Fixed Income is hard..... do not know which way to go

[COcheesehead]

Our current yearly income needs of $150 k to $175 k are met by -

1) DW SSI
2)Dividends around $100k
3)Draw from taxable, rebalancing & keeping the AA 70/30 - Pass on to kids with step up basis, when we pass
4) Use IRAs for Roth conversions only
5) Roth accounts to be used in future for Nursing Home money or pass on to kids

Hope I answered your question

I can see why this process is hard for you. I asked a simple question - do you need the income- and I got your response above. I am not trying to be mean, but you really seem to be over thinking this or maybe I just see things in a simpler manner.

I am going to guess and say you need income for #3. So you need liquidity for rebalancing. I would ladder super safe CDs, agencies and or treasuries. All of which can be bought off a yield table https://fixedincome.fidelity.com/ftgw/fi/FILanding

I would set up 6 -12 month rungs and go out five years. You then would only have to make 1-2 buys a year, have cash for rebalancing and have all the interest deposited into a MM or core cash account for spending. It doesn’t get much simpler than that. You’ll probably make a 5%+ ish yield, but never lose a dime if you hold until maturity.
Fidelity used to also for no extra fee, set up a ladder for you. I am not sure if they charge for that service now, but that is another easy way to get the ball rolling.

I wish you good luck.

 

[rkser]

Thanks for your help, Cocheeshead

Yes I am in a conundrum as to how to invest the moneys in money markets in short fixed income.

I am new to this coming from Mutual Fund/ ETFs and find it difficult & confusing.

I will figure it out, I have the local Rep to talk this over or go to Fixed income solutions of Fidelity for a fee or go to VGSH as a last resort .

We need money from the whole taxable portfolio for living expenses , not from just the bonds .

 

[Dash man]

Thanks for your help, Cocheeshead



Yes I am in a conundrum as to how to invest the moneys in money markets in short fixed income.



I am new to this coming from Mutual Fund/ ETFs and find it difficult & confusing.



I will figure it out, I have the local Rep to talk this over or go to Fixed income solutions of Fidelity for a fee or go to VGSH as a last resort .



We need money from the whole taxable portfolio for living expenses , not from just the bonds .

Search YouTube for videos on investing in Treasuries. You can set them to automatically roll over at maturity. Buying treasuries at auction is extremely simple.
I wouldn’t worry about rates dropping anytime soon.

 

[Bossman]

I used a Fidelity rep to build a corporate bond ladder about 3-4 years ago and other than a reasonable fee for each bond, there was no additional charge. I also had a separate discussion with a very knowledgeable fixed income specialist at Fidelity for no fee. I did share my questions in advance, so the analyst was prepared. I am a private client, so that may of had an impact in the service that I was provided.

I have recently moved a significant amount of my IRA money into fixed income instruments, predominantly CDs and high yield money market funds. The CD's all pay interest monthly, have yields between 5.25 and 5.35 and terms from 12 to 24 months. The money market funds are paying up to 5.29%, depending upon your minimum purchase.

I am now looking at agency bonds that have yields close to 6.5%. These are a little trickier as most (if not all) of them are continuously callable although the next call date can be six months out. The agency bonds typically pay semi annually, so you also need to take that into account.

Lastly, some pundits are predicting rate cuts in 2024, so locking in your money for 3-5 years may be an interesting move. The max yield I have seen going out that far is 4.75%. Good luck!

 

[Texas Proud]

I am not trying to ladder at all.... just buying stuff to get current income..


IOW, if I get a high enough income then I am good to go... will only reinvest when a maturity occurs...


One of my recent purchases was BAT... cusip 5489AD0... BBB+, matures in 2053 and current yield close to 7.4%...


I do not care about any ups or downs on the price as I am getting a good income stream from this security...



For the adventurous out there... NSS... rated B but variable with 3 mth libor +6.7%... now at 11% plus yield... matures 2043... one of my inflation hedges...

 

[rick55]

Is a bond fund better and easier?

