Is this the worst possible time to buy a bond fund?

[clifp]

Dshibb, Brewer is a Wall St professional and specializing in fixed income/credit so the short answer is hell yes he know about real returns. Even bankrupt companies (e.g. GM) debt tends to trade closer to $.10 on the dollar than to 3 or 4 .

More importantly do you got a link to 4.5% liquid account, I'd be very interested in such an investment. Albeit a bit dubious about its safety.

 

[clifp]

Speculate, speculate, oh lolly lolly gonna speculate...

To answer my rhetorical question it is very impossible to save amount for retirement without taking some risk. I used a retirement calc on Schwab (FIRECalc was too sophisticated) and came up with a figure that somebody age 30 wanted to retire on at age 60 at a comparable salary needed to save 35,000 out of their 100,000 salary with 4% nominal return. Even for this LYBM board that would be quite a feat.

Now I know must of us know this, but I think it is worth repeating. One of the consquences (I think it is very much intended) of the unprecedent Fed and treasury actions over the last 6 months is to dramaticallly reprice risk.

An associate of Warren Buffett, said the only asset class this century not in a bubble was risk. The pendulum has swing the other way. I think safe assets are overpriced and risky are underpriced.

As Brewer said in his example they are lots of equity like returns available in corporate bonds right now. And bonds unlike stocks the risk of losing everything is fairly remote even during very tough times.

 

[brewer12345]

As Brewer said in his example they are lots of equity like returns available in corporate bonds right now. And bonds unlike stocks the risk of losing everything is fairly remote even during very tough times.

Actually, I would say that the most valuable feature of bonds is that they mature. You know when you buy a bond that if the issuer does not default you have locked in a certain yield until maturity. In contrast, when you buy an equity, the return might or might not materialize over a particular time period. I spent a few years accumulating a position in a company that was very heavily shorted even though it was a cash cow and ran a generally low risk business. I knew they would eventually buy up enough shares to trigger a short squeeze, but I didn't know when or how far it would go. It eventually happened, but with a bond at an equivalent yield I would have had certainty of timing and a clear indication when to sell (at par or above).

 

[Gearhead Jim]

...
But that does beg the question how does one fund or sustain a retirement with 1 year CD of 2.25% or even longer term ones at 3.5%?
...

With inflation running about -2%, a 3.5% nominal yield is a real yield of 5.5%; not too bad. Inflation will probably pick up some day, but then the CD rates will trend up. Not a way to get rich, but not as bad as you might think.

Actually, I would say that the most valuable feature of bonds is that they mature. You know when you buy a bond that if the issuer does not default you have locked in a certain yield until maturity.
...

That was my point in a previous post, and I can't figure out a way to make a bond fund perform like individual bonds. It could be done if the fund owned only bonds maturing on a certain date and held them to maturity, but no one seems to do that. Thus, my reluctant interest in CD's.

 

[clifp]

With inflation running about -2%, a 3.5% nominal yield is a real yield of 5.5%; not too bad. Inflation will probably pick up some day, but then the CD rates will trend up. Not a way to get rich, but not as bad as you might think.



That was my point in a previous post, and I can't figure out a way to make a bond fund perform like individual bonds. It could be done if the fund owned only bonds maturing on a certain date and held them to maturity, but no one seems to do that. Thus, my reluctant interest in CD's.

Well according to the BLS the CPI for the first 3 months of the year is running at an annualized at positive +2.2.% and in 2008 it was +.1% for the whole year. Other than housing, gas, and selected food prices I am not seeing many price declines.

You may want to check out bond unit investment trust which is a unmanaged collection of bonds with a fixed maturity and termination date. They aren't as popular as they use to be but maybe worth investigating, because I agree that known bond maturity is a very important factor.

