

I know that the Bogleheads are big on their three-fund portfolio and for the most part I like the simplicity of that idea. My portfolio is too complex right now and I am working to simplify it. But I am not going to use a bond fund for the fixed income component of my portfolio just because that is the Bogleheads way. I like the concept of simplicity but I am not blindly drinking their Kool-Aid. The downside of that, however, is that I have ended up with a long list of individual bonds (US Treasuries). Fortunately the Schwab website allows you to open or close the equities and fixed income windows. Otherwise, it would take much longer to scroll down the webpage.

I am comfortable buying individual bonds so that I, and not a fund manager, control whether the bond is sold before maturity, or most likely for me, held to maturity. I understand that the value of the bond will decrease as interest rates increase. I am comfortable signing on for a bond to pay me a set rate of interest for a set period of time, although I am not venturing out beyond 5 years at this point. With a bond fund, I don't know what kind of trip I am signing up for when I invest in the fund. I am not trying to reopen that debate. I am just explaining where my head is.

I don't have a lot of experience with corporate bonds and thus I am not very comfortable with them. Yet. So that limits me to US Treasuries and municipals which it makes no sense to hold in an IRA, especially a Roth IRA. And currently, at least in my state, the interest rates means that US Treasuries are a better deal than municipals.

I am still not sure what my questions are, just my frustrations. So I will just start firing off questions I guess.

Is it appropriate to hold bonds (bonds other than municipals or US Treasuries) in an IRA?

Where should fixed income investments be held? I tend to lean towards holding bonds in a taxable account because I think of them as providing the income I might periodically need to withdraw for expenses. Nonetheless, equities can still be sold because a withdrawal is a withdrawal. I haven't actually had to withdraw much more than 1.0 to 1.5%. Nonetheless, I want to preserve some semblance of periodic income (even if it just gets reinvested) and keep some assets that are relatively liquid.

I can't redo everything in one fell swoop. As I sell off more bond funds in the T-IRA, given my low comfort and experience levels with corporate bonds, would it make just as much sense to invest some of the proceeds in Certificates of Deposit, at least as long as these nice interest rates prevail?

 

[OldShooter]

IMO it is between difficult and impossible for a small retail investor to assemble an adequately diversified corporate bond portfolio. Just selecting and buying a large number of positions is a lot of work and it takes a lot of money. Then you have to maintain the portfolio as bonds mature, are called, etc. So I am with you. Govvies aka zero credit risk are where we are. 90% TIPS actually.

 

[pb4uski]

IMO it is between difficult and impossible for a small retail investor to assemble an adequately diversified corporate bond portfolio. ...

It actually can be easy peasy if one uses the target maturity date corporate bond ETFs like BlackRock iBonds or Invesco Bulletshares. Currently a 5 rung ladder of 2024-2028 maturities sport a ~5.9% portfolio yield so after the 0.1% ER would yield ~5.8% +/- the impact of any purchase premium/discount... so probably a net yield between 5.70-5.75%... mostly A and BBB rated corporate bonds. 300-600 holdings per ETF so well diversified.

https://www.ishares.com/us/resources/tools/ibonds
https://www.invesco.com/bulletshares/tools/bond-ladder

 

[gauss]

Over the past couple of years, I have been developing a multi-pronged strategy for fixed income given the high rates we are currently enjoying.

#1) I setup a 9 year fixed (ie non-rolling) ladder of zero coupon STRIPPED US Treasuries that begin to mature when I turn age 75 (over 15 years from now) and continues to about age 84. This will lock in a 5 - 5.5% YTM for me for the long term. No interest will payable until maturity (ie zero coupon) so these will be set it and forget it. The majority is in retirement accounts so that I will not need to recognize any of the phantom income (ie OID) associated with zero coupons for income taxes.