 

[Echard]

1) Safety is important , not more than 3% loss of money,

Thankyou

This is the critical requirement you listed. If you want that tight of a control, laddering CD’s, treasuries and agency bonds is probably the only way to get that tight of control. Note that the value of the bonds may drop along the way, but it doesn’t matter because they will recover their value by the maturity date.

Also, make sure you can generate the amount of cash you need from doing this. If they yield on average 4.2%, but don’t produce enough cash every year, then you have to either reduce your spend or increase your risk level.

 

[surprising]

Take a look at CEF bond funds. I own several as part of my bond allocation and they provide better yields and most of them pay monthly. The funds I own pay on average 9% yield. Just need to be able to stomach big price moves as the fund price is disconnected from the NAV, but I've held through Covid and 2022 drops and while the prices fell, not a single fund reduced or eliminated their distribution. CEFs are unique in that the number of shares is fixed, unlike ETFs. This means that during market panics and selloffs, CEFs are not forced to sell assets, unlike ETFs. I think this keeps the distributions pretty stable and also provides opportunity for the fund manager to think long term.

 

[COcheesehead]

I am not trying to ladder at all.... just buying stuff to get current income..


IOW, if I get a high enough income then I am good to go... will only reinvest when a maturity occurs...


One of my recent purchases was BAT... cusip 5489AD0... BBB+, matures in 2053 and current yield close to 7.4%...


I do not care about any ups or downs on the price as I am getting a good income stream from this security...



For the adventurous out there... NSS... rated B but variable with 3 mth libor +6.7%... now at 11% plus yield... matures 2043... one of my inflation hedges...

You might be a candidate for closed end bond funds. The NAV is all over the board, lately down like other bond funds, but they yield in and around 12%. WDI, PDO are just two of many.

 

[Montecfo]

I have been shopping the CEFs. Seems good timing while many remain discounted and rate risk much reduced.

 

[rayvt]

You might be a candidate for closed end bond funds..... WDI, PDO are just two of many.

I don't see that yield to be sustainable. WDI 's NAV yield is 10.75%, PDO's NAV yield is 12.5%. They cannot possibly be earning that much from their holdings, so they are going to eventually slash their distribution.

Not to mention that WDI went from 20 to 13.50, and PDO went from 22 to 12.50. That's a huge capital loss from something that you consider to be a fixed income/bond-like investment.


Oooh, FIDO even talks about that. https://www.fidelity.com/learning-c...osed-end-funds/total-return-distribution-rate

 

[Slim11]

Agree.


If you want some duration ideas focused on income, here's a few.


JPM 20 year non callable notes with 5.625% coupon. Trading below par at $96.80 for an effective yield of 5.9% (cusip 46625HJM3)


WFCPRL and BACPRL - Wells Fargo and Bank of America perpetual preferreds. Wells Fargo pays annual dividend of $75 for an effective yield of 6.55% and BAC pays annual dividend of $72.50 for an effective yield of 6.45%.


Federal Farm credit bond - (cusip 3133EPTP0). 5% coupon trading below par at $98.49 for an effective yield of 5.12%.

The risk with the above as with treasuries and cds is if rates continue up your nav or base value goes down. If all you care about is the income and never plan to sell, it shouldn't be a concern.

I am in the same boat as the OP, and I am thinking of having a good chunk of money deticated to preferreds , but do not understand them that well. I have a few weeks to figure it out. I am looking at CD ladders (25%), 457 plan is in a 4% fixed (25%), preferreds (10%) stocks that I controll (20%), and maybe some stock that the computer assignes me ( 20%). I am looking at the fidelity robo advisor, cost is .35 percent. If it does better then me, I may add to it after a year or so, if it dosen't I will close it down. Its sort of a plan.

 

[surprising]

I don't see that yield to be sustainable. WDI 's NAV yield is 10.75%, PDO's NAV yield is 12.5%. They cannot possibly be earning that much from their holdings, so they are going to eventually slash their distribution.

Not to mention that WDI went from 20 to 13.50, and PDO went from 22 to 12.50. That's a huge capital loss from something that you consider to be a fixed income/bond-like investment.


