bond funds or CDs/Treasuries

[Freedom56]

If you’re getting 4.5% YTM short term, your credit quality has to be pretty low. That would be my only concern with your methods, but to each their own.

I bought Enstar group rated BBB 03/10/2022 4.5% notes at 99.60 back in July. I wouldn't call it a low rated issue.

I bought Ally Financial financial 12/15/2019 4% notes rated BB+ back in June for 98.95

The default risk is nil for those issues at those maturities.

The high yield portion of my portfolio is doing very well as it should during this part of the economic cycle.

 

[COcheesehead]

I bought Enstar group rated BBB 03/10/2022 4.5% notes at 99.60 back in July. I wouldn't call it a low rated issue.

I bought Ally Financial financial 12/15/2019 4% notes rated BB+ back in June for 98.95

The default risk is nil for those issues at those maturities.

The high yield portion of my portfolio is doing very well as it should during this part of the economic cycle.

Bonds are pretty fairly priced. Yield has a cost. You’re either going lower rated or longer duration. That’s just the way it is and if you think as an individual investor you are getting first crack at a “deal”, who is the bond guy going to call first? Fidelity, Vanguard or you? I keep that in mind when buying. I always think, someone with deeper pockets passed on this before me.

 

[Freedom56]

Bonds are pretty fairly priced. Yield has a cost. You’re either going lower rated or longer duration. That’s just the way it is and if you think as an individual investor you are getting first crack at a “deal”, who is the bond guy going to call first? Fidelity, Vanguard or you? I keep that in mind when buying. I always think, someone with deeper pockets passed on this before me.

Not always. When there are ratings downgrades, many funds are into a forced selling due to fund rules, at those times a retail investor have the advantage. This is also the case when there are fund outflows that cause selling to raise cash. I look at the company, earnings, and interest coverage ratio, before ratings which are backward looking. The market will sell off a bond in anticipation of a ratings downgrade and then the bond will plunge on the news and recover before resuming a downtrend. Ratings don't always dictate the yield. Consider this investment grade loser that bond funds love to diversify into - Bed Bath and Beyond:

Bonds Detail

I can find you high yield bonds with the same maturity yielding less. Personally I would never buy Bed Bath and Beyond. The stores are an empty disorganized mess with product stuffed 30 feet high where nobody can reach them without a ladder. Not to mention they have far too many empty stores and you can buy most of their crap on Ebay or Amazon for much less.

 

[COcheesehead]

Not always. When there are ratings downgrades, many funds are into a forced selling due to fund rules, at those times a retail investor have the advantage. This is also the case when there are fund outflows that cause selling to raise cash. I look at the company, earnings, and interest coverage ratio, before ratings which are backward looking. The market will sell off a bond in anticipation of a ratings downgrade and then the bond will plunge on the news and recover before resuming a downtrend. Ratings don't always dictate the yield. Consider this investment grade loser that bond funds love to diversify into - Bed Bath and Beyond:

Bonds Detail

I can find you high yield bonds with the same maturity yielding less. Personally I would never buy Bed Bath and Beyond. The stores are an empty disorganized mess with product stuffed 30 feet high where nobody can reach them without a ladder. Not to mention they have far too many empty stores and you can buy most of their crap on Ebay or Amazon for much less.

Happy investing.

 

[njhowie]

Not always. When there are ratings downgrades, many funds are into a forced selling due to fund rules, at those times a retail investor have the advantage. This is also the case when there are fund outflows that cause selling to raise cash. I look at the company, earnings, and interest coverage ratio, before ratings which are backward looking. The market will sell off a bond in anticipation of a ratings downgrade and then the bond will plunge on the news and recover before resuming a downtrend. Ratings don't always dictate the yield.

Let me also throw another point out there. At least in the case of the muni market, astute individual investors have some distinct advantages over funds and institutions. The big one is a byproduct of the immense illiquidity in the market. In general, the municipal bond market is not active. Brokers also have a 5 bond transaction minimum, and generally in multiples of 5 (though very rarely you will see an oddball number offered - I have acquired 2 and 3 at times which have popped up for some situational reason). This puts technical criteria in place which can cause illogical price dislocations. A block of bonds may sit for days or weeks waiting to be sold. When an institution is buying/selling municipal bonds, they basically ignore those offered in quantities of 5, 10, 20...probably anything below 50 - it's not worth the effort for them. This means for the individual retail investor, he/she is merely competing with and trading against other individual retail investors. When a block of 5 or 10 munis are offered, it is generally the result of the dealer who was able to take them with a low ball bid from the investor who irrationally gave them up on the cheap. The dealer is looking to simply flip these 5 or 10 as quickly as possible and make something on it. This results in being able to get excellent pricing for individuals who take the time to watch what is taking place, and reviewing the history of how much the bonds being offered were acquired for. Because of the illiquidity previously mentioned, 95 times out of 100, you can easily see how much the dealer paid for the bonds being offered and as long as you offer a reasonable markup it will get accepted so he can unload the piddly number of bonds sitting in inventory wasting his time.

 

[COcheesehead]

Fidelity’s system for allowing an investor to sell a muni prior to maturity is to allow dealers to bid on those bonds. On the rare occasion when I had a desire to sell a bond, they would obtain anywhere from 5-10 bids on the bond. I actually made money. No low ball bids as described above.
On the flip side, I have never been able to buy a bond for anything less than ask. Offers are entered for a day or on a kill or fill basis. They always, in my experience, only sell at ask price.

 

[Dtail]

The very high majority of what I buy are pre-refunded/advance refunded municipal bonds. These have already been issued calls and are refunding usually in 3 years or less. For all intents and purposes, these are AAA because they are pre-refunded, irrevocably escrowed with government/treasury securities which pay all remaining interest and principal, and there is an external escrow agent (bank) which manages it through redemption. I like these a lot because they are about as safe as you can get. The funny thing is that you can regularly find them trading at bargains where they are yielding more than munis of significantly lower quality. Like everything else where there is a market, pricing can be illogical. Last week I was able to get some with yield to maturity/redemption of 3.5% for 13 months, another for 3.32% for 10 months, and one for 4.87% for 2 years. Again, irrevocably pre-refunded and escrowed with government/treasury securities.

Of the small remainder (maybe 5% to 10%), most are not AAA, but certainly well above the cutoff for what is considered investment grade. Everything I have here is rated A or better.

Thanks for the detailed explanation.

 

[njhowie]

Fidelity’s system for allowing an investor to sell a muni prior to maturity is to allow dealers to bid on those bonds. On the rare occasion when I had a desire to sell a bond, they would obtain anywhere from 5-10 bids on the bond. I actually made money. No low ball bids as described above.
On the flip side, I have never been able to buy a bond for anything less than ask. Offers are entered for a day or on a kill or fill basis. They always, in my experience, only sell at ask price.

Interesting, as my experience with Fidelity has been almost completely opposite...I'm always bidding below the offer. I don't always get them when doing that, but certainly with some regularity. Another muni investor (who worked as a municipal bond portfolio manager) I know does the same and also has the same experience as I do. With him, he never buys at the offer - he is always looking to squeeze more out of the dealer.

Periodically, when I do request a bid, the 5 to 10 that come back are always pathetic...well below current value.

I also have an account with Merrill Edge, and previously had one with Etrade - both of them do not allow bidding on municipal bonds - you only get to purchase at the offer price. Every now and then I will find a bargain through Merrill - where it is priced better than Fidelity. Also, Merrill does not charge any commission on muni trades.

 

[COcheesehead]

Interesting, as my experience with Fidelity has been almost completely opposite...I'm always bidding below the offer. I don't always get them when doing that, but certainly with some regularity. Another muni investor (who worked as a municipal bond portfolio manager) I know does the same and also has the same experience as I do. With him, he never buys at the offer - he is always looking to squeeze more out of the dealer.

Periodically, when I do request a bid, the 5 to 10 that come back are always pathetic...well below current value.

I also have an account with Merrill Edge, and previously had one with Etrade - both of them do not allow bidding on municipal bonds - you only get to purchase at the offer price. Every now and then I will find a bargain through Merrill - where it is priced better than Fidelity. Also, Merrill does not charge any commission on muni trades.

Maybe it has to do with buying wide. I buy only my state specifc muni’s because of my tax situation. Dealers might not budge on something that narrow. Happy investing.

 

[njhowie]

Maybe it has to do with buying wide. I buy only my state specifc muni’s because of my tax situation. Dealers might not budge on something that narrow. Happy investing.

Could very well be - I have no specific state I'm looking for when it comes to munis. In fact, most I'm buying are taxable munis as they are for my tax deferred accounts.

 

[candrew]

even if they were greek 30 year bonds?

​

Opa!!

 

[meleana]

I want to maybe do this also, but mine are mostly all in IRA's with a Mutual Fund Company. How would I do that?


Others are in a regular brokerage account and when you cash them out there are fees that add up.

 

[copyright1997reloaded]

Who in the world buys 30 year bonds? Not any individuals that I know. How many 30 year bonds do you own?

I have 20 year Tips 2.5% maturing 1/15/2029 that I bought a few months after they were issued...so not 30 years but 20 years. I am still happy with a 2.5% real return. They are happily sitting in a tax deferred account so that I don't have to worry about accrued interest: https://www.treasurydirect.gov/instit/annceresult/tipscpi/tipscpi_detail.htm?cusip=912810PZ5

 

[WWDog]

I planned very well and have a very favorable situation. I bring in more than I use in retirement via pensions and SS. Other than the odd expenditure my savings are rarely touched. I stay in CDs in a ladder and just rotate adding to each year's CD. I sleep very well at night and never deny myself or the wife when we want something. My only worry is someone changing the rules on me which I believe has a higher probability each year.