 

[dshibb]

ClifP, How about almost all of them? Best Nationally Available High APY Liquid Accounts
Redneck, Advantage, and AmericanNet apparently have fallen, but Coulee is now at the top with 5.01, and 1st Arkansas is at 4.44. Those are reward checking so you need to have a direct deposit(there are ways to fake that if you search that forum) every month. And like 10-15 debits a month. You buy the small items that you need and then go to the gas station a few times and put in like 10 cents to make-up your required debits.

If you don't want the hassle there are two high yield savings at 3.05 and 3.00.

There also have been a few installment accounts that are paying like 5-6 percent, look on the forum(fatwallet) for those.

 

[dshibb]

Correction those Witchita(Redneck, Evantage, etc.) banks are still the best, some idiot edited them down, but according to their websites they are still paying 5.25%. They also don't require a direct deposit and only require 10 debits a month.

I wouldn't worry about safety they are FDIC insured, and the math on rewards checking accounts usually allows the bank to make out okay. The average person having them has way less than the max, and when they use their debit card the bank gets fees back from the seller; that accounts for like 2.5% annually(don't confuse that amount for the % fee they are charging the merchant). After that from what I can tell most of these high yield banks are offering those for one of two reasons. The first is that they are in expansion and acquisition mode right now and its still cheaper credit than what other companies get for floating a bond. At least that was the case when the WSJ did an article on Beal Bank.The second and more common is that they are teaser rates that are subject to change significantly in like a year.

 

[dshibb]

Hey brewer, sorry for the comment earlier, I'm not the biggest fan of corporate bonds that yield less than 15% in this environment. Primarily because of the inflation factor and the fact that the stock market is very high beta and when they have a bull they really have a bull, but of course that goes the other way too.

I am curious to hear any other higher risk/higher yielding bonds that you would recommend.

 

[brewer12345]

I am curious to hear any other higher risk/higher yielding bonds that you would recommend.

To be clear: I am recommending nothing to anyone. I mentioned some individual issues I have bought as an illustration of what is out there, not because I am recommending anything to anyone.

Other stuff on the menu lately:

- Aspen preferred: AHL preferred series A. This is exchange traded with a $25 par and a 7.4% coupon. I have ben buying between $12 and $12.50 for a 15% yield. The coupon is a qualified dividend. They are similar to Axis capital, and have continued to make money during this mess. Interestingly, they recently bought about a third of this issue of preferred at $12.50, which suggests they have ample cash and capital.

- Ford Motor "baby bonds": These are 202X $25 par bonds that are exchange traded. They come up as F+A at Schwab. I bought at $10 and under on the view that an 18% yield on a bond issued by a company I think will ultimately "make it" was worth a modest fling. If they do end up going BK, the govt isn't involved so won't be pulling a cramdown like they are with Chrysler and GM. There are similar issues from Ford Motor Credit under tickers FCZ and FCJ. I view Ford Credit as a better credit than Ford Motor, and likely to stay out of BK even if Ford Motor files.

- ArcelorMittal: Today I bought some senior unsecured bonds maturing in 2018 at about a 10% yield. This is the world's largest steel company which has vertically integrated into both raw materials (coal, iron ore, zinc, etc.) and downstream (steel service centers, value added products, etc.). They are BBB rated and appear to have sufficient cash and liquidity to ride out the recession. If not, as a bondholder I would get an equity stake in the largest steel company in the world. I only bought a little of this and am watching to see if I get a chance to buy a material amount at a more attractive price.

There are lots and lots of very attractively priced bonds out there and this is just a sampling. Go look at what your broker has to offer.

 

[clifp]

ClifP, How about almost all of them? Best Nationally Available High APY Liquid Accounts
Redneck, Advantage, and AmericanNet apparently have fallen, but Coulee is now at the top with 5.01, and 1st Arkansas is at 4.44. Those are reward checking so you need to have a direct deposit(there are ways to fake that if you search that forum) every month. And like 10-15 debits a month. You buy the small items that you need and then go to the gas station a few times and put in like 10 cents to make-up your required debits.

