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

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Freedom56 said:
When you buy a corporate bond at a discount, the coupon payment is treated as ordinary income and you will receive par value at maturity and realize a capital gain and in this case will be taxed at a 15% rate.
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15% or 20%.
 
Freedom56 said:
There is a structural change to the labor market that many are ignoring. The lowest tier of the labor force have much more spending power ever before due to increased wages and paid benefits. That coupled with deep discounting by retailers with bloated inventories will keep retails sales strong but margins will be much weaker moving forward. Many CEOs are complaining about weak markets, but they should have expected that the $7.8 trillion induced spending spree would eventually end. Much of the layoffs that are being announced now is due to misallocation of capital on worthless projects with negative returns. So when Amazon's CEO announces that the economy is slowing, you really have to wonder why he was funding a space tourism project with profits from his e-commerce empire. Most of the layoffs announced are of workers who are still working from home and refuse to come to the office. Those people should re-think their attitude toward the work from home or I quit attitude. The more people continue to work from home, the more vulnerable they are to being replaced by lower cost labor around the world. People are also changing their spending habits. They are no longer buying things they don't really need as they use to. Consumers continue to spend on travel and leisure. The airports are crowded. Hotels bookings are strong. restaurants and bars are overflowing with people. People are paying a lot of money to attend concerts and other events. If this is a recession, it doesn't feel like one.
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The higher income folks (including a lot of retirees) are continuing to spend especially on travel. Housing (a key economic driver) is off sharply as are auto sales. Repos are up and credit card debt is expanding. Large layoffs announced.

It is a multi-tiered economy. Not everyone will be impacted in the same way or at the same time. What is undeniable is growth has slowed sharply.

Still hoping for a soft landing.
 
Montecfo said:
The higher income folks (including a lot of retirees) are continuing to spend especially on travel. Housing (a key economic driver) is off sharply as are auto sales. Repos are up and credit card debt is expanding. Large layoffs announced.

It is a multi-tiered economy. Not everyone will be impacted in the same way or at the same time. What is undeniable is growth has slowed sharply.

Still hoping for a soft landing.
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Here in SW PA and when we have traveled to eastern PA and across into NJ, the mall parking lots have been full, and in the few times we have gone to a restaurant, there has been a wait of 20-30 minutes. I don't know if they're buying at the malls or "just shopping". No signs of any slowdown that I can see.
 
Freedom56,
Is there a site to see if VG is doing something similar with brokered CD's? I recently purchased a 2 year WF CD at 4.85%.
Thx
 
ER604me said:
Freedom56,
Is there a site to see if VG is doing something similar with brokered CD's? I recently purchased a 2 year WF CD at 4.85%.
Thx
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For new issues of CDs and corporate bonds, you pay par value and the broker receives about 1.2-2% commission from the issuer. You can see that in the prospectus. For secondary market CDs, you are basically out of luck as brokers are only required to provide the last trade price if there is one.
 
Montecfo said:
The higher income folks (including a lot of retirees) are continuing to spend especially on travel. Housing (a key economic driver) is off sharply as are auto sales. Repos are up and credit card debt is expanding. Large layoffs announced.

It is a multi-tiered economy. Not everyone will be impacted in the same way or at the same time. What is undeniable is growth has slowed sharply.

Still hoping for a soft landing.
Click to expand...

There is something else going on. We have been travelling business/first class for the last 32 years for both domestic and international travel. Prior to the pandemic, there were always empty seats in business/first class and most people were travelling for business. Now business/first class is always full and mostly made up of leisure travelers. The airport business class lounges are full of families travelling with kids. Airlines are running full flights through all classes. Growth has slowed down in some sectors as people are no longer buying things they no longer really need. They are spending their money on leisure and entertainment. They are not upgrading their phones and computers unless they break. I think it's going to take more time to work through the $8 trillion of stimulus and there is $1.8 more for infrastructure. Then you have California giving more stimulus money to compensate for inflation.
 
Freedom56 said:
There is something else going on. We have been travelling business/first class for the last 32 years for both domestic and international travel. Prior to the pandemic, there were always empty seats in business/first class and most people were travelling for business. Now business/first class is always full and mostly made up of leisure travelers. The airport business class lounges are full of families travelling with kids. Airlines are running full flights through all classes. Growth has slowed down in some sectors as people are no longer buying things they no longer really need. They are spending their money on leisure and entertainment. They are not upgrading their phones and computers unless they break. I think it's going to take more time to work through the $8 trillion of stimulus and there is $1.8 more for infrastructure. Then you have California giving more stimulus money to compensate for inflation.
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A significant amount of business/first class travel is via upgrades using frequent flier miles. Even back in 2000-2011 when I was travelling for work I would use this technique when possible. (Buy a coach ticket, use points to upgrade.) Similar for hotel points - I had a very nice stash of them (was highest tier at Marriott, Hilton, Starwood, IHG all at the same time) but I've been using them instead of buying hotel rooms. (There are some exceptions to this based on relative value, but my overall preference is to use points.)

I just booked for a friend a couple trips on American - the points delta between cattle class and first made it not that much more to go first class.

I am not saying your assessment isn't partially true - there is definitely a backlog of leisure travel due to COVID. The question becomes how long does it last?
 
Freedom56 said:
There is something else going on. We have been travelling business/first class for the last 32 years for both domestic and international travel. Prior to the pandemic, there were always empty seats in business/first class and most people were travelling for business. Now business/first class is always full and mostly made up of leisure travelers. The airport business class lounges are full of families travelling with kids. Airlines are running full flights through all classes. Growth has slowed down in some sectors as people are no longer buying things they no longer really need. They are spending their money on leisure and entertainment. They are not upgrading their phones and computers unless they break. I think it's going to take more time to work through the $8 trillion of stimulus and there is $1.8 more for infrastructure. Then you have California giving more stimulus money to compensate for inflation.
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yes. Airlines have reduced capacity. And yes, people are still travelling. Travel and leisure is still robust. But all of this is anecdotal.

Let's look at the data. The index of Leading Economic indictors attempts to measure changes in the US economy. 3 consecutive moves in the same direction signal a significant change.

It has declined 8 months in a row and became more negative in October.

“The US LEI fell for an eighth consecutive month, suggesting the economy is possibly in a recession,” said Ataman Ozyildirim, Senior Director, Economics, at The Conference Board. “The downturn in the LEI reflects consumers’ worsening outlook amid high inflation and rising interest rates, as well as declining prospects for housing construction and manufacturing. The Conference Board forecasts real GDP growth will be 1.8 percent year-over-year in 2022, and a recession is likely to start around yearend and last through mid-2023.”

https://www.conference-board.org/topics/us-leading-indicators
 
Fidelity currently has new issue of callable 15-year FHLB bonds with 6.38% expected yield. I just ordered to buy 150k worth but I expect it to be called in 6 months (the earliest callable date) or soon thereafter. I don't see much credit risk or interest rate risk. I am new to fixed income investing so am I missing something?
 
zd500 said:
Fidelity currently has new issue of callable 15-year FHLB bonds with 6.38% expected yield. I just ordered to buy 150k worth but I expect it to be called in 6 months (the earliest callable date) or soon thereafter. I don't see much credit risk or interest rate risk. I am new to fixed income investing so am I missing something?
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Since you are buying the issue at par, the worst case is that you earn 6.38% for the next 6 months and get your $150K bank plus interest. If you are okay earning 6.38% for the next 15 years then you should be fine. It's certainly better than 2.2% for 15 years just a year ago.
 
Freedom56 said:
Since you are buying the issue at par, the worst case is that you earn 6.38% for the next 6 months and get your $150K bank plus interest. If you are okay earning 6.38% for the next 15 years then you should be fine. It's certainly better than 2.2% for 15 years just a year ago.
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Thank you! That's exactly my thinking. When it's called, I will likely reinvest the proceeds in another agency bonds as long as 1) the yield is at least 1% better than the 6-month T-bill at that time, and 2) I am comfortable with the yield holding long-term. Both are true this time.
 
If the yield curve is identical in 6 months as it is now, why would we expect the bond to be called right away?
 
swk7907 said:
If the yield curve is identical in 6 months as it is now, why would we expect the bond to be called right away?
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Good point. So it will unlikely to be called before the yield curve (in particular at 15-year maturity I guess?) is lower than what it is today.
 
zd500 said:
Good point. So it will unlikely to be called before the yield curve (in particular at 15-year maturity I guess?) is lower than what it is today.
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not sure its quite as good (call date sooner) but smidge better yield.. 3133ENU24
 
zd500 said:
Good point. So it will unlikely to be called before the yield curve (in particular at 15-year maturity I guess?) is lower than what it is today.
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The thing to remember with these agencies is that a callable bond is basically a regular bond with a call option tied to it. The premium of a call option is much higher the longer it has until expiration.

So a 15 or 14.5 year call option will cost far more than a 1 year call option and this can be seen in the much higher yield relative to treasuries you see in a 15 year maturity vs. a 1 year maturity (as I'm typing it looks like the 15 year agencies is roughly 250 bps over treasuries vs. a 2 year which is only 80 bps over treasuries). Granted some of that difference is also due to higher credit risk with longer durations but I would guess most of it is from the call option.

So what does this all mean? Basically if the yield curve stays exactly as it is in the short term, I wouldn't expect this bond to be called. As time grows if the yield curve doesn't change at all eventually the bond would be paying too much premium for the shorter duration call option (since the premium for the option is embedded in the higher interest rate) and I would expect it to be called.

I don't know the math on calculating that option so I don't really have an expectation on when it would be called. Buy you can probably compare the yield premium of agencies vs. treasuries across different durations to get a sense.
 
swk7907 said:
The thing to remember with these agencies is that a callable bond is basically a regular bond with a call option tied to it. The premium of a call option is much higher the longer it has until expiration.

So a 15 or 14.5 year call option will cost far more than a 1 year call option and this can be seen in the much higher yield relative to treasuries you see in a 15 year maturity vs. a 1 year maturity (as I'm typing it looks like the 15 year agencies is roughly 250 bps over treasuries vs. a 2 year which is only 80 bps over treasuries). Granted some of that difference is also due to higher credit risk with longer durations but I would guess most of it is from the call option.

So what does this all mean? Basically if the yield curve stays exactly as it is in the short term, I wouldn't expect this bond to be called. As time grows if the yield curve doesn't change at all eventually the bond would be paying too much premium for the shorter duration call option (since the premium for the option is embedded in the higher interest rate) and I would expect it to be called.

I don't know the math on calculating that option so I don't really have an expectation on when it would be called. Buy you can probably compare the yield premium of agencies vs. treasuries across different durations to get a sense.
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Fidelity will show you the spread (if you click on the bond listing) to a similar treasury and that can be used for comparison.
 
So I'm on Schwab looking at that 3133ENU24 agency issue that has a 6.45% coupon. Ask is 100.017 with a YTW of 6.278%.

It has an "Evaluated Price" of 99.6747. The footnote for Evaluated Price says:
Evaluated Price
The evaluation-pricing model is a model calculated estimate determined from alternative information in addition to recent trade data. The price may differ from actual market transactions and should be used for approximate account valuation purposes only. Contact us for additional quote information about a particular holding.
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Can I consider the Evaluated Price to be akin to fair value?

If I look up recent trades for that CUSIP on FINRA recent trades have been 99.917 with a sole recent trade of 100.017 so it would seem that the fair value is 99.917 based on recent trades.

So if I were to buy it online my only choice with Schwab is to buy at their 100.017 limit price. Not that I would bother for 1bp... just looking to learn and understand... but could I call in and place a limit order for 99.917? If so, would there be a commission for placing the order?

Or am I too deep the weeds?
 
pb4uski said:
So I'm on Schwab looking at that 3133ENU24 agency issue that has a 6.45% coupon. Ask is 100.017 with a YTW of 6.278%.

It has an "Evaluated Price" of 99.6747. The footnote for Evaluated Price says:


Can I consider the Evaluated Price to be akin to fair value?

If I look up recent trades for that CUSIP on FINRA recent trades have been 99.917 with a sole recent trade of 100.017 so it would seem that the fair value is 99.917 based on recent trades.

So if I were to buy it online my only choice with Schwab is to buy at their 100.017 limit price. Not that I would bother for 1bp... just looking to learn and understand... but could I call in and place a limit order for 99.917? If so, would there be a commission for placing the order?

Or am I too deep the weeds?
Click to expand...
Same bond is selling at Fidelity for $99.913 with an open bid at $99.65
 
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