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

[Montecfo]

Bought some Agencies

I bought 3 small tranches of FNMA and FHLB noncallable bonds, 18 month duration for the step ladder.

The next m25 bp hike this month appears to be baked in.

 

[GenXguy]

As I stated many times, this economy is strong and getting stronger. The rate hikes are just adding more stimulus to the economy in the form of interest income as there is a lot of cash in the system previously earning almost zero but now generating over $1T in interest income.

That interest income is being offset by taxes and inflation, so there's no stimulus. All of it needs to keep getting reinvested after taxes to maintain close to the original purchasing power. There's no extra money to spend.

 

[Montecfo]

As I stated many times, this economy is strong and getting stronger. The rate hikes are just adding more stimulus to the economy in the form of interest income as there is a lot of cash in the system previously earning almost zero but now generating over $1T in interest income.

The rate hikes are not stimulating the economy. The rate hikes are a drag on the economy. This is why the Fed calls their current posture "restrictive".

 

[Freedom56]

That interest income is being offset by taxes and inflation, so there's no stimulus. All of it needs to keep getting reinvested after taxes to maintain close to the original purchasing power. There's no extra money to spend.

Tell that to my neighbor who is now earning $6300 per month from his cash in risk free T-Bills versus about $90 per year parked in checking and savings accounts at the local bank. At the July 4th BBQ he was even happier when I told him that no state taxes are due on this extra income. The July 4th BBQ turned into an unexpected financial seminar with more people planning to move their excess cash to TreasuryDirect accounts and T-Bills once they learned that they could earn 5%+ on their savings risk free. I was astonished at how many people park their excess cash in checking and savings accounts earning next to nothing. But the food was good.

The math is very simple. People don't spend 100% of their windfall income on inflated goods. Yes he will pay federal taxes on the extra $6300 of interest income but consider the reality that after taxes, the delta income is a significant boost over parking it in an account earning almost zero. Inflation arguments don't apply to windfall incomes which is what is happening.

 

[GenXguy]

Tell that to my neighbor who is now earning $6300 per month from his cash in risk free T-Bills versus about $90 per year parked in checking and savings accounts at the local bank. At the July 4th BBQ he was even happier when I told him that no state taxes are due on this extra income. The July 4th BBQ turned into an unexpected financial seminar with more people planning to move their excess cash to TreasuryDirect accounts and T-Bills once they learned that they could earn 5%+ on their savings risk free. I was astonished at how many people park their excess cash in checking and savings accounts earning next to nothing. But the food was good.

The math is very simple. People don't spend 100% of their windfall income on inflated goods. Yes he will pay federal taxes on the extra $6300 of interest income but consider the reality that after taxes, the delta income is a significant boost over parking it in an account earning almost zero. Inflation arguments don't apply to windfall incomes which is what is happening.

Sorry, but inflation always plays in. There's no real windfall. It's not just the money you spent, but the money that remains that is devalued due to inflation. If you spend all the interest, on inflated goods or not (most everything is inflated), along with fed taxes (and state taxes where they apply), you end up with less purchasing power with what remains. So there's no true windfall. You can spin it any way you like, but that's the reality. And if you feel you can spend it despite losing purchasing power after inflation and taxes, you could have spent down your savings some in the first place when inflation was 2% and interest was 1% to 3% with less dollars coming out for taxes as well.. It sounds like your friends don't know that inflation is actually making that $100000 (or whatever) in T-bills worth a lot less. If it was an financial education seminar, you should have know about this and gotten the word out. You are failing them. They need to keep saving it, there's not really anything extra, unless they are ok with less purchasing power left over, which would have been the case in the past as well.

 

[Freedom56]

The rate hikes are not stimulating the economy. The rate hikes are a drag on the economy. This is why the Fed calls their current posture "restrictive".

Navigating through this period in history requires lateral thinking not the conventional sound bites spewed by the financial media. The Fed never hiked rates in an economy where record amounts of cash were sitting in accounts earning zero and are suddenly earning over 5%. The rapid rise in interest rates are adding stimulus shock caused by all that cash that was earning next to zero. As I stated consistently, long rates are too low and will move higher. This is what is happening now. As the yield curve flattens, long duration fixed income will revert back to yields seen in the past. We may see that soon as investors liquidate their positions out of bond funds and the forced redemptions add pressure to bond prices. In addition, the treasury will be auctioning $1.6-1.7T of longer duration notes and bonds that will put pressure on long yields.

