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

[Spock]

I’m seeing some bonds on Schwab that are tempting because of their high yields, over 7%. They are investment grade, but on the low end of that classification. My thought is to purchase no more than $25k for each offering to limit the risk, perhaps less. I’ve included screenshots of 2 of them below.

Is this too much risk for most people here? Has anyone ever had a bond default, and if so did you lose your capital?

I'll fish a low rating for extremely short dates. Too risky for me if the it doesn't mature current year.
But then I view my skew into GSEs to be uncomfortable.

 

[11522914]

That part of the financial world has really changed. I'm not sure why anyone would buy a CD directly from a bank anymore. I guess unless they didn't have a brokerage account.

+100

I'll never buy another non-brokered bank CD.

 

[Montecfo]

+100

I'll never buy another non-brokered bank CD.

Really? Ok.

They are really 2 different products. One has a set rate penalty when closed early, which is sometimes negotiable. And you can sometimes add funds later or withdraw funds penalty free, receive one or more rate bumps, or other special terms.

The other is like a treasury bond except it is very thinly traded and illiquid. No special features except easier to buy.

I am keeping options open.



And rates vary.

 

[jldavid47]

This is why I advocate buying bonds/notes from large money center banks. Two thirds of the population are financially ignorant.

Only two thirds?

 

[pb4uski]

That part of the financial world has really changed. I'm not sure why anyone would buy a CD directly from a bank anymore. I guess unless they didn't have a brokerage account.

True today but back in 2019 brokered CDs and most bank CDs stunk but there were a number of great credit union CD specials available that many of us took advantage of.

 

[11522914]

Really? Ok.

They are really 2 different products. One has a set rate penalty when closed early, which is sometimes negotiable. And you can sometimes add funds later or withdraw funds penalty free, receive one or more rate bumps, or other special terms.

The other is like a treasury bond except it is very thinly traded and illiquid. No special features except easier to buy.

I am keeping options open.



And rates vary.

One has a set rate penalty when closed early
* Won't affect me as I hold to maturity. Have cash always available for unexpected expenses and if I ever have to sell, click a few buttons, sold. No reason to get on phone, call a bank, negotiate and hope they may consider my request. My goal last year was to make life easier. One other thing, if rates drop and I have to sell, I may make a profit. Try that with your bank CD. In early January I couldn't believe what I could sell my brokered 5% non-callable CDs for.

And you can sometimes add funds later or withdraw funds penalty free, receive one or more rate bumps, or other special terms.
* Last year I consolidated most everything to one brokerage account. The days of opening new bank accounts for cds or checking bonuses, etc are over for me. Not chasing rates to earn possibly a few extra basis points. I found brokered CDs are very competitive and easy - easy being the main reason.

Of course if direct bank CDs offered significant % above brokered CDs I may reconsider. Don't see that happening at this time.

 

[Freedom56]

Only two thirds?

Okay maybe 80%.

 

[jazz4cash]

I told them they are all over the place in brokerage CDs. They didnt have a clue to what I was talking about. So I assume they dont have such accounts.

Your golf buds don’t participate in this fabulous forum.
I’ve had a brokerage account for years but didn‘t know about brokered CDs until a couple years ago when the credit union CD specials dried up.

 

[olympic]

One has a set rate penalty when closed early
* Won't affect me as I hold to maturity. Have cash always available for unexpected expenses and if I ever have to sell, click a few buttons, sold. No reason to get on phone, call a bank, negotiate and hope they may consider my request. My goal last year was to make life easier. One other thing, if rates drop and I have to sell, I may make a profit. Try that with your bank CD. In early January I couldn't believe what I could sell my brokered 5% non-callable CDs for.

And you can sometimes add funds later or withdraw funds penalty free, receive one or more rate bumps, or other special terms.
* Last year I consolidated most everything to one brokerage account. The days of opening new bank accounts for cds or checking bonuses, etc are over for me. Not chasing rates to earn possibly a few extra basis points. I found brokered CDs are very competitive and easy - easy being the main reason.