I would plan for possibly spending these bonds as they mature. This ladder has a constant amount per year, but they will grow at about 5.3% annually and hopefully keep up with inflation. This should add about 50% to our Social Security income in "real" terms if average inflation does not exceed 5% (although there are probably "sequence of inflation" issues that would make it a bit more complicated to properly analyze.)

#2) I also have, as pb4uski mentions, a rolling ladder of corporate target maturity ETFS. This ladder runs for now out to about 8 years from now and when each year's ETF matures and is liquidated, I roll the proceeds to the end of the ladder. The ladder is designed to provide me yearly liquidity and also yearly interest/dividends that I could spend if I choose. I am also experimenting with replacing a portion of the yearly ETFs with a sampling of actual bonds contained in that year's ETF to avoid the risks of other big money flowing in to or out of the ETF at inappropriate times.

#3) I have very recently begun to explore the concept of buying high-yield (ie Junk) bonds or funds with the unspent dividends from #2. For now I am only going out a year in duration to limit the risk of default and interest rate risk.

I get ideas for bonds to purchase for a particular year by looking at the holdings of the Bulletshare target maturity ETFs.

My intent is to hold all of the bonds/funds to maturity.

-gauss

 

[pb4uski]

The Eagle has landed!

A lot to pack in there.

Generally fixed income should be held in tax-deferred accounts because interest is ordinary income just like tax-deferred withdrawals are. If you hold equities in tax-deferred account it effectively converts qualified dividends and long-term capital gains from preferenced income to ordinary income.

Conversely, equities should be held in taxable accounts where possible because qualified dividends and long-term capital gains get preferential tax rates. Foreign equities are best held in taxable accounts because you can then use the foreign tax credit, which is lost for foreign equities held in tax-deferred and tax-free accounts.

I agree with your preference for individual bonds vs bond funds. While I hold individual bonds, I think the target maturity bond ETFs are a good choice for those who eschew bond funds but want simplification and diversification. These ETFs invest in stated categories of bonds that all mature in a stated year... in December of the maturity year there is a terminal distribution to the ETF holders and then the fund is done... akin to receiving the par value of an individual bond at maturity. Since the ETF holds hundreds of bonds, you have good diversification. (I don't currently own any of these but have owned both BlackRock iBonds and Invesco Bulletshares in the past). They offer Treasury, corporate, high yield and muni versions. Since diversification of credit risk isn't necessary for Treasuries, I think individual holdings are preferable for Treasuries.

It is fine to hold Treasuries in an tIRA. No reason to not hold munis if the yield is right or there are also taxable munis that would be appropriate for an tIRA.

Almost 1/3 of my fixed income are agency bonds... issued by GSEs... government sponsored entities like the Federal Home Loan Bank, Federal Farm Credit Bureau, et al... usually Aaa by Moody's and AA+ by S&P and IMO just a baby-step down from Treasuries with repect to credit risk.

Another 1/3 are in brokered CDs that are FDIC insured. These are issued by FDIC insured banks and sold through brokers. As long as you stay below the FDIC limits for any single issuing bank then you are fully protected from default risk.

I have a "trick" for not worrying about income. I have an online savings account that is the "gatekeeper" between my investment accounts and the checking account that I use to pay my bills. I have an automatic monthly "paycheck" transfer from this account to checking and periodically do other transfers to cover lumpy expenses like property taxes, insurance, etc. I have a target of having a year's worth of paycheck and $25k safety stock when I replenish the gatekeeper, which I do periodically from taxable account cash flow. The online saving account yields 4.3%. With this mechanism in place I don't have to limit myself to monthly payers or I can freely invest in lower coupon bonds that trade at a discount. I often look out for callable bonds where the coupon is 3% or lower since I think they are unlikely to be called that trade at a good discount and YTM.

 

[pb4uski]

...#2) I also have, as pb4uski mentions a ladder of corporate constant maturity ETFS. This ladder runs for now out to about 8 years from now and when each year's ETF matures and is liquidated, I roll the proceeds to the end of the ladder. The ladder is designed to provide me yearly liquidity and also yearly interest/dividends that I could spend if I choose.