Oooh, FIDO even talks about that. https://www.fidelity.com/learning-c...osed-end-funds/total-return-distribution-rate

There are good CEFs and bad CEFs. For a CEF bond fund, you want to stay away from any fund that has regular ROC (return of capital) distributions. It means they are just selling assets to fund the distribution, which will erode the NAV and share price.

 

[COcheesehead]

I don't see that yield to be sustainable. WDI 's NAV yield is 10.75%, PDO's NAV yield is 12.5%. They cannot possibly be earning that much from their holdings, so they are going to eventually slash their distribution.

Not to mention that WDI went from 20 to 13.50, and PDO went from 22 to 12.50. That's a huge capital loss from something that you consider to be a fixed income/bond-like investment.


Oooh, FIDO even talks about that. https://www.fidelity.com/learning-c...osed-end-funds/total-return-distribution-rate

The big losses like other bond funds are likely behind them. I am not recommending them, but to the poster that said they don’t care about volatility only income, timing might be right.
PDO is selling at a premium to NAV, but WDI is at an almost 10% discount to NAV and it is INCREASING distributions. WDI is covering 102% of its distributions and that is increasing. UNII trend is up.
CEFdata.com is your friend when finding the facts on these things.

 

[Texas Proud]

You might be a candidate for closed end bond funds. The NAV is all over the board, lately down like other bond funds, but they yield in and around 12%. WDI, PDO are just two of many.

Wow... both have expense ratios closer to 3%.... both are leveraged..


They also seem to be active managed... I was not able to see the weighted avg of their rating... It might be a flyer with a small bit.. but both have lost value over the years so kinda getting back some of your own money in a way...

 

[TXBev]

Decisions and more decisions. I will close on my property next week. I will be downsizing to a cheaper house. I will need to invest the rest of my sale into something that is safe (I'll be 86), for income. A little growth would be good. The Feds are saying they need to raise rates maybe several more times which will have an effect on some investments. Have no debt but will need more income than my Social Security. I will lose the income from rentals, do not have an IRA. For now, I will be parking the proceeds in a money market account with Raymond James. They do have financial planners and I may talk to one of them. They also sell securities to pay their bills. Some of the initials people use here are over my head. I've had long term nursing home insurance and a prepaid funeral, since being in my 50's. Therefore, I do not need to save for that and will not be a burden on my children. It would be interesting to see what people would suggest if this was their mother asking for suggestions.

 

[COcheesehead]

Wow... both have expense ratios closer to 3%.... both are leveraged..


They also seem to be active managed... I was not able to see the weighted avg of their rating... It might be a flyer with a small bit.. but both have lost value over the years so kinda getting back some of your own money in a way...

Not for the faint of heart, but if high income is your goal….

 

[Montecfo]

Wow... both have expense ratios closer to 3%.... both are leveraged..


They also seem to be active managed... I was not able to see the weighted avg of their rating... It might be a flyer with a small bit.. but both have lost value over the years so kinda getting back some of your own money in a way...

Well, you need to do your homework. In bonds you WANT active management. And yes they are leveraged. Which is one of the reasons I like them now. I did not like them in 2021. But I did very well in variable rate securities in a CEF.

I would only buy them at a discount. Consider same when they get to high end of their historic range.

You do have to watch expenses just as with any actively managed fund.

Not commenting on these specific funds since I do not know them

 

[rkser]

I feel overwhelmed(frozen) with Fixed Income in my case -

- The constant searching needed for better yields

- The time & thought commitment it needs to deploy our $2 million & keep tab on all the moving pieces

- Many choices available & the constant pressure to pick the right one - Treasuries, CDs, MYGAs, individual Bonds, (so many piecemeals )

- I am afraid I am going to mess up our retirement & just keep thinking & be tethered to the Laptop.

Because of the recent losses in Bond Funds, got out of the 1)Muni Fund VWIUX & the 2)Bond Index BND & am now facing all these choices, otherwise Life was fine, till it was not because of the interest rate hikes. I have been a buy & hold kind of investor who got out of Bond Funds, but VTI & VXUS are still going strong & well .