If you don't want the hassle there are two high yield savings at 3.05 and 3.00.

There also have been a few installment accounts that are paying like 5-6 percent, look on the forum(fatwallet) for those.

The reward checking seem very gimmicky to me, sort of like trying to play the balance transfer game (another popular pastime at Fat Wallet) with lots of restriction including a limit of 10K to get maximum interest for the Redneck bank.

I've been moderately burned several times with teaser rates disappearing or in the case of Netbank, disappearing completely (FDIC takeover) and going through the moderate hassle of seeing my account transferred to ING direct.

On other hand the 3% savings account do seem like they would be a reasonable alternative to CD. After a bit of searching I also found that Schwab bank now offers a high yield savings 2% which is higher than the best Schwab Money Market. And for me worth the trouble of setting up yet another account.

 

[dshibb]

Thanks for the information Brewer.

Well currently evantage, redneck, etc. are 25K, but I figured out why they are all getting listed lower. Letter just went out, "Due to the high demand for our reward checking accounts we are lowering out apy to 4% on the first 10K effective may 5th. But Coulee is still paying out 5.01. And the best way to play it is to link your orange to the account and when they lower the rate just move it out and find another one.

And reward checking isn't gimmicky, the math completely checks out when you get an average joe performing well over a dozen transactions a month, but they always run the risk of having a flood of rate chasers fly into their bank and skewing their margins. All I can say is if you have the capital, its worth the game.

 

[cardude]

Follow up on this...........

I'm trying to get my AA together, and a large part of it is going to be Vanguard bond funds, probably VWITX.

Since I need a bond fund at some point, and since VWITX does not seem to move around all that much anyway (although over the last 5 years it was down about 10% during late 2008), do I just bite the bullet and do it now or is something coming over the horizon that should make me wait? It will be a big investment, so I don't want to totally miss-time it.

Thanks..........

 

[DblDoc]

cardude;

I had a similar decision to make several years ago. While not as much $ as you are working with it was my entire portfolio. My reading at the time and based on discussions at Bogleheads is that, just like any other attempt to time the market, it is a fools errand to time your transition. The intellectual decision should be based on decided that this is your AA going forward and do it all carte blanche. Of course there is the emotional/behavioral side to investing which cannot be ignored. If you would be devastated if your move to VWITX was to result in a loss in the short term then you may be better off to move into that position over some period of time by DCA.

DD

 

[Stevewc]

Just one thought: Be prepared to see the NAV drop if interest rates go up.
But, if you stay in the fund long term it shouldn't matter.
Steve

 

[cardude]

Just one thought: Be prepared to see the NAV drop if interest rates go up.
But, if you stay in the fund long term it shouldn't matter.
Steve

That's why I *think* I should DCA into it, because it seems rates have nowhere else to go but up, but how many years do I DCA into it while I wait on this to happen, and how much yield would I lose compared to my lowly current cash yields while I wait?

Sounds like damned if I do, damned if I don't...............

 

[Stevewc]

I'm struggling with the same problem.
I noticed the FED plans to stop buying treasury's in OCT.
Will this event cause interest rates to start moving up?
Trying to time the bond market is a tough proposition.
So you probably have the right way to do it, Little by little.
Another thing that is often recommended, go for shorter term funds.
You could also shop for individual Muni bonds in your State for better tax advantage. I personally do both, funds and individual.
Steve

edit to add: I missed what was probably the best buying time of my life for muni's as the market crashed 2008 2009. I bought stock funds all the way down but couldn't bring my self to buy muni's that were doing the same thing. I was a deer in the head lights, I guess. You got to admit it all looked like armageddon.

 

[FIREd]

I just bought some more VWITX this morning. I feel good about it. I think it will be a while before rates start moving up sharply, and in the mean time I want to enjoy the 4% tax free yield. When the muni yield curve starts flattening, then I'll start moving to the shorter end of the curve. It just seems too early.