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

[Montecfo]

I personally have nothing against CEFs but buying them early in the year was bad timing. You really want to buy leveraged CEFs about one month before the last rate hike. Many of these CEFs are deleveraging as borrowing costs far exceed coupon rates of the securities they hold.

You make a good point, that I would take a step further: you can probably be looking at CEF's to buy at a discount as we reach the end of the hiking cycle, if you like and understand these funds. Now is not too early to begin looking.

 

[Freedom56]

You make a good point, that I would take a step further: you can probably be looking at CEF's to buy at a discount as we reach the end of the hiking cycle, if you like and understand these funds. Now is not too early to begin looking.

You have to dig a little deeper into some of these leveraged CEFs to understand their financing terms for their leverage. Normally they borrow short term and buy long term. So when their short term loans mature and they have to borrow at short term rates today, they could end up in a situation where the borrowing costs exceed the coupon of the longer term debt.

 

[OnTheBeach]

Thank you for the insight. I started small at the beginning of the year and have built up the position as interest rates have risen so I have been averaging down the cost. So given the information above - It does make more sense to buy individual bonds at a lower yield and but lower the leverage risk. Have a Happy Thanksgiving.

 

[Closet_Gamer]

What if the Fed starts talking back the rate increases, the level or the frequency, even a bit - like what came out today - and folks start to buy bond funds again. Maybe the opposite occurs and instead of tax loss deals, managers suck up all the good inventory. Nah or ya?

I've been thinking something similar.

We all need to be mindful of recency bias as it relates to interest rates. These big bonds funds are getting crushed by their duration. Duration of 7 and 3% rate hike = (21%) = ouch.

But when the fed reverses, which it will at some point, the durations will serve to refloat the value of bonds and therefore the value of the bond fund.

I sold my broad bond fund early this year and have built some ladders instead.

If we believe we are closer to the end of the rate cycle than the beginning there may be good reason to begin buying back into bond funds. In doing this, one would seeking capital appreciation on the bonds rather than distribution yield.

 

[lordjust]

I've been thinking something similar.

We all need to be mindful of recency bias as it relates to interest rates. These big bonds funds are getting crushed by their duration. Duration of 7 and 3% rate hike = (21%) = ouch.

But when the fed reverses, which it will at some point, the durations will serve to refloat the value of bonds and therefore the value of the bond fund.

I sold my broad bond fund early this year and have built some ladders instead.

If we believe we are closer to the end of the rate cycle than the beginning there may be good reason to begin buying back into bond funds. In doing this, one would seeking capital appreciation on the bonds rather than distribution yield.

is that how the fund managers work? Do they watch the bonds and trade in their poor performers or lower yields for higher yields? If so, wouldn't they have been buying them all this time? I just kind of picturing them waiting for a specific time (bond maturity?) to trade in their bonds for others rather than watching the market. I am speculating here.. so i could be way off base as this is more of a question.

 

[Freedom56]

is that how the fund managers work? Do they watch the bonds and trade in their poor performers or lower yields for higher yields? If so, wouldn't they have been buying them all this time? I just kind of picturing them waiting for a specific time (bond maturity?) to trade in their bonds for others rather than watching the market. I am speculating here.. so i could be way off base as this is more of a question.

Passive bond funds take no such action. Look at BND. The distribution and average coupon have not budged all year. Passive bond funds do something even worse. Every month they sell the shorter duration (now at a loss) and buy longer durations to maintain an average duration. Bond funds need positive inflows to buy bonds. The only buyers are short sellers covering and taking profits. It's all about what a bond fund holds versus what you can buy today. Don't expect a bond fund with a 5 year duration and with an average coupon of 2.4% to outperform even a 5 year 5% non-callable CD.

 

[Closet_Gamer]

is that how the fund managers work? Do they watch the bonds and trade in their poor performers or lower yields for higher yields? If so, wouldn't they have been buying them all this time? I just kind of picturing them waiting for a specific time (bond maturity?) to trade in their bonds for others rather than watching the market. I am speculating here.. so i could be way off base as this is more of a question.

A bond manager doesn't have to be active to see a duration linked change in price of a fund. A perfectly passive, buy-and-hold bond fund will see the prices move too.

Similar to when interest rates are rising, the upside price sensitivity of a portfolio is also linked to its duration. If they are marking their assets to market, the price of a bond will increase when rates begin to drop.

A long duration fund should be just as sensitive to price increases when rates are falling as it is to price decreases when rates are rising.

I don't think rate increases are done ... but those of us who sold our high duration bond funds will want to think about getting that duration back before interest rates begin to fall.

 

[lawman]

Hypothetical question. I would never buy a bond or treasury or C.D. that I did not intend to hold to maturity but having said that I have no idea what I might want money for 3 years down the road. Let's say I buy a $100000.00 5 year treasury that is paying 5%. Lets say something happens 3 years down the road that I need the money for. Let's say that interest rates have not changed since I bought the treasury. I want to know how big of a hit should expect if I sell it on the secondary market.

 

[copyright1997reloaded]

Hypothetical question. I would never buy a bond or treasury or C.D. that I did not intend to hold to maturity but having said that I have no idea what I might want money for 3 years down the road. Let's say I buy a $100000.00 5 year treasury that is paying 5%. Lets say something happens 3 years down the road that I need the money for. Let's say that interest rates have not changed since I bought the treasury. I want to know how big of a hit should expect if I sell it on the secondary market.

If rates stay the same (across the treasury yield curve) you can determine how much the bond would theoretically be worth by comparing it to a another bond with that shorter maturity.

For example, if you bought a 5 year T-Note @ 4.5%, and held it for three years, and rates stayed the same then that 5 year note should price about the same as a new 2-year note does (because the 5-year note would only have 2 years left). You can back into the expected price using a bond yield calculator and adjust the current price to match the now new issue 2-year notes yield. (Minus the hit you would take on the spread.)

Thus, assuming a normal yield curve and no change in rates (positive slope) you would make money (gain on the price).
Assuming a flat yield curve, no gain or loss
Assuming an inverted yield curve, e.g. you buy 10-year notes today which have a lower yield than 1-year bills, loss.

Of course, it is hard to predict any of this - not only where rates will be but the shape of the curve.

ETA: I thought I gave an example similar to this on this (or another) thread about a month ago. I can't look now but will look when I get a chance.

 

[lawman]

If rates stay the same (across the treasury yield curve) you can determine how much the bond would theoretically be worth by comparing it to a another bond with that shorter maturity.

For example, if you bought a 5 year T-Note @ 4.5%, and held it for three years, and rates stayed the same then that 5 year note should price about the same as a new 2-year note does (because the 5-year note would only have 2 years left). You can back into the expected price using a bond yield calculator and adjust the current price to match the now new issue 2-year notes yield. (Minus the hit you would take on the spread.)

Thus, assuming a normal yield curve and no change in rates (positive slope) you would make money (gain on the price).
Assuming a flat yield curve, no gain or loss
Assuming an inverted yield curve, e.g. you buy 10-year notes today which have a lower yield than 1-year bills, loss.

Of course, it is hard to predict any of this - not only where rates will be but the shape of the curve.

ETA: I thought I gave an example similar to this on this (or another) thread about a month ago. I can't look now but will look when I get a chance.

Thanks for the explanation. I guess there are a lot of variables other than interest rates..I'm just trying to decide if I should avoid 5 year durations or if it still might be to my advantage to buy some even if something unexpected should happen that would cause me to sell..

 

[COcheesehead]

Thanks for the explanation. I guess there are a lot of variables other than interest rates..I'm just trying to decide if I should avoid 5 year durations or if it still might be to my advantage to buy some even if something unexpected should happen that would cause me to sell..

I buy to hold. I think that folks need to go into the transaction with that mindset. If the absolute worst happens and you need the funds, you can sell.

 

[beachfire]

My ladder now has an average maturity of 4.8 years with a YTM of 7.6% and an average coupon of 6.1%. As long as the Fed continues to raise rates, The bleeding will continue. I wouldn't give up hope on the fire sale. It will eventually come.

Thanks for all the input Freedom - I am just trying to gauge when to extend maturities. If your average duration is 4.8 years, would it be fair to say that about 1/3 of your ladder has maturities at 7 years or longer?

Thanks again for all the guidance you have provided!

 

[lawman]

Any reason to avoid Banco Santander?

 

[lawman]

I don't understand Treasury auctions. At Schwab they list Treasury Auctions under New Issues. These are not new bills. I would think that a new issue would sell at par. They are priced below par and have first settlement dates that have long since passed..Please help me understand why the U. S. Treasury would be auctioning old bills?

 

[capjak]

I don't understand Treasury auctions. At Schwab they list Treasury Auctions under New Issues. These are not new bills. I would think that a new issue would sell at par. They are priced below par and have first settlement dates that have long since passed..Please help me understand why the U. S. Treasury would be auctioning old bills?

Some are Truly new issues and some are reopening.

https://treasurydirect.gov/auctions/reopenings/

"In a security reopening, the U.S. Treasury issues additional amounts of a previously issued security. The reopened security has the same maturity date and coupon interest rate or spread as the original security, but with a different issue date and usually a different purchase price."

 

[Freedom56]

Thanks for all the input Freedom - I am just trying to gauge when to extend maturities. If your average duration is 4.8 years, would it be fair to say that about 1/3 of your ladder has maturities at 7 years or longer?

Thanks again for all the guidance you have provided!

The longest maturity I have is out to February 2031. I have a lot of maturities in 2027. From June 2028 through February 2031 have no maturities but I intend to fill that hole moving forward and collapse it into a 5 year ladder over time. A 5 year ladder is easier to manage and much less volatile. It also fits nicely with these repeating Fed interest rate cycles (i.e. create bubble, pop the bubble). Unless I start to see higher yields for longer durations, I am not going to buy longer durations. Back in 2009 I was able to buy 10 year non-callable notes from Capital One Financial for 8.8%. Capital one then issued new 10 year notes in 2021 at coupon of 2.359%. I would never touch that. Those 30 year bonds that were issued in the mid to late 90's with high coupons are maturing through 2025-2029 are going to offer the best value next to newly issued bonds/notes.

 

[lawman]

Some are Truly new issues and some are reopening.

https://treasurydirect.gov/auctions/reopenings/

"In a security reopening, the U.S. Treasury issues additional amounts of a previously issued security. The reopened security has the same maturity date and coupon interest rate or spread as the original security, but with a different issue date and usually a different purchase price."

Thanks..I can't imagine why they would do that..If one buys one and pays over par I assume he is going to also pay accrued interest which will be returned with the first interest payment causing one to pay more income tax than one owes. Am I correct..

 

[Freedom56]

Any reason to avoid Banco Santander?

Scandal after scandal - Strip club visits, Madoff connection, botched payments...

 

[lawman]

Scandal after scandal - Strip club visits, Madoff connection, botched payments...

Thanks..When in comes to corporate bonds I know just about as much as the fund manager of the bond fund I sold..

 

[Car-Guy]

The inverted CD yield curve has been getting worse by the day in the past few weeks. Actually, I'm not sure I've ever seen this before. Very strange times

 

[jazz4cash]

The inverted CD yield curve has been getting worse by the day in the past few weeks. Actually, I'm not sure I've ever seen this before. Very strange times

I’m not seeing inversion at Fido.

 

[Car-Guy]

^^^^
As of "now", at Schwab you can get a 1yr for 4.8% and a 2yr for 4.9% but a 3yr is only yielding 4.3% and a 4yr is down to 4.2%. And there are lots of short term CD's available but very few that are longer term, and nothing 5 or more years out. That's been the trend in the past few weeks or so.

 

[NomDeER]

^^^^
As of "now", at Schwab you can get a 1yr for 4.8% and a 2yr for 4.9% but a 3yr is only yielding 4.3% and a 4yr is down to 4.2%. And there are lots of short term CD's available but very few that are longer term, and nothing 5 or more years out. That's been the trend in the past few weeks or so.

Same with Vanguard. At first look, an inversion might not be apparent, but that's only because there are some callable CDs with higher yields in that 3-5 year period. The non-callable ones are in that 4.2-4.3% range.

I think the inversion is partly because banks are expecting interest rates to have fallen by that 3-5 year period. But, I also think what we're seeing today is because it is Friday. I've noticed that any good 3-5 year CDs get wiped out because people snap them up. Recently it seems that there are a few better CD deals on Mondays and no good deals late in the week or over the weekend.

 

[Car-Guy]

Same with Vanguard. At first look, an inversion might not be apparent, but that's only because there are some callable CDs with higher yields in that 3-5 year period. The non-callable ones are in that 4.2-4.3% range.

I think the inversion is partly because banks are expecting interest rates to have fallen by that 3-5 year period. But, I also think what we're seeing today is because it is Friday. I've noticed that any good 3-5 year CDs get wiped out because people snap them up. Recently it seems that there are a few better CD deals on Mondays and no good deals late in the week or over the weekend.

The bold above by me is probably true too.... I haven't been watching it that close but the "pick-ins" are pretty slim beyond 3 years at any % rates at any time these days.

 

[Popeye]

The bold above by me is probably true too.... I haven't been watching it that close but the "pick-ins" are pretty slim beyond 3 years at any % rates at any time these days.

Yeah, non-callable cds in the range go pretty quickly. We should post them in that CD thread if we see them.