The choices I see for us -

1) MYGA - I see rates going down beyond 3 yrs because of inverted curve
2) Hire 0.4% Fixed Income manager at Fidelity
3) Immediate Annuity, cannot believe I am writing this
4) Go back to the two Bond Funds we got out of (yes, beyond wash sale), accept the mistake of thinking I could do better on my own & be done with this darn experiment.
5) Cannot see myself tinkering with investments every few weeks, or every few months

Our total portfolio 2 months back was at 70/30 was VTI, VXUS, BND, VWIUX, now it has changed to VTI, VXUS + CDs + Money Market

Thoughts on how to simplify fixed income investing, for a not so smart novice

 

[clifp]

I'm sympathetic to your problem and there is no question that bond funds aren't the same as stock funds as you found out with BND.

I avoid the problem of bonds by not currently owning it. However, I do chair the investment committee of non-profit, that has about $2.5 million bond portfolio. It is managed by UBS and they charge about .6% for service, which is not cheap. On the other hand when look at the several scores of bonds in the portfolio I'm glad. I'm not handling it. They historically beat the bond indexes, but seldom beat it by more than their fees.

Given your parameter about want to buy, hold and forget, you may have to go back to a bond fund.
I've been quoting Buffett and arguing that bonds were "return free risk" for nearly a decade. I don't think that's the case today.
But let me propose an alternative that may work for you.

Take a million and build a 5 year ladder of treasury, including TIP, plus CDs if you liked, staggered every 6 months. So ten investments of $100K each, every 6 months When one matures, you buy something 5 years out. That's not a huge amount of work, and ensures you a high degree of liquidity in case **** happens while bringing in over $50K per year of income.

I personally think that long-term rates may go up to meet short-term rates to get rid of the inverted yield curve, but who really knows? The second million I'd go ahead and stick back into BND and/or VWIUX if that make more sense and forget about it.

Sure it is possible that BND may drop 10-15% in the future. However, the 30-day yield is 4.45% that's another 45K income, so your stock portfolio doesn't have to do great to more than meet you income need.

 

[mrfeh]

Thoughts on how to simplify fixed income investing, for a not so smart novice

I suggest you pose this question on bogleheads.org

Here is the template: https://www.bogleheads.org/wiki/Asking_portfolio_questions

 

[Texas Proud]

The problem is you seem to not want any loss on an investment... with bonds that is not possible..



If true then you need to go into CD ladder... they do not lose value...


This is a very unusual time with rates going up for zero to over 5% in a short time... bond funds are subject to severe price changes with that much change... but buy and hold is still the better way...


For me, I decided to buy individual bonds (note: I also bought a good number of preferred shares with good yields as a bond proxy)... I will not care about the price changes of those bonds unless there is a downgrade to ratings... I am fine with their current yield or yield to maturity and will hold until that maturity... I have staggered when they mature but in reality I do not need to do so except for reinvestment risk... I think that in a few years SS and income will be enough... and a few years after that RMDs added will defiantly be enough..


I have seen a table in both Fido and Schwab that has a list of bond options such as AAA, munis, Fed with the various time frames from a year out to 30 (IIRC)... you can see the yields and then click on what you like and a bunch of individual bonds pop up.. you can then decide what to buy.

 

[COcheesehead]

The problem is you seem to not want any loss on an investment... with bonds that is not possible..



If true then you need to go into CD ladder... they do not lose value...


.

Every fixed income asset will have a mark to market price, so even CDs may show a daily loss in principle value as rates bounce around.

A bond or a CD will, however, short of default, return to its original value at maturity known as par.

So if you buy quality bonds, they will likely never lose a dime if held for the duration. Daily pricing may show principle fluctuations, but that will only matter if you decide to sell prior to maturity and even in those cases, if you have collected some interest payments, you will likely still be ahead.