 

[dixter]

you do realize that corporate bonds that pay at least 10% from the past are still available for purchase... they trade all day long on Fidelity... also bond prices are lower at the market day open than they are during the rest of the day... so bid on your bond purchase early in the day...

as to cash and interest rate adjustments via the FED... as most know the banks these days don't pay much for savings/checking accounts... a easy way to get at least some cash for your money is to open an account with https://www.treasurydirect.gov/
where you can purchase any type of treasury instrument right out of your bank account.. so for example... if you look at the rates this morning... via website
https://www.treasury.gov/resource-c...rest-rates/Pages/TextView.aspx?data=billrates
we can see if you purchased today how much the treasury is going to pay you... all you do is create a personal account... link a bank account and purchase a bill/bond and selected duration... after the duration the treasury sends the funds back to your account and you can purchase it again or set it up auto mode... easy money that you don't have to pay any broker to handle for you...

 

[pb4uski]

They may pay 10% but they probably don't yield 10%.... and if they do yield 10% then they are junk.

 

[COcheesehead]

They may pay 10% but they probably don't yield 10%.... and if they do yield 10% then they are junk.

Agree. People confuse coupon and yield.

 

[dixter]

So if there is any confusion on Coupon rate vs yield...

if you purchase a bond at par value ($1000/shr) then the coupon rate=yield rate...

if you purchase a bond below par, the coupon rate stays the same and the yield rate goes above the coupon rate...

if you purchase a bond above par, the coupon rate stays the same and the yield goes below the coupon rate...

in all cases the coupon rate stays the same... so if the coupon is 10% then you get 10% at par value of the bond..

 

[pb4uski]

^^^^ I suspect that there is a point in there somewhere... the problem is that the coupon rate is totally irrelevant to the true return.

My point was that in this interest rate environment it is totally ignorant to say:

corporate bonds that pay at least 10% from the past are still available for purchase

... perhaps there are, but what's your point?

If the coupon is 10% and it is a decent credit then you'll be paying a lot more than $1,000 and amortization of premium will reduce the yield far below 10%.

 

[dixter]

I just went to Fidelity and did a fixed income search of corporate bonds and set the maturity date to 01/2052 just to get the search engine to populate a set of long term corporate bonds.... I am going to post an example corporate bond that you can easily purchase in the morning....
The search engine shows 20 cusips ( bonds ) I click the coupon column and it populated with highest coupon payouts at the top... so it shows a Corporate Bond by the company Ford Motor... its coupon payout is reported as 9.98 % and a maturity date of 2/15/2047 (28 yrs and a few months) the moody rating is BAA3 and the S&P rating is BBB (This is not a Junk Rating) as of this afternoon the bond is priced above par with a price of $1,306.79/bond or $306.79 above par... so the yield is 7.637% ... so what this indicates at a par value $1000 with a coupon of ~ 10% it will take the bond 3yrs to make up the difference in par vs above par pricing of the $306.79 and at that time the bond has paid for the above par value cost... the remaining years of coupon payouts are now at 10% and the yld is at 10% so long as you hold the bond to maturity in 25 yrs and at that time frame when the bond matures you will get back the par value of the bond of $1000 and that bond over the 25yrs span just paid you $2500/bond... so combined for your initial investment of $1306.79 you now have been paid by the bond a total of $3500.00/bond ($1000 par/bond and coupon payout of $2500) Thats not a bad investment... its easy to just multiply these numbers by a larger investment... say you wanted to have an income stream of $10K/yr... you just purchase 1000 bonds...
oh... and yes this particular bond is call protected... the cusip # 345370BW9 this is just an example and the coupons are paid to you every 6 months for the duration you hold them... there are no fees you have to pay each yr... its not front loaded or back loaded... and if for any reason you need your cash back you just put in a sell order and a couple of minutes later you have the bonds sold and it takes around 5 days for the cash settlement.... its too easy

 

[pb4uski]

I think that you just proved my point... you're paying a 30% premium for a 10% coupon.. the amortization of that 30% premium effectively reduces the yield to 7.6%. The 10% coupon is irrelevant. Same if the coupon were 5% for the same term and credit and the bond was bought at a significant discount. No magic in either.

 

[dixter]

I guess I was just replying to the original poster who was asking about ylds below 5% levels and I'm just showing you don't have to purchase CD's paying 2% or funds paying 3%.... you can create your own bond funds and get an easy easy 7.637% effective yld or if you are young enough let the bonds you purchase pay back the above par costs and enjoy your 10% .... its called fixed income for a reason...

 

[pb4uski]

I think the OP was referring to much shorter paper than 28 years.

 

[dixter]

I guess I look at it a little differently...

to purchase the bond it takes $1306.79/bond... but you get the par value back at maturity of $1000/bond.... so you actually only paid $306.79 for the bond...and a single bond is paying you $100/yr for 28yrs... so for a cost of $306.79 you get $2800.00/bond

 

[pb4uski]

I guess I look at it a little differently...

That is an understatement.