 

[Freedom56]

The 2 year treasury hit a 16 year high today. They yield curve is finally starting to flatten.

https://www.cnbc.com/2023/07/06/us-treasurys-investors-look-ahead-to-key-economic-reports.html

 

[swk7907]

Retail note offerings at Schwab.

14 month 5.8% note from TD Bank rated AA2

2 year 6% note from Bank of Montreal rate A2

5 year 6% note from TD Bank rate A1

You are likely to pick up these on the secondary markets at higher yields.

Why does TD have two different ratings based on the duration of the note? Isn't the credit rating usually just a single rating for the bank?

 

[Freedom56]

pb et al - Thanks for the nudge.

I bought the TD 6.25%.

I am around 60% CDs and 40% investment grade Corp/Agency bonds between FIDO and TDA fixed income holdings, with a 4.90% yield.

Almost all of my TDA fixed income is Corp notes.

Fidelity corp note offerings seem to be more limited.

A bunch of my older low-yielding CDs are maturing over the next few months. I hope to replace those with the higher yielding Corp notes.

All is good!!

A 100% return of capital at maturity is a powerful feature of a fixed income ladder. Rolling maturities and coupon payments over to higher yields as rates rise is a bonus. Keeping durations relatively short, will keep you out of trouble.

 

[swk7907]

pb et al - Thanks for the nudge.

I bought the TD 6.25%.

I am around 60% CDs and 40% investment grade Corp/Agency bonds between FIDO and TDA fixed income holdings, with a 4.90% yield.

Almost all of my TDA fixed income is Corp notes.

Fidelity corp note offerings seem to be more limited.

A bunch of my older low-yielding CDs are maturing over the next few months. I hope to replace those with the higher yielding Corp notes.

All is good!!

It seems that note is only available at TDA. Fidelity only has the TD 6.05%. I'd rather get the extra 20 bps with the extra year until maturity. Looks like it doesn't settle until 7/19 so maybe Fido will have it next week.

 

[Freedom56]

Why does TD have two different ratings based on the duration of the note? Isn't the credit rating usually just a single rating for the bank?

TD bank has a strong capital position (better than any North American Bank right now). Duration is also a factor in assessing risk in a corporate note. So the rating agencies are saying that over the next 14 months, the risk is lower than 5 years.

 

[RetiredAndLovingIt]

Sorry, but inflation always plays in. There's no real windfall. It's not just the money you spent, but the money that remains that is devalued due to inflation. If you spend all the interest, on inflated goods or not (most everything is inflated), along with fed taxes (and state taxes where they apply), you end up with less purchasing power with what remains. So there's no true windfall. You can spin it any way you like, but that's the reality. And if you feel you can spend it despite losing purchasing power after inflation and taxes, you could have spent down your savings some in the first place when inflation was 2% and interest was 1% to 3% with less dollars coming out for taxes as well.. It sounds like your friends don't know that inflation is actually making that $100000 (or whatever) in T-bills worth a lot less. If it was an financial education seminar, you should have know about this and gotten the word out. You are failing them. They need to keep saving it, there's not really anything extra, unless they are ok with less purchasing power left over, which would have been the case in the past as well.

Failing them is a bit of a stretch when you know nothing about these people, don't you think?

 

[Freedom56]

Sorry, but inflation always plays in. There's no real windfall. It's not just the money you spent, but the money that remains that is devalued due to inflation. If you spend all the interest, on inflated goods or not (most everything is inflated), along with fed taxes (and state taxes where they apply), you end up with less purchasing power with what remains. So there's no true windfall. You can spin it any way you like, but that's the reality. And if you feel you can spend it despite losing purchasing power after inflation and taxes, you could have spent down your savings some in the first place when inflation was 2% and interest was 1% to 3% with less dollars coming out for taxes as well.. It sounds like your friends don't know that inflation is actually making that $100000 (or whatever) in T-bills worth a lot less. If it was an financial education seminar, you should have know about this and gotten the word out. You are failing them. They need to keep saving it, there's not really anything extra, unless they are ok with less purchasing power left over, which would have been the case in the past as well.

