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

[lawman]

These are all new issues and should be under Fixed Income "new issues" in Schwab.

The CUSIP for the Citigroup 3.75% 1 year note is: 17330PSX8

The Credit Suisse 4% step up note is: 22553QAB3

The Bank of Montreal 4.5% note is: 06368GWK9

Thanks...So when will the Bank of Montreal become available?

 

[madatrub]

Thanks...So when will the Bank of Montreal become available?

Offering period expires Wednesday at 11:30am

 

[lawman]

Offering period expires Wednesday at 11:30am

Excuse my ignorance but what is an offering period?

 

[jazz4cash]

Excuse my ignorance but what is an offering period?

That’s the period that you can purchase the security (unless it sells out prior to).

 

[Freedom56]

Thanks...So when will the Bank of Montreal become available?

The Bank of Montreal 4.5 notes close on 7/13/22. You have to get your order in now if you want it. It won't execute unit 7/13/22. The settlement date is 7/15/22.

 

[lawman]

The Bank of Montreal 4.5 notes close on 7/13/22. You have to get your order in now if you want it. It won't execute unit 7/13/22. The settlement date is 7/15/22.

Thanks

 

[bobbyr]

I looked on schwab this morning and the two most recommended showed up as non-callable?
callable means the bank can return your money at any point?
If you buy into a 1 year item, what is penalty for early departure?

 

[Freedom56]

I looked on schwab this morning and the two most recommended showed up as non-callable?
callable means the bank can return your money at any point?
If you buy into a 1 year item, what is penalty for early departure?

Non-callable means that the issuer redeems the full par value at the end of the term maturity including all accrued interest and not before.

Callable means that the issuer has the right to call the note in accordance with the call schedule. See the attached example for the Bank of Montreal notes. In this example the earliest call date is 7/15/23 and then every three months thereafter. The bank refunds the full par value plus any accrued interest.

If you buy a one year term and want to sell before the term, you have to sell it on the secondary market. You are paid the accrued interest by the buyer an the the price you sold it at. If rates drop, the value of the note increases so you can exit your position with a gain and any accrued interest. If the rates rise sharply the notes will fall in value but the fall will be limited given the short duration. So you could sell below par and receive any accrued interest. You are basically locking up your money for the one year term.

 

[jazz4cash]

Just placed an order for the Bank of Montreal note with IRA funds. I had been looking at these and doing due diligence on bond vs. note. Thanks, Freedom56, your input was very helpful.

 

[Born2Fish]

I have not had any luck finding these on TDA IRA website.

I wanted to grab some Bank of Montreal but my searches did not display it.

Is anyone else using TDA to purchase this note? Where do I find it?

Thanks so much for sharing these opportunities!!

 

[BoredAtWork]

If you are building a monthly income stream via bonds how much exposure do you typically tolerate for an individual bond? The lazy part of me thinks most corporate bonds are semi-annual coupon payments. Find 6 bonds at different monthly coupon payment dates to cover all 12 months in the year. Phase the yields to match the income I need. Concern is with only 6 bonds that seems like a pretty high exposure on each of my overall the portfolio.

 

[Freedom56]

I have not had any luck finding these on TDA IRA website.

I wanted to grab some Bank of Montreal but my searches did not display it.

Is anyone else using TDA to purchase this note? Where do I find it?

Thanks so much for sharing these opportunities!!

At TDA, new issues are under Research & Ideas, Bonds & CDs, New Issues.

Update: TDA is offering this note under the reference above. Select "view all" in the corporate note section.

 

[jazz4cash]

[-]I am looking for corporate notes on Vanguard for DW's account and cannot find them.[/-] Even at Fido they are not easy to find.

At Vanguard, I found corporate notes by selecting bonds/corporate and then using the search tool to select new issue. They have a Citigroup 5yr note 5 callable at 5%. CUSIP 17290AL57. Oh wait this looks familiar.....it was listed in an earlier post from Fido but it only comes up now if I search using CUSIP. I am more comfortable with the Bank Of Montreal note.

 

[Born2Fish]

At TDA, new issues are under Research & Ideas, Bonds & CDs, New Issues.

Update: TDA is offering this note under the reference above. Select "view all" in the corporate note section.

Thanks!!

 

[Freedom56]

If you are building a monthly income stream via bonds how much exposure do you typically tolerate for an individual bond? The lazy part of me thinks most corporate bonds are semi-annual coupon payments. Find 6 bonds at different monthly coupon payment dates to cover all 12 months in the year. Phase the yields to match the income I need. Concern is with only 6 bonds that seems like a pretty high exposure on each of my overall the portfolio.