Of course if direct bank CDs offered significant % above brokered CDs I may reconsider. Don't see that happening at this time.

One major difference with bank vs. brokered is the way interest payments are handled. Bank CDs compound. Both have advantages depending on your goals.

 

[jazz4cash]

I am keeping options open.

+100
These markets are fluid. We’re seeing direct CDs from a few credit unions and online banks getting more competitive. The direct products generally have better call protection too. I’m layering a variety of FI products, and…..
I’ll never say never.

 

[Mulligan]

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

Send them to bankrate.com. There are plenty of 5%+ CDs from banks.



https://www.bankrate.com/banking/cds/cd-rates/

I get the impression from them if they cant drive within a 10 mile radius and drop the load off and sign a CD paper contract, it aint happening. A separate example. After a bit of coaxing from me, my best friend finally about 6 months ago extracted his fathers 500k sitting in a bank generating next to nothing and started rolling it into short duration Tbills. His dad doesnt trust electronic transactions at all, but relented after I gave the blessing. Why he trusted my opinion and wouldnt listen to his son is beyond me as it was same advice, as his son oversees his money anyways.
He first would inform him on monies being deposited in Treasury Direct, but lately my friend said he just quit telling him and was buying more anyways because he would just complain about it being taken out of the bank and being sent through a computer to God knows where.

 

[Mulligan]

I’m seeing some bonds on Schwab that are tempting because of their high yields, over 7%. They are investment grade, but on the low end of that classification. My thought is to purchase no more than $25k for each offering to limit the risk, perhaps less. I’ve included screenshots of 2 of them below.



Is this too much risk for most people here? Has anyone ever had a bond default, and if so did you lose your capital?

I dont know about this one, but I personally dont own any A rated debt. All of mine are typically BBB range utility (preferably subsidiary debt) from 2-12 years out now. Its my personal hang up granted, but its the only sector I buy. Such as Philadelphia Electric, Arizona Public Service, New Mexico Public Service, Empire District, Commonwealth Edison, PPL, etc.

 

[Montecfo]

Mulligan,

I have been enjoying your posts and regularly monitor the preferred stock threads where you are very active and such a great help to many.

Do you hold regular equities also or are you mainly in preferreds and debt?

 

[Mulligan]

Mulligan,

I have been enjoying your posts and regularly monitor the preferred stock threads where you are very active and such a great help to many.

Do you hold regular equities also or are you mainly in preferreds and debt?

Ha, no common equities isnt my cup of tea. But I certainly defer to Warren Buffett there… Preferreds now I am mostly just riding the Libor and 3 month Tbill floating wave and some term stuff.

Buffett previously told CNBC that for people looking to build their retirement savings, diversified index funds make “the most sense practically all of the time.”
You can have monkeys throwing darts at the page, and, you know, take away the management fees and everything, I’ll bet on the monkeys [over the advisors],” he said.

 

[Spock]

One major difference with bank vs. brokered is the way interest payments are handled. Bank CDs compound. Both have advantages depending on your goals.

My Discover Bank CD (not brokered) pays interest monthly, non-compounding.

 

[Sunset]

I am amazed at how “old school” some of my retired golf friends are. Yesterday after playing I mentioned one can get 1-2 year CDs at 5% now. They were amazed. So today 3 of them came today calling me crazy as they all called around local banks for these 5% CDs, and couldnt find anything higher than 4%.
I told them they are all over the place in brokerage CDs. They didnt have a clue to what I was talking about. So I assume they dont have such accounts.

I've bought stocks for decades, but didn't know I could buy CD's at the brokerage.
I learned it here....

 

[Freedom56]

Florida Power and light (AA2/A+) have issued two make whole call notes:

FLORIDA PWR &LT CO BOND CALL MAKE WHOLE 5.05000% 04/01/2028

CUSIP 341081GK7

FLORIDA PWR &LT CO BOND CALL MAKE WHOLE 5.10000% 04/01/2033

CUSIP: 341081GL5

The yields are too low and these should trade at yields around 5.75%-5.9% in this environment. Similar notes are available from FPL at yields of 5.4% already so just sit back and wait.