Okay got it. I'll make a note of your points for the next BBQ.

1. It's better to earn $90 per year than $6300 per month ($75,600 per year) for the same capital.

2. Inflation is making the $75600 worth a lot less so earning $90 a year is better.

3. You will have much less purchasing power with $75,600 per year versus $90 per year due to inflation.

I just hope they don't toss me into the pool after I tell them that.

 

[swk7907]

TD bank has a strong capital position (better than any North American Bank right now). Duration is also a factor in assessing risk in a corporate note. So the rating agencies are saying that over the next 14 months, the risk is lower than 5 years.

Interesting, I never realized they did it like this. Obviously 14 months is less risk than 5 years for any company so are they saying that the risk of 14 months vs. like companies and then the risk of 5 years vs. like companies?

 

[Freedom56]

Interesting, I never realized they did it like this. Obviously 14 months is less risk than 5 years for any company so are they saying that the risk of 14 months vs. like companies and then the risk of 5 years vs. like companies?

Yes. First and foremost, the default risk for "A" rates notes is extremely low. But a AA rating versus an A rating allows the issuer to price their notes to a lower spread relative to treasury notes.

 

[Vincenzo Corleone]

If I may...

I believe what GenXGuy is failing to understand is we're talking about a portion of peoples' portfolios that they WILL NOT risk in equities. This is the FIXED INCOME portion of their portfolios. What I think GenXGuy is trying to say is that putting the money into equities has a better chance of beating inflation with the possibility of lower tax consequences. But it's an apples to oranges comparison in this discussion, which is only considering the FIXED INCOME portion of peoples' portfolios - that is, money they WILL NOT risk in equities. So, yes, 5% in treasuries is a heck of a lot better than .5% in a savings account.

I hope this puts the "inflation/taxes" argument to rest.

 

[GenXguy]

Failing them is a bit of a stretch when you know nothing about these people, don't you think?

No, not when missing out on some basic info.

 

[pb4uski]

pb et al - Thanks for the nudge.
...

For the record, I desire neither credit nor blame! [emoji16]

 

[GenXguy]

Okay got it. I'll make a note of your points for the next BBQ.

1. It's better to earn $90 per year than $6300 per month ($75,600 per year) for the same capital.

2. Inflation is making the $75600 worth a lot less so earning $90 a year is better.

3. You will have much less purchasing power with $75,600 per year versus $90 per year due to inflation.

I just hope they don't toss me into the pool after I tell them that.

I will address the no-context straw men more completely:

1) It's better to earn $2000/yr with only $1000/yr lost to inflation and taxes than $6300 when $8000 of your principal and interest is lost to inflation and additional to income taxes.

2) Inflation is making the $75000 principal worth a lot less, so earning earning 3% on a $75000 CD in a 2% inflation environment is definitely better, as I had been doing in recent years. You will actually come out ahead vs. the high inflation today which erodes your purchasing power on your 5% CD along with taxes

3) Your purchasing power will drop more than $75,000 in the high inflation environment if you spend all your interest, and would drop much less in the low inflation environment possibly not losing anything at all, like if you earn 3% in a 2% inflation environment as I was doing with some CDs in recent years and reinvesting to keep ahead of the game.

They might throw you in the pool if they don't want to hear the truth about their purchasing power not actually increasing after inflation and taxes. But the math is clear. There's not really any extra money to spend until inflation drops. I think core CPI is about 4.6% now. Many of us are paying 27% or more in income taxes on these types of investments. There's no real windfall.

 

[pb4uski]

That interest income is being offset by taxes and inflation, so there's no stimulus. All of it needs to keep getting reinvested after taxes to maintain close to the original purchasing power. There's no extra money to spend.

Whether there is stimulus or not depends on whether the holder perceives that they are richer and whether they respond to that perception by spending more.