Yes most are semi-annual payments. My monthly coupon payments are not uniform throughout the year but I really don't care. I look at the quality of the company first and their ability to pay. I have bonds/notes from 22 issuers with varying durations (i.e. multiple duration notes from the same issuer). I also hold CDs from many banks. Yes you should diversify but too much diversification can hurt you. Consider how much bonds funds have from airlines, automobile, retail, energy, and industrial sectors. What's even worse is that those funds continue to buy those sectors when those companies emerge from bankruptcy. Why not? They are only losing "other peoples money". Isn't it much smarter to just avoid those sectors? Some corporate bonds (i.e Johnson & Johnson) are rated higher than treasuries. Just like with stocks, you need to pick solid blue chip companies with a history of profitability and free cash flow. Unlike stocks, you don't need growth to earn money with bonds/notes.

A short duration bond fund like SQLD may give you monthly payments but at a distribution yield of 1.664% who would want that with yields where they are today? SQLD is one of the better performing bonds funds but the bar is so low. Don't be fooled by the SEC yield that bonds funds list. This is yet another scam bond funds use to lure investors. The SEC yield is a theoretical number that has nothing to do with the actual distributions. The distributions are not guaranteed nor is your principal.

The bottom line is it take time to build up a fixed income ladder. On any given month after I receive my coupon payment, I look at yield of corporate bonds, CDs, and treasuries before deciding on what to invest in or I may choose to hold cash and wait for a better yields. You have to ask yourself, would you trust your money to a bond fund that buys a 3 year note from Bank of Montreal with a coupon of 0.70% and now selling it at a 10% loss? Or would you trust your own judgement and buy a 3 year note from the same bank at 4.5%?

https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C997336&symbol=BMO5261885

Just keep in mind that while bond fund distribution yields are lower that CDs, treasuries, or corporate bonds of the same duration, they will be in the "buy high/sell low mode". They are holding far too much low coupon debt. Unless yields drop precipitously, the thrashing bond funds have suffered thus far will only get worse during tax loss selling season.

 

[Freedom56]

From today's webinar at Fidelity: Headwinds and tailwinds: The importance of fixed income in portfolios

This was one of the better presentations. Fidelity should feature people form outside Fidelity more often that their own clueless fund managers. I have attached the presentation material.

Here are my notes from the Q&A section. We actually had some good questions:

What duration should be purchased with new money? Answer: 1-5 years for treasuries or corporates. The yield curve is too flat to buy longer durations. Buy high investment grade credit now.

Should we wait to get higher yields or start to invest now? Answer: Step into short duration high grade bonds now. The rates are more compelling now for high grade bonds than prior years.

What about Muni Bonds? Answer: Fundamentals are good and will improve with funding from the infrastructure bill. A lot of state issuers are sitting on funds that have been allocated from the stimulus and the infrastructure bill will add to that.

Where do you see the best individual bonds values? Answer: We have seen the most of the interest rise already priced into the market. Buy high grade short duration bonds now (treasuries and corporates) and then focus on high yield once the rate uncertainty stabilizes.

Any foreign market bonds look compelling? Answer: The yields in the US are the most compelling. When you move into Euro bonds the yields are lower. Emerging markets have lower credit ratings and you introduce credit risk. Now is not the time to invest in emerging markets but they could be in a few month.

Are preferred stocks considered part of fixed income portfolio? Answer: A preferred stock is more like a bond than common stock. They are higher in the capital structure than common stock but is the lowest part of the capital structure relative to bonds.

How can the Fed bring down inflation with a target fed funds rate 6 points lower than inflation and what is a realistic rate to break inflation? Answer: The Fed is not only raising rates but a lot of their policy is balance sheet reduction. The Fed has held trillions in treasuries and mortgage backed securities. The lack of buying buy the fed is another weight to the financial system. They are no longer a source of demand. The shadow rate is actually the target Fed funds rate over 3.8% and close to double that when you factor in the lack of buying of treasuries and mortgage back securities. Higher rates will eventually cool demand for homes and car loans. Eventually we hit a recession that results in inflation being controlled naturally.

What are your thoughts on high yields and floating rates? Answer: The rise in rates have created some compelling opportunities but you will be taking more risk. The Fed is still running an experiment with their interest rate policy with this level of inflation. They may overtighten and cause a hard landing. If you get higher spreads from high yield it makes sense to "leg" in and over the long term, if you hold those bonds to maturity you will lock in very attractive yields and income generation.

What is American Century's View of the market? Answer: If the chief problem is inflation, you want products that address that such as TIPS and funds and products that address that. Focus on the short duration part of the market.

Would you please talk about I-bonds? Answer: I-bonds have some of the benefits that TIPS have but have to be purchased individually. One of the disadvantages is liquidity and the penalties associated with early exit.

What are the chief concerns of risk right now? Answer: When does the Fed shift policy? Will people return to the labor force and cool wage growth. We don't expect the large number of people who retired early in 2020 to return but many are sitting on the sidelines contemplating a return to work. Commodity prices trends will also cool inflation. Control of COVID is another concern.

Here is a link to their next free seminar on bond pricing:

https://fidelityevents.com/bond-pricing-study

 

[aja8888]

Freedom56: Thanks for the summary and the links. ^^^^^

 

[lawman]

Thanks Freedom

 

[daylatedollarshort]

Thanks you for the sharing your knowledge on buying individual bonds, Freedom56. I've learned a lot from your posts.

 

[BoredAtWork]

Thank you Freedom, very insightful. Looked at some offerings today and the corporate bonds are quite appealing with tenors of 1-5 years. I was initially interested by muni’s as I am in a higher tax bracket and will be in a state with state level income tax. I also feel like Muni’s have been so wrecked in the last 6 months they are a good timing play. The duration on available muni’s in my state though are very long. Like 10-20 years. It is tough to rationalize locking up capital for that long. Any other ways to invest in Muni’s with shorter duration? Not sure I want to check Muni’s out of state because then unclear I get the state income tax break.

I looked at the federal agency offerings too and essentially was same as Muni’s. Really long durations scared me off.

 

[Freedom56]

Thank you Freedom, very insightful. Looked at some offerings today and the corporate bonds are quite appealing with tenors of 1-5 years. I was initially interested by muni’s as I am in a higher tax bracket and will be in a state with state level income tax. I also feel like Muni’s have been so wrecked in the last 6 months they are a good timing play. The duration on available muni’s in my state though are very long. Like 10-20 years. It is tough to rationalize locking up capital for that long. Any other ways to invest in Muni’s with shorter duration? Not sure I want to check Muni’s out of state because then unclear I get the state income tax break.

I looked at the federal agency offerings too and essentially was same as Muni’s. Really long durations scared me off.

The new issues offerings change daily and then there is the secondary market. Therefore you need to check regularly. I really don't like long durations. Right now my ladder does not go beyond February 2031. I am only buying 1-5 years now where 70% of my holdings are.

You have to filter out many of the offerings from Fidelity. For example, today I saw one rated A by S&P from Capital Impact Partners with 4.7% coupon and 15 years duration. This issue made no sense and the company itself is a non-profit serving disadvantaged communities so who wants that? You have to separate investing from philanthropy. How this organization that lives on government grants receives an "A" rating is a mystery. But then again S&P rated mortgage backed securities loaded with subprime loans as "AAA" in the past so we shouldn't be surprised if this is yet another train wreck.

With corporate bonds I always evaluate the particular bond/note based on the probability of default during the term. It's very difficult to see where a company will be beyond 10 years. For the technology sector even 5 years is a long time. Plus the longer the duration, the more volatile the price of the bond.

One way I have invested in muni bonds in the past was through closed end funds (CEFs). These are actively managed and most of them are leveraged. I bought many of them during the 2009 market crash when their distribution yields were 9% and they were trading at at an average 15-20% discount to asset value. Things were going fine until late 2010 a clown named Meredith Whitney forecasted widespread defaults in the muni bond sector. I was sitting on some sizeable capital gains so I exited after two years of tax free distributions and took the hit on capital gains. She was 100% wrong on her call and continued to double down. I just focused on corporate bonds and preferred stocks for short term holdings. Right now leveraged muni CEFs are paying up to 5.5% distributions (tax free). However, return of you capital is not guaranteed (see attached list). They are exchange traded and pay distributions monthly. You can research them at:

https://www.cefconnect.com/fund/MUC

The best time to buy these are when they trade at a significant discount to asset value so you have some level of capital protection. You can calculate your tax equivalent yield at the site referenced above. I'm not buying at this point but will reconsider during tax loss selling season as investors will no doubt harvest their losses.

Hope this information helps.

 

[Lawrence of Suburbia]

Does all this mean that conservative balanced funds like VTINX and VWINX might be better investments going forward, for someone in retirement? With inflation of course factored in? ...

 

[gayl]

So avoid these new issues at this time.

Hear something new every day. Have a lot to read up on

 

[Freedom56]

Here are this weeks corporate note offerings at Fidelity and also TDA:

The safest is Bank of Montreal's 36 month 4.5% callable note.
The best one this week is Wells Fargo's 36 month 4.5% callable note with 18 months of call protection.
The Credit Suisse note does not offer any benefits over the two above and has a lower coupon with a longer duration.
The UBS 1 year note is okay but I don't understand why they issued this as callable note after 6 months.

Avoid the last two from Prospect Capital and National Rural.

The market for high yield notes is recovering and investment grade notes are stable for now. We are just past the halfway mark for the year and hopefully more fund selling will create more opportunities in the secondary markets.

 

[Freedom56]

Attached is the presentation from Fidelity yesterday on bond pricing that some people may find helpful. It helps explain bonds are priced and why prices vary from brokerage to brokerage (i.e. why some brokers are ripping you off).