 

[pb4uski]

I feel overwhelmed(frozen) with Fixed Income in my case -

- The constant searching needed for better yields

- The time & thought commitment it needs to deploy our $2 million & keep tab on all the moving pieces

- Many choices available & the constant pressure to pick the right one - Treasuries, CDs, MYGAs, individual Bonds, (so many piecemeals )

- I am afraid I am going to mess up our retirement & just keep thinking & be tethered to the Laptop.

Because of the recent losses in Bond Funds, got out of the 1)Muni Fund VWIUX & the 2)Bond Index BND & am now facing all these choices, otherwise Life was fine, till it was not because of the interest rate hikes. I have been a buy & hold kind of investor who got out of Bond Funds, but VTI & VXUS are still going strong & well .

The choices I see for us -

1) MYGA - I see rates going down beyond 3 yrs because of inverted curve
2) Hire 0.4% Fixed Income manager at Fidelity
3) Immediate Annuity, cannot believe I am writing this
4) Go back to the two Bond Funds we got out of (yes, beyond wash sale), accept the mistake of thinking I could do better on my own & be done with this darn experiment.
5) Cannot see myself tinkering with investments every few weeks, or every few months

Our total portfolio 2 months back was at 70/30 was VTI, VXUS, BND, VWIUX, now it has changed to VTI, VXUS + CDs + Money Market

Thoughts on how to simplify fixed income investing, for a not so smart novice

Yes, from your posts it is clear that you are paralyzed. I think some of your angst is that you are not particularly interested in the effort needed to DIY but are at the same time keen to squeeze every last nickel of yield out of your fixed income portfolio.

I don't see 4 as a good option and given 5, running your own bond portfolio may not be a good option for you (I rather enjoy it but to each their own). I also would not suggest 1 as you would end up with many different accounts with different insurers and liquidity can be an expensive hassle due to high surrender costs. Ditto 3, lack of liquidity though annuity certain yields are attractive at certain times.

If you can concede to simplified DIY, a viable alternative to BND could be a 10-15 year CD/UST bond ladder of 20-30 individual positions maturing every 6 months or so... your brokerage firm could help you with the initial construction and then you would just need to reinvest as positions mature... twice a year. No need to fret between CDs or UST, just buy whichever is yielding the highest at the time you are reinvesting. Since both FDIC insured brokered CDs or full faith and credit US Treasuries are credit risk-free, they are functionally equivalent. For reference, BND is 67% US government securities.

Another simple option would be a 10-year ladder of iBond target maturity Treasury ETFs which would yield about 4.5% at today's interest rates.

Blackrock offers target maturity bond ETFs for Treasuries, corporate, high-yield and municipal bonds. Investco offers target maturity bond ETFs for corporate, high-yield and municipal bonds.

If you want to spice things up a little you could go with two ladders... a mix of iBond Treasury and corporate bond target maturity ETFs. A 70/30 mix would yield about 4.8%.

If you go this route you could keep the next year of expected cash flow and safety stock in an online savngs account or money market fund, and then when iBond terminal distribtutions are paid in December each year replenish the money market fund and reinvest the remainder in new 10 year target maturity iBond ETFs. If you had an unexpected need for money you could always sell some of the iBond positions.

See https://www.ishares.com/us/resources/tools/ibonds

Investco offers similar target maturity bond ETFs in corporate, high yield and municipal bonds. A municipal bond ladder may be useful if your want tax-free munis for your taxable accounts.

https://www.invesco.com/bulletshares/tools/bond-ladder

 

[pb4uski]

I just logged into Schwab and used their CD & Treasury Ladder Builder Tool to build a 10-year, 10-rung CD/UST ladder... each year selecting whatever was the highest yielding security. 10 positions in total. Less than 5 minutes of work.

Key metrics:

Principal Cost
$1,860,284
Accrued Interest
$4,029.27
Total Par Value
$2,000,000
Average Coupon %
3.04%
Average Maturity
5.4 Years
Average Price
93.01
Average APY/YTM
4.66%
Annual Cash Flow
$60,950.00

Details on the positions: