Bond fund question

[lawman]

Just be patient and hold cash in a money market account. Here is my take on interest rates. We are forming a short term bottom on yields and they will tick up over the course of 2022 to deflate the bubble that has been forming in equity markets, commodities, and crypto currencies. The risk off trade is in effect. The rise in interest rates will then pause in 2023 and then slowly head back down. The bond market will discount this by the end of 2022. So much money has flowed into equity markets over the past 18 months that we have completely worthless companies like Gamestop, AMC, and other meme stocks are still trading at ridiculous valuations. This is no different than 1999 but with significantly more capital flowing into the markets. Like all bubbles, this one will pop too,

As a bond investor, I am not changing my strategy and I will buy short/medium term corporate bonds/notes of stable and profitable technology, e-commerce, pharma, biotechnology, and telecom companies with coupons over 4% when they drop below par. I will avoid retail, energy, and industrial sectors. Don't worry about bond ratings but focus on company profits and free cash flow and credit default swap rates. "BB" rated bonds in many cases are safer than many "A" rated investment grade bonds. Boeing is a good example of how to get burned by buying an A rated corporate bond at a premium only to see it's rating to fall to BBB- and soon below investment grade. Using this buy low and hold to maturity/sell high strategy will result in a long term 7-8% return for bonds. When the market drops everything drops and there is a lot of irrational selling by funds that are forced to liquidate their holdings as they are hit with redemptions. That is the best time to buy individual bonds. If you don't want to buy individual bonds, buy a CEF rather than an ETF. CEFs are actively managed and can take advantage of irrational market selling. Many muni bond CEFs are hitting 52 week lows every day and are trading at discounts to their asset value. Keep an eye on them and buy non leveraged muni bond CEFs when they start yielding 5% (they are just over 3% now) and over 6.5% for leveraged muni bond CEFs (they are 4.8% now). The chart patterns on those CEFs are screaming that a buying opportunity is about to emerge very soon.

I can only wish I had the knowledge to do that...Thanks and good luck!

 

[Dog]

She just basically went over all the pertinent info. regarding the two funds I own. She made no recommendations which really surprised me..She thought my two funds should continue to serve me well and that she thought the current share prices probably already reflects a couple of rate hikes later this year..

Thank you. I guess that is good news for you [emoji4]

 

[COcheesehead]

What criteria do you generally use, if you don't mind sharing the secret formula?

Mr Graybeard has good advice.

What I’ll add is…

Understand the difference between coupon and yield to worst. People mix them up.

Determine what you want from the ladder. I built mine under the premise of bridge me to social security with all the income I need to ward off SOR and not have to touch my equities.

If your state has income tax, you may want to only choose your state specific bonds. They’ll be double tax free.

Search the duration to meet your goals. Stagger them to mature as you’ll need the funds. I have mine out almost ten years, but I started in 2015 when rates were higher.

Read the ME - material events to see if the bond is upgraded, downgraded and what funky things are related to it. The devil is in the details.

Like Mr Graybeard I go for only big coupons 4% -5%+. If it doesn’t get called, you win. If it does, you still make more than a CD - tax free and you have fresh funds to spend or invest.

I don’t trade. I hold to maturity. I bought these for income. Not to pay capital gains.

GO - general obligation are a bit less risky because they are paid by taxation. Specific project bonds - hospitals, airports, etc depend on only the revenue of that specific project.

Some bonds have a depth of book quote which may be better than the posted quote, so check that out.

Don’t be afraid to go long. The yield is better and if what everyone expects to happen doesn’t (does it ever?) you’ll be happy.

There’s probably more, but I have bought so many bonds over the years some of it is just intuitive to me. Right now my ladder has almost 135 different bonds and throws off between $125,000 and $205,000 until about 2031 - tax free. I like that peace of mind.

 

[lawman]

Mr Graybeard has good advice.

What I’ll add is…

Understand the difference between coupon and yield to worst. People mix them up.

Determine what you want from the ladder. I built mine under the premise of bridge me to social security with all the income I need to ward off SOR and not have to touch my equities.

If your state has income tax, you may want to only choose your state specific bonds. They’ll be double tax free.

Search the duration to meet your goals. Stagger them to mature as you’ll need the funds. I have mine out almost ten years, but I started in 2015 when rates were higher.

Read the ME - material events to see if the bond is upgraded, downgraded and what funky things are related to it. The devil is in the details.

Like Mr Graybeard I go for only big coupons 4% -5%+. If it doesn’t get called, you win. If it does, you still make more than a CD - tax free and you have fresh funds to spend or invest.

I don’t trade. I hold to maturity. I bought these for income. Not to pay capital gains.

GO - general obligation are a bit less risky because they are paid by taxation. Specific project bonds - hospitals, airports, etc depend on only the revenue of that specific project.

Some bonds have a depth of book quote which may be better than the posted quote, so check that out.

Don’t be afraid to go long. The yield is better and if what everyone expects to happen doesn’t (does it ever?) you’ll be happy.

There’s probably more, but I have bought so many bonds over the years some of it is just intuitive to me. Right now my ladder has almost 135 different bonds and throws off between $125,000 and $205,000 until about 2031 - tax free. I like that peace of mind.

I feel stupid.

 

[aja8888]

I feel stupid.

Nah, lots to learn trading bonds. Call the bond desk where you have an account and ask them to help you buy a bond and they will walk you through it. Once you go through the process you will see that it is not as complicated as you think.

I'm pretty sure Investopedia (website) has a bond tutorial.

 

[lawman]

Nah, lots to learn trading bonds. Call the bond desk where you have an account and ask them to help you buy a bond and they will walk you through it. Once you go through the process you will see that it is not as complicated as you think.

I'm pretty sure Investopedia (website) has a bond tutorial.

I'm familiar with the basics of bonds but I'm quite sure that's just enough knowledge to really screw up in this difficult environment..The bond fund that I think I need to sell is PFORX. It currently is only yielding a little over 1%....I just don't know what to buy..I don't plan on needing the money anytime soon but I still don't want to take on a lot of risk.

 

[aja8888]

I'm familiar with the basics of bonds but I'm quite sure that's just enough knowledge to really screw up in this difficult environment..The bond fund that I think I need to sell is PFORX. It currently is only yielding a little over 1%....I just don't know what to buy..I don't plan on needing the money anytime soon but I still don't want to take on a lot of risk.

If you are not interested in buying individual bonds, then take your cash from the sale and buy into something like BND and spread the purchases out over the next two years and follow interest rates up as the FED raises them. Over time BND will trade out their positions and be current. No one has a crystal ball.

Just be glad you don't own any Bitcoin bought at $60K!

 

[lawman]

If you are not interested in buying individual bonds, then take your cash from the sale and buy into something like BND and spread the purchases out over the next two years and follow interest rates up as the FED raises them. Over time BND will trade out their positions and be current. No one has a crystal ball.

Just be glad you don't own any Bitcoin bought at $60K!

Yeah I think I'll pass on bitcoin..

For some reason I've never been one to dollar cost average..I either want in on something or out of something..My gut is telling me bond funds are dead weight for at least the next year..I guess I'll do nothing..I'd just about as soon have my dead money in a bond fund as money market...

 

[aja8888]

Yeah I think I'll pass on bitcoin..

For some reason I've never been one to dollar cost average..I either want in on something or out of something..My gut is telling me bond funds are dead weight for at least the next year..I guess I'll do nothing..I'd just about as soon have my dead money in a bond fund as money market...

You could always buy a MYGA for three years and make about 2% annually.

 

[lawman]

You could always buy a MYGA for three years and make about 2% annually.

MYGA

 

[aja8888]

MYGA

Multi year guaranteed annuity.

https://www.blueprintincome.com/fix...PtFHHOEPghsZMGxozCTWE2wa_fOuFgqhoCE0YQAvD_BwE

Several folks here buy them.

 

[lawman]

Multi year guaranteed annuity.

https://www.blueprintincome.com/fix...PtFHHOEPghsZMGxozCTWE2wa_fOuFgqhoCE0YQAvD_BwE

Several folks here buy them.

Can I buy that inside my Schwab brokerage account or does it have to be in an I.R.A.?

 

[Dtail]

Can I buy that inside my Schwab brokerage account or does it have to be in an I.R.A.?

It does not have to be in an IRA. I bought some for my parents in their brokerage trust account.

 

[aja8888]

Can I buy that inside my Schwab brokerage account or does it have to be in an I.R.A.?

Either place.

 

[JJpop]

Is there anything now that can give me a 2% return with a reasonable degree of certainty that will be relatively stable?

Yes. Look into MYGA’s.
Fixed annuities that are similar to CDS but without FDIC.
Your state should have a special insurance to back you if the insurance company went bankrupt. Very safe if you buy from a good company. Terms are usually 2 to 10 years.
I have a 4 year and a 5 year both paying 3.05 pct in my IRA.

 

[Dtail]

Yes. Look into MYGA’s.
Fixed annuities that are similar to CDS but without FDIC.
Your state should have a special insurance to back you if the insurance company went bankrupt. Very safe if you buy from a good company. Terms are usually 2 to 10 years.
I have a 4 year and a 5 year both paying 3.05 pct in my IRA.

A fan of MYGA's too.
To note, that with current rates, one would have to dip into the B+ credit quality to receive a 3% 5 year contract.
One should know also that there are penalties for larger early withdrawals.

 

[ERhoosier]

Not a fan of MYGA's, especially from less that top-financial strength companies. And not just because locking in a fixed rate of interest today WILL look less attractive as present interest rates rise (as the Fed has basically stated they will).

MYGAs are an insurance product, not a CD (FDIC insured) or an investment grade bond (that you can readily sell on the secondary market). Early withdrawal may be prohibited or come with significant financial penalty (typically 10% declining over the years). Some have (IMHO sneaky) automatic renewal provisions (like only 30d at renewal to WD your $$ or it renews for another term). And while state insurance guarantee associations provide a backstop (up to state-specific limits), it make take years to get your $$$ as an insolvent insurance company goes through the court bankruptcy process.
https://www.boomermoneyandmore.com/...-bankruptcy-like-i-did-three-must-do-actions/

Back to the OP's question- With interest rates all but certain to rise, all of my fixed income holdings are short term instruments held to maturity. The slightly higher interest rates of intermediate to long term bonds is simply not worth the risk (e.g. 1% drop in principle value for each year of effective bond duration).

 

[mickeyd]

My financial advisor is wanting me to sell

Red flag...what do you want to do? It's your money.

 

[gt5059b]

He suggested VTIP which is a TIPS fund. I think it is likely a good move but I'm hesitant because I don't understand how they work..I do know that VTIP had a 3 year period of negative returns which I do not understand..

No idea where you're looking, but VTIP current 3 year annualized return is 4.56% if you reinvested dividends.

 

[young-ish]

Your advisor is attempting to predict the future. Are you comfortable with an active investing approach or are you interested in a passive investment strategy? Your answer to this question dwarfs any predictions about interest rates.