#3) I have very recently began to explore the concept of buying high-yield (ie Junk) bonds or funds with the unspent dividends from #2. For now I am only going out a year in duration to limit the risk of default and interest rate risk.

-gauss

Have you considered buying the high-yield flavors of the target maturity bond ETFs for your high-yield position?

Do you have the iBond or Bulletshare product for your corporate positions?

 

[Tranquility Base]

IMO it is between difficult and impossible for a small retail investor to assemble an adequately diversified corporate bond portfolio. Just selecting and buying a large number of positions is a lot of work and it takes a lot of money. Then you have to maintain the portfolio as bonds mature, are called, etc. So I am with you. Govvies aka zero credit risk are where we are. 90% TIPS actually.

Beside the difficulties you mention OldShooter, every time I set up the search funtion for corporate bonds and check the box for noncallable, the search comes up empty. Well, maybe not every time, but certainly most of the time. If anything does come up, the yield to maturity on the bond often is lower than on a US Treasury for the same term. That's probably for A and up. I guess I'd have to go lower into the B range to find anything that might match a US Treasury. Too risky. Leaves me wondering why I even bothered looking.

 

[OldShooter]

It actually can be easy peasy if one uses the target maturity date corporate bond ETFs like BlackRock iBonds or Invesco Bulletshares. ...

Of course, but OP doesn't want funds, nor do we.

 

[pb4uski]

Of course, but OP doesn't want funds, nor do we.

It is a target maturity ETF... very different from your typical bond fund or ETF.

It is akin to buying individual bonds in that there is a maturity date (December of the stated year). It is like buying a share of a bond portfolio where the bonds all mature in a stated year.

The OP said he didn't want bond funds and if you had bothered to read my post I said that I agree, but these are different.

Do you understand what these things are or are you just being disagreeable?

 

[Tranquility Base]

It actually can be easy peasy if one uses the target maturity date corporate bond ETFs like BlackRock iBonds or Invesco Bulletshares. Currently a 5 rung ladder of 2024-2028 maturities sport a ~5.9% portfolio yield so after the 0.1% ER would yield ~5.8% +/- the impact of any purchase premium/discount... so probably a net yield between 5.70-5.75%... mostly A and BBB rated corporate bonds. 300-600 holdings per ETF so well diversified.

https://www.ishares.com/us/resources/tools/ibonds
https://www.invesco.com/bulletshares/tools/bond-ladder

Thanks. I will take a look at some of the target maturity date corporate bond ETFs. I had never heard of them before.

 

[COcheesehead]

Beside the difficulties you mention OldShooter, every time I set up the search funtion for corporate bonds and check the box for noncallable, the search comes up empty. Well, maybe not every time, but certainly most of the time. If anything does come up, the yield to maturity on the bond often is lower than on a US Treasury for the same term. That's probably for A and up. I guess I'd have to go lower into the B range to find anything that might match a US Treasury. Too risky. Leaves me wondering why I even bothered looking.

You are doing something wrong in your search. I have bought several non callable issues recently. I usually get dozens of non call options with yields well above treasuries. I search only A-, A3 and above and have bought yields in the high 6% - to low 7% range.
FYI, non call issues have shot to the moon in the last two trading days as interest rates have receded.

 

[pb4uski]

Beside the difficulties you mention OldShooter, every time I set up the search funtion for corporate bonds and check the box for noncallable, the search comes up empty. Well, maybe not every time, but certainly most of the time. If anything does come up, the yield to maturity on the bond often is lower than on a US Treasury for the same term. That's probably for A and up. I guess I'd have to go lower into the B range to find anything that might match a US Treasury. Too risky. Leaves me wondering why I even bothered looking.

You really need to look at the details of the call provisions.

