Building a Fixed Income Portfolio

[swk7907]

I've been doing more research and getting more comfortable with fixed income investing. I have most of my bond funds liquidated with the balance probably to be done next year (due to tax purposes).

I'm trying to determine my percentage of fixed income that should be in treasuries vs. agencies vs. corporates vs. munis. I'm also trying to determine how diversified my corporates (and to a lesser extent munis) need to be to offset the credit risk of any one issue.

Looking at BND I see 51% in Government Issues, 26% in Corporates and 21% in Securitized. Would securitized be asset back/mortgage backed securities or something else? Would agencies fall into Government Issues or Corporates?

Does Fidelity (or other broker) offer the ability to purchase a basket of corporate bonds to diversify credit risk but then you own the actual bond rather than being managed as a fund? If not, do you think 10-20 corporate issues would be enough for diversification purposes? I guess that would probably depend on credit rating.

The bulk of this post is by wanting to get some corporate bonds incorporated into my holdings but I feel I'd be signficantly elevating the default risk of a single holding which, if I'm not diversified enough, could torpedo the total return of my portfolio. I'm also trying to determine what percentage of my total bond portfolio should be in corporates. If I use a similar 25% as BND and try to have 10-20 any one bond is only 1.25%-2.5% of my total portfolio. This is probably fine from a diversification perspective but feels like a lot of work for not much money invested.

Thanks for all of the thoughts.

 

[pb4uski]

From what I have seen the spread to Treasuries for high quality corporate bonds is pretty narrow right now so they are t particularly attractive to me... if I'm going to tak on a little credit risk then I want to be paid for doing so. Not I'll admit that I haven't been digging very deep because I'm on the sidelines until the next Fed meeting (but still getting 3.7% in a money market).

 

[jazz4cash]

I have come to believe that diversification is not as important with fixed income securities as it is with stocks. With stocks I want to diversify across sectors, small, mid, large cap, growth, value, etc. That lends itself very well to index mutual funds. With fixed income securities I am primarily concerned with concentration of a specific issuer. My AA is 70/30 so it's easy to spread 30% across 10 issuers and I feel diversified.
Everything is investment grade. I am very unlikely to rebalance my bonds because they have "run up". The behavior is very smooth and predictable compared to equities. This year has been a bit different but it's so much easier to ignore mark to market bond values vs. NAV of a bond fund. Also, a slug of the 30% is in CD's and cash. The Fidelity Fixed Income Analysis tool keeps me focused on the principal value at maturity.

 

[Winemaker]

My fixed income portfolio is primarily preferred stocks, and in this environment, some are at very decent prices. Yes they are a bit lower on the credit "food" chain, but I try to limit my purchases. They are very liquid and may have a capital gain if called.

 

[COcheesehead]

First have the right bond in the right type of account.
Second decide how secure you want the income stream. Callable bonds may get called away and you lose your cashflow. Treasuries are not callable.
Third look at default rates. The lower the rating the higher the default rates.
After that, I buy the highest yield at a good to great quality level. Agency bonds as of late have been a good opportunity as have major banks, but they may be called away so less dependable. Don’t overlook CDs - some are non callable. There are also step up bonds for a rising rate environment. Taxable munis occasionally have some deals too and they fit well in a deferred account.

 

[ER604me]

First have the right bond in the right type of account.
Second decide how secure you want the income stream. Callable bonds may get called away and you lose your cashflow. Treasuries are not callable.
Third look at default rates. The lower the rating the higher the default rates.
After that, I buy the highest yield at a good to great quality level. Agency bonds as of late have been a good opportunity as have major banks, but they may be called away so less dependable. Don’t overlook CDs - some are non callable. There are also step up bonds for a rising rate environment. Taxable munis occasionally have some deals too and they fit well in a deferred account.

COcheesehead
What do you recommend for types of bonds in taxable vs. tax deferred vs. Roth?

 

[COcheesehead]

COcheesehead
What do you recommend for types of bonds in taxable vs. tax deferred vs. Roth?

If there is a tax advantage for you, put munis in taxable and taxable bonds in deferred. I have read on here of folks putting munis in IRAs which makes a non taxable bond - taxable. There are taxable munis which may work for your deferred accounts.
I have put taxable bonds in taxable accounts at times if the yield is higher than the tax free muni equivalent return.

 

[Montecfo]

Some folks do all their fixed in CD's, some in treasuries, some in Index funds (I do not recommend that). Most probably mix it up. If the numbers make sense, munis in your taxable accounts are generally low risk, but you have to know what you are buying (meaning what income stream supports the bonds).

If you do not want to be thinking about default risk, then buy treasuries or agencies. Those would be safest and no need to "diversify" except by term. As you get comfortable maybe consider high quality corporates in strong industries.

Good place to start. Read. Learn.

 

[COcheesehead]

Muni’s are just behind treasures and agency bonds in terms of safety. Buy anything with an A or higher and you are golden. GO - general obligation bonds are more secure income for the issuer because they are based on taxation, but revenue bonds aren’t too far behind and usually have higher yields though the income is only from the entity itself.