While I concede that economically you might be right because real, after-tax returns are low or negative at the same time I think very few people think in real, after inflation, terms and many people don't consider taxes.

I have a good friend who I just helped move a bunch of money from a low yielding bank savings account to Schwab where it's in SWVXX. He just knows that he's getting almost 5% now, whereas before he was getting about 1%, so he feels richer. And it wouldn't surprise me if he ends up spending a little bit more. His income is modest now that he is retired, so taxes are not a factor. And thinking about money in real terms is beyond his comprehension but it almost 5% at least it's money is keeping up with inflation.

 

[GenXguy]

If I may...

I believe what GenXGuy is failing to understand is we're talking about a portion of peoples' portfolios that they WILL NOT risk in equities. This is the FIXED INCOME portion of their portfolios. What I think GenXGuy is trying to say is that putting the money into equities has a better chance of beating inflation with the possibility of lower tax consequences. But it's an apples to oranges comparison in this discussion, which is only considering the FIXED INCOME portion of peoples' portfolios - that is, money they WILL NOT risk in equities. So, yes, 5% in treasuries is a heck of a lot better than .5% in a savings account.

I hope this puts the "inflation/taxes" argument to rest.

No, not even close. I wasn't talking about or comparing to equities in any of my posts.

I understand how all this works, but I know the math. It has to do with Freedom stating there's all this extra money to spend, stimulus to the economy, when in fact, there isn't any "real" extra money to spend because purchasing power is not increased on the investment. I've explained it repeatedly, but the responses are usually straw men throwing back out-of-context numbers avoiding the real math.

So, sure, you can spend all the interest in your 5% CD or bond, but after you do that and pay taxes, your remaining dollars from the fixed environment are devalued - a loss in purchasing power. Because there was not really any "extra" money to spend. You need to keep saving it and reinvesting if you want to retain purchasing power of those investments. Otherwise, you could have just kept spending the money when it was earning less interest as well when inflation was low and taxes were taking a smaller bite.

 

[GenXguy]

Whether there is stimulus or not depends on whether the holder perceives that they are richer and whether they respond to that perception by spending more.

While I concede that economically you might be right because real, after-tax returns are low or negative at the same time I think very few people think in real, after inflation, terms and many people don't consider taxes.

I have a good friend who I just helped move a bunch of money from a low yielding bank savings account to Schwab where it's in SWVXX. He just knows that he's getting almost 5% now, whereas before he was getting about 1%, so he feels richer. And it wouldn't surprise me if he ends up spending a little bit more. His income is modest now that he is retired, so taxes are not a factor. And thinking about money in real terms is beyond his comprehension but it almost 5% at least it's money is keeping up with inflation.

Exactly. That's why I said the previous poster failed his BBQ guests when talking about the interest income. As you said, many people don't think about it to that degree and need that education about what they are really gaining after taxes and inflation take a big bite.

I hadn't seen you posting for a while, so welcome back.

 

[imbatman]

3130AWLM0 (Fido) - 6.14% FHLB (Agency) 7 year (callable in 6-months)

 

[Vincenzo Corleone]

No, not even close. I wasn't talking about or comparing to equities in any of my posts.

I understand how all this works, but I know the math. It has to do with Freedom stating there's all this extra money to spend, stimulus to the economy, when in fact, there isn't any "real" extra money to spend because purchasing power is not increased on the investment. I've explained it repeatedly, but the responses are usually straw men throwing back out-of-context numbers avoiding the real math.

So, sure, you can spend all the interest in your 5% CD or bond, but after you do that and pay taxes, your remaining dollars from the fixed environment are devalued - a loss in purchasing power. Because there was not really any "extra" money to spend. You need to keep saving it and reinvesting if you want to retain purchasing power of those investments. Otherwise, you could have just kept spending the money when it was earning less interest as well when inflation was low and taxes were taking a smaller bite.

OK, I stand corrected. It's the language being used you object to, e.g., "windfall". Got it. But I think saying that Freedom "failed" his friends, is quite a stretch.

 

[Gumby]

I think it would benefit everyone if we all could tone it down a little. It's okay to disagree with an argument. It is not okay to attack someone personally, because that will get the thread closed.