For example, last week I bought A-rated PacifiCorp 3.5% 06/15/2029 Callable CUSIP 695114CU0 for a 6.115% YTM....it is callable... but it matures on 6/15/2029 and first call is 3/15/2029... so at worst it gets called 3 months before maturity... big deal... make my day. Currently trading at a 5.728% yield.

If you limit yourself to A rated issues it will indeed be hard to get a big premium over similar term Treasuries right now, but it comes and goes.

I just did a screen of corporates maturing in 2028 rated BBB+ or higher by S&P and Baa1 or higher by Moody's sorted by YTM. The first two screens had yields ranging from 6.952% to 5.603%. The same screen for UST maturing in 2028 had a YTM of 4.550% to 4.526%.

Or you can make it easy and buy iShares® iBonds® Dec 2028 Term Corporate ETF ticker IBDT that has 573 mostly A and BBB rated corporate bonds maturing in 2028 with a portfolio YTM of 5.87% compared to its Treasury counterpart ticker IBTI that has a portfolio yield of 4.69%.

To be clear, this isn't a recommendation and you need to do your own due diligence, but there are possibilities but you need to be patient.

 

[COcheesehead]

One trick to find non call bonds is to search either A- or A3 / higher and not both simultaneously. Some bonds are rated an A3 and a BBB+ but would be excluded if searching for both parameters.
Also as pb4uski points out selecting not continuously callable presents callable bonds, but further out.

 

[Tranquility Base]

The Eagle has landed!

A lot to pack in there.

Generally fixed income should be held in tax-deferred accounts because interest is ordinary income just like tax-deferred withdrawals are. If you hold equities in tax-deferred account it effectively converts qualified dividends and long-term capital gains from preferenced income to ordinary income.

Conversely, equities should be held in taxable accounts where possible because qualified dividends and long-term capital gains get preferential tax rates. Foreign equities are best held in taxable accounts because you can then use the foreign tax credit, which is lost for foreign equities held in tax-deferred and tax-free accounts.

I agree with your preference for individual bonds vs bond funds. While I hold individual bonds, I think the target maturity bond ETFs are a good choice for those who eschew bond funds but want simplification and diversification. These ETFs invest in stated categories of bonds that all mature in a stated year... in December of the maturity year there is a terminal distribution to the ETF holders and then the fund is done... akin to receiving the par value of an individual bond at maturity. Since the ETF holds hundreds of bonds, you have good diversification. (I don't currently own any of these but have owned both BlackRock iBonds and Invesco Bulletshares in the past). They offer Treasury, corporate, high yield and muni versions. Since diversification of credit risk isn't necessary for Treasuries, I think individual holdings are preferable for Treasuries.

It is fine to hold Treasuries in an tIRA. No reason to not hold munis if the yield is right or there are also taxable munis that would be appropriate for an tIRA.

Almost 1/3 of my fixed income are agency bonds... issued by GSEs... government sponsored entities like the Federal Home Loan Bank, Federal Farm Credit Bureau, et al... usually Aaa by Moody's and AA+ by S&P and IMO just a baby-step down from Treasuries with repect to credit risk.

Another 1/3 are in brokered CDs that are FDIC insured. These are issued by FDIC insured banks and sold through brokers. As long as you stay below the FDIC limits for any single issuing bank then you are fully protected from default risk.

I have a "trick" for not worrying about income. I have an online savings account that is the "gatekeeper" between my investment accounts and the checking account that I use to pay my bills. I have an automatic monthly "paycheck" transfer from this account to checking and periodically do other transfers to cover lumpy expenses like property taxes, insurance, etc. I have a target of having a year's worth of paycheck and $25k safety stock when I replenish the gatekeeper, which I do periodically from taxable account cash flow. The online saving account yields 4.3%. With this mechanism in place I don't have to limit myself to monthly payers or I can freely invest in lower coupon bonds that trade at a discount. I often look out for callable bonds where the coupon is 3% or lower since I think they are unlikely to be called that trade at a good discount and YTM.

I haven't figured out yet how to multi-quote just one post so I hope I haven't screwed this up. I want to follow up to try to better understand things. I'm not being argumentative or disagreeable, although I am more than capable of being either.


"Generally fixed income should be held in tax-deferred accounts because interest is ordinary income just like tax-deferred withdrawals are." Isn't the main exception a bond or other instrument that is not subject to federal or state taxation, or both?



"If you hold equities in tax-deferred account it effectively converts qualified dividends and long-term capital gains from preferenced income to ordinary income." I agree with that. But I've understood that equities could be held in either a taxable or account or a tax-deferred account, notwithstanding the occasions when asset allocation forces your hand. I thought that it was advantageous to hold appreciating securities in a tax-deferred account to defer the tax on the capital gains, notwithstanding the preferential tax rate for LTCGs. Or is this limited to the situation where someone has a crystal ball and knows in advance that they are getting in at the ground floor on the next wonder stock, such as Amazon or Apple? Or is the preferenced income factor overriding?

"Conversely, equities should be held in taxable accounts where possible because qualified dividends and long-term capital gains get preferential tax rates." Understood.


"While I hold individual bonds, I think the target maturity bond ETFs are a good choice for those who eschew bond funds but want simplification and diversification." Thanks for the tip. How do the target maturity bond ETFs avoid the problems of bond funds? I don't understand bond funds enough to know if the problem is caused by their holding bonds or being a mutual fund. The problem to me is the loss of value when too many fund investors run for the exits. How would it make any difference if the target maturity bond investment was structured as an ETF instead of a mutual fund?


"It is fine to hold Treasuries in an tIRA. No reason to not hold munis if the yield is right or there are also taxable munis that would be appropriate for an tIRA." Honestly, I had to reread that line! I thought that Treasuries and munis should always be held in a taxable account to get the most bang for the buck. In fact, this morning (warning - upcoming stupidity alert), I wasn't paying close enough attention when I bought some Treasuries. I meant to buy them in my taxable account but accidentally bought them in my tIRA. (Too many outside distractions!) I was planning to sell them next week and reinvest the proceeds in something else in the tIRA. If nothing else, it would be a learning experience to see how a bond is sold (seems to be different than selling stocks and mutual funds, at least at Schwab). I don't know what kind of hit I'll take, assuming interest rates stay about the same for the next week or so. It was only about $10,000. But are you suggesting that I just leave the US Treasuries in the tIRA?


"Another 1/3 are in brokered CDs that are FDIC insured." I love brokered CDs. They are so much easier to purchase than going through the bank directly. And of course the rate is usually better. I still remember my aching back in the early 1980s when I was renewing a CD. I think the interest rate was about 13% and the renewal was only going to be 9% or so. Highway robbery!


Side question. When I have bought US Treasuries, I have always done so on Schwab. I assume it is what is called the secondary market because I have not been buying from the government directly through an auction. Is there an advantage to one method or the other? I guess I like the secondary market for the same reason I like ETFs vs mutual funds. I can complete the transaction right then and there. The bonds usually seem to close the next day on the secondary market but my understanding is that auctions only occur every so often and not every day.



"I have a "trick" for not worrying about income. I have an online savings account that is the "gatekeeper" between my investment accounts and the checking account that I use to pay my bills." I do much the same thing in terms of having a gatekeeper. I haven't pursued having an automatic monthly "paycheck" transfer from this account to checking. I just periodically do whatever transfers are necessary to cover expenses that aren't covered by my wife's pension and social security income. It probably is much to manual of a system than it needs to be. For that matter, I probably don't have to watch things quite so hawkishly either. It's not that I worry about income. I'll worry more about that when I start drawing my social security at age 70 and the worry will be having to deal with the excess income. I just don't like to have money sitting somewhere, such as in checking or in Schwab's cash account, when it can easily be earning more somewhere else. To some extent, I am not managing or investing for my wife and I as much as I am for our kids.



"With this mechanism in place I don't have to limit myself to monthly payers or I can freely invest in lower coupon bonds that trade at a discount." Good point. I guess I hadn't thought that through, that lower coupon bonds purchased at a discount are still going to be paying less interest. The YTM will be higher than the coupon rate, but your periodic interest payment will still be less than a bond with a higher coupon rate and thus a higher price up front.



"I often look out for callable bonds where the coupon is 3% or lower since I think they are unlikely to be called that trade at a good discount and YTM." I hadn't thought of that. I will remember that for next time. Pretty much I've just been automatically clicking the box for "noncallable" when I am searching for bonds or CDs. I know some people are willing to roll the dice on callable bonds with an interest rate closer to market rates. I just don't care to do so and I haven't even explored how much time there is between the current date and the earliest date the bond is callable. It seems like I'll just end up doing the work twice.


Thank you again for your reply!

 

[Tranquility Base]

One trick to find non call bonds is to search either A- or A3 / higher and not both simultaneously. Some bonds are rated an A3 and a BBB+ but would be excluded if searching for both parameters.
Also as pb4uski points out selecting not continuously callable presents callable bonds, but further out.

Thanks! I probably am doing something wrong with my search as you have pointed out and has pb4uski has suggested. I'll do some more practice searching now.

 

[UpQuark]

...I understand that the value of the bond will decrease as interest rates increase. I am comfortable signing on for a bond to pay me a set rate of interest for a set period of time, although I am not venturing out beyond 5 years at this point. ....

I join you in not feeling comfortable with bond funds, tho my bond funds are within my retirement-target-year fund, and my current feeling is that the managers of the fund don't understand them either because the value of my target-year fund is down 25% and it didn't pay income in May even tho income is supposedly their highest priority after the target retirement year is reached.

But today I am confused about what to do with my actual bonds. I have a bond ladder out for a year and then a couple rungs each year for a few more years out.

I'm wondering now if I should sell all my bonds and put everything into 30 year Treasuries that have a 5% coupon. I don't know how the math works, for example, if I have a 4 year bond paying 4.2% coupon and to sell it on the secondary market would require selling at a big discount, does that mean buying a 30 yr with 5% coupon would not net me any more money than waiting 4 yrs and buying the 30 yr (by then with only 26 yr remaining) on the secondary market?

And then I feel like I shouldn't tie up any money in bonds yet until the coupons reach whatever height they maybe will go up to?

I have no idea what a person's bond portfolio should consist of.

My feeling tho is that the T-IRA should contain most of the AA's bonds because that part of my investments won't grow (if I'm withdrawing and spending the interest) which would help keep the RMDs reasonable (my understanding is that the RMDs top out at about 7.5% of the t-IRA's value, but maybe I'm wrong about that).

 

[pb4uski]

You may find this link useful in thinking through the most tax efficient placement of your investments. https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

I agree that tax-free bonds would typically be in taxable accounts and not tax-free accounts. In most cases a person's equity allocation exceed their taxable account and in that case the excess would go to tax-free accounts like Roths and lastly to tax-deferred accounts. The other to fill taxable accounts with equities is because equities in taxable accounts get a stepped-up basis upon the owner's death whereas equities in tax-deferred accounts do not.

One of the main issues that people have with bond funds is lack of control. Your money goes into a black box that the bond managers manage. Also, you can't hold a bond fund to maturity like you can with individual bonds or target maturity bond ETFs. If rates spike both bond funds and an individual bond portfoilo will have declines in value. But with individual bonds you can hold to maturity and that declline in value will disappear AND you will be able to see it disappear. If you need cash from your portfolio, you decide what bonds to sell. If you need cash from your bond fund you don't have any choice.. the fund is a single amalgamated security.

There is nothing wrong with holding US Treasuries in a tIRA... many people do. While one normally would not hold tax-free munis in a tIRA there are taxable munis that would be or if you run across a tax-free muni with a particularly attractive yield, then why not?

I'm one of those who are ok with callable bonds... in fact they are about 1/2 of my portfoio but I try to stay below 1/2. I had not had any calls in a long time until just today... and ironically, it was a 6.5% coupon agency bond that was only issued 17 days ago and they called 65% of the issue. No big deal, I'll just reinvest the proceeds next week but it was my highest coupon agency issue and I still have 35% of it.

 

[DrRoy]

I recently found BBB+ to A- corporate bonds for 7+%.

 

[gauss]

Have you considered buying the high-yield flavors of the target maturity bond ETFs for your high-yield position?


I looked at the 2024 BSJO Bulletshares. I then looked at the holdings and was drawn to the Apr 2024 QVC 4.85% notes that were yielding between 12 and 13% and put the funds there instead. I have a bit of a distaste for the target maturity ETFs in that I don't understand why the income fell off so sharply (and then recovered) during the past couple of years.



Do you have the iBond or Bulletshare product for your corporate positions?

I'm in the Bulletshare corporates since 2019.

.

 

[Chuckanut]

PB4’s message #5 makes for a great intro into how to buy, hold and use fixed income bonds and CD’s to generate a reliable income flow with minimal risk. I think newbies would be well advised to read it and work through understanding it. Even if it’s not completely applicable to their situation. Take what you can use, and leave the rest.

 

[Healthy Lifestyle]

PB4’s message #5 makes for a great intro into how to buy, hold and use fixed income bonds and CD’s to generate a reliable income flow with minimal risk. I think newbies would be well advised to read it and work through understanding it. Even if it’s not completely applicable to their situation. Take what you can use, and leave the rest.

+1,

I agree with the valuable insight that PB4uski presented (message #5), as it only confirms that we are always learning and building our knowledge base.

 

[Tranquility Base]

You may find this link useful in thinking through the most tax efficient placement of your investments. https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

I agree that tax-free bonds would typically be in taxable accounts and not tax-free accounts. In most cases a person's equity allocation exceed their taxable account and in that case the excess would go to tax-free accounts like Roths and lastly to tax-deferred accounts. The other to fill taxable accounts with equities is because equities in taxable accounts get a stepped-up basis upon the owner's death whereas equities in tax-deferred accounts do not.

One of the main issues that people have with bond funds is lack of control. Your money goes into a black box that the bond managers manage. Also, you can't hold a bond fund to maturity like you can with individual bonds or target maturity bond ETFs. If rates spike both bond funds and an individual bond portfoilo will have declines in value. But with individual bonds you can hold to maturity and that declline in value will disappear AND you will be able to see it disappear. If you need cash from your portfolio, you decide what bonds to sell. If you need cash from your bond fund you don't have any choice.. the fund is a single amalgamated security.

There is nothing wrong with holding US Treasuries in a tIRA... many people do. While one normally would not hold tax-free munis in a tIRA there are taxable munis that would be or if you run across a tax-free muni with a particularly attractive yield, then why not?

I'm one of those who are ok with callable bonds... in fact they are about 1/2 of my portfoio but I try to stay below 1/2. I had not had any calls in a long time until just today... and ironically, it was a 6.5% coupon agency bond that was only issued 17 days ago and they called 65% of the issue. No big deal, I'll just reinvest the proceeds next week but it was my highest coupon agency issue and I still have 35% of it.

Thanks for the Bogleheads link. I have looked at that information before. It was probably the first site I looked at when I started designing my Asset Location spreadsheet. It's good to review some of these things again, however, as you get a bit smarter, or just less dumb.


Not to beat a dead horse, but this thought occurred to me this morning and I am wondering if it would be a fair statement about the issues many people (including me) have about bond funds in comparison to ETFs and individual bonds which I don't have an issue with. When I hold and ETF or an individual stock or bond and decide to sell, the ETF doesn't have to buy it, the corporation doesn't have to buy back my stock, and the bond issuer doesn't have to redeem my bond. It is up to ME to find a buyer and I would do so by selling it through Schwab or Fidelity. But when I sell my shares of a bond fund (or any mutual fund for that matter), the fund manager does have to buy back my shares and thus have to work to come up with the money to pay me off. It is not just up to me to find a buyer myself. And thus when the bond fund manager is scrounging around to come up with the money to pay me, a lot of other investors in that particular fund can find their apple carts upset. Is that a fair characterization? Is that just a more long-winded version of your statement that "Your money goes into a black box that the bond managers manage."


I hope I didn't jinx your 6.5% callable bond that just got called today.


Now I am off to look at some of the target maturity bond ETFs that you mentioned and to try to figure out what I am doing wrong with searching for corporate bonds as you and COcheesehead have pointed out.

 

[Tranquility Base]

One trick to find non call bonds is to search either A- or A3 / higher and not both simultaneously. Some bonds are rated an A3 and a BBB+ but would be excluded if searching for both parameters.
Also as pb4uski points out selecting not continuously callable presents callable bonds, but further out.

Where is "not continuously callable" a search option? At Fidelity? On Schwab the search options are

Zero Coupon,
Variable Rate
Stepped-Rate Coupon
Non-Callable
Callable

Survivor's Option
Recently Issued


So at Schwab I presume I would just need to check "callable" instead of "non-callable."


"One trick to find non call bonds is to search either A- or A3 / higher and not both simultaneously." I'm not following you. By "not both simultaneously" do you mean to search either the Moody's ratings or the S&P ratings, but not simultaneously?

 

[COcheesehead]

Where is "not continuously callable" a search option? At Fidelity? On Schwab the search options are

Zero Coupon,
Variable Rate
Stepped-Rate Coupon
Non-Callable
Callable

Survivor's Option
Recently Issued


So at Schwab I presume I would just need to check "callable" instead of "non-callable."


"One trick to find non call bonds is to search either A- or A3 / higher and not both simultaneously." I'm not following you. By "not both simultaneously" do you mean to search either the Moody's ratings or the S&P ratings, but not simultaneously?

It’s a Fidelity option. You have to click on the “show more criteria” link and a whole bunch of cool things pop up including Continuously Callable yes, no or all.

 

[Tranquility Base]

You really need to look at the details of the call provisions.

For example, last week I bought A-rated PacifiCorp 3.5% 06/15/2029 Callable CUSIP 695114CU0 for a 6.115% YTM....it is callable... but it matures on 6/15/2029 and first call is 3/15/2029... so at worst it gets called 3 months before maturity... big deal... make my day. Currently trading at a 5.728% yield.

If you limit yourself to A rated issues it will indeed be hard to get a big premium over similar term Treasuries right now, but it comes and goes.

I just did a screen of corporates maturing in 2028 rated BBB+ or higher by S&P and Baa1 or higher by Moody's sorted by YTM. The first two screens had yields ranging from 6.952% to 5.603%. The same screen for UST maturing in 2028 had a YTM of 4.550% to 4.526%.

Or you can make it easy and buy iShares® iBonds® Dec 2028 Term Corporate ETF ticker IBDT that has 573 mostly A and BBB rated corporate bonds maturing in 2028 with a portfolio YTM of 5.87% compared to its Treasury counterpart ticker IBTI that has a portfolio yield of 4.69%.

To be clear, this isn't a recommendation and you need to do your own due diligence, but there are possibilities but you need to be patient.

I have revisited the searching for corporate bonds and have played around with the settings. It has opened up more bonds in the results.


I have been looking at IBDT as an example to explore and read up on. But I can't find anything so far mentioning the ETF's portfolio YTM of 5.87%. Where are you finding the YTM? I've been on Schwab's site but I have looked elsewhere as well.