 

[Freedom56]

Treasuries up to 3 years have broken above their November 2022 peak. The 5 and 7 year are about to do the same followed by the 10 and 30 year. We should see some nice yields on high grade corporates and CDs, with call protection, fairly soon.

 

[copyright1997reloaded]

One has a set rate penalty when closed early
* Won't affect me as I hold to maturity. Have cash always available for unexpected expenses and if I ever have to sell, click a few buttons, sold. No reason to get on phone, call a bank, negotiate and hope they may consider my request. My goal last year was to make life easier. One other thing, if rates drop and I have to sell, I may make a profit. Try that with your bank CD. In early January I couldn't believe what I could sell my brokered 5% non-callable CDs for.

And you can sometimes add funds later or withdraw funds penalty free, receive one or more rate bumps, or other special terms.
* Last year I consolidated most everything to one brokerage account. The days of opening new bank accounts for cds or checking bonuses, etc are over for me. Not chasing rates to earn possibly a few extra basis points. I found brokered CDs are very competitive and easy - easy being the main reason.

Of course if direct bank CDs offered significant % above brokered CDs I may reconsider. Don't see that happening at this time.

I try to not make blanket rules. While I agree that brokered CD's have many advantages (for example easy to buy and sell) and allow for consolidation, an individual CD at an institution may have advantages if it has a reasonable early termination penalty. While you might plan on "holding to maturity", if rates go up quickly and the CD is longer term, a better return might be had by terminating the CD, taking the penalty, and reinvesting in a new CD. I did that very thing on a Connexus CD last year which was 4 years in term at a paltry rate. One can think of a early termination penalty as having similar properties as the big guys have when they issue "callable" CD's/Bonds. (In their case, they pay a higher yield to incent you to buy the callable issue.)

Don't get me wrong, I have no CD's at the moment at individual institutions. And yes, there is value in consolidation (and also risk). But "never say never" is my financial model.

 

[Vincenzo Corleone]

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

 

[Rianne]

Treasuries up to 3 years have broken above their November 2022 peak. The 5 and 7 year are about to do the same followed by the 10 and 30 year. We should see some nice yields on high grade corporates and CDs, with call protection, fairly soon.

Using your crystal ball, how long do you see these rates last? Can we safely say into 2024?

 

[Freedom56]

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.

 

[Vincenzo Corleone]

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.

Thanks. Is there any reason not to nibble on this now?

 

[Freedom56]

Using your crystal ball, how long do you see these rates last? Can we safely say into 2024?

The Fed funds will peak this year around June and hold steady well into next year per the Feds own comments. The market is slowly adjusting to this reality. The heavy lifting of the rate increases are over and we will see three more rate hikes. We are reaching a ceiling on rates since the national debt is $31T and counting. This high level of debt will also put a floor on rates and there is a risk of another treasury rating downgrade. The sweet spot in the yield curve is still at the short end. There is no compelling reason to go beyond 5 years unless you can lock reasonable yields up to 10 years. Locking in a 10 year treasury note at 3.5% made no sense and locking in at 4.07% still makes no sense. But if the 10 year breaches 5%, we will see a massive liquidation of bond funds as investors flee those low yielding funds and lock in a risk free 5% coupon. Watch the 20 year treasury also. It was at 4.17% this morning. This period will allow a many retirees to lock a steady stream of income over the next 5 to 10 years with no market risk.

 

[Freedom56]

Thanks. Is there any reason not to nibble on this now?

High grade bonds are gong to yield 6%+ very soon and the coupon is still 4.75%. We are resetting to the October 2022 peak and if the trend continues, we will likely breach those levels across the yield curve. This means the return of the Goldman Sachs 6.75% 5 year notes or 6%+ yields with longer call protection.