Callable Bonds & CDs being called

[lem1955]

I didn't really understand the risk of fixed income securities being called when I invested and now have a stack of lots of callable securities. Two have been called so far. Do you avoid callable securities when interest rates are falling?

 

[Jerry1]

I avoid them period. Callable securities carry the risk of being called. That’s one reason they pay higher rates. Nothing wrong with that, I just don’t want to deal with it.

 

[audreyh1]

I have never bought a callable bond or CD. Too screwy. I don’t need the complication.

 

[Car-Guy]

I have avoided callable CD's like the plague. One of the things that attracted me to fixed income instruments was the predictability. (Really the guarantee) My crystal ball works perfectly on my non callable CD's.

 

[lem1955]

Learned my lesson. Thanks for the replies.

 

[jazz4cash]

You have to look at the call schedule and understand the details. Also if the coupon is low on a bond being sold at a discount you can find good yield with low risk of call. There are many callable bonds that have 1st call 1-3 months before maturity. They do it to meet liquidity regulations. If you avoid all callable bonds you won’t find these. With rates dropping issuers are tightening up call provisions so it’s getting harder to find good stuff.

 

[frayne]

I avoid them period. Callable securities carry the risk of being called. That’s one reason they pay higher rates. Nothing wrong with that, I just don’t want to deal with it.

Exactly.

 

[Chuckanut]

Callable bonds and CDs are the borrower’s way of transferring interest rate risk to the lender. As a lender you should be paid handsomely to take this risk. For me that means at least 1% more than the non callable rate. I have bought several at 1.2% more than non callable.

However, that still leaves the issue of what to do with the things when they mess up the steps on your nicely designed ladder. For that reason, I tend to avoid the things. Also, the premium for callables seems to have come down lately, though that is only my personal observation.

The best way to buy callables is at a discount on the secondary market when the coupon interest rate is significantly lower than current and anticipated future rates. That makes the borrower unlikely to call the bond/CD. FWIW, those are not easy to find. People with more time and skill than I seem to find them from time to time.

FWIW, I have several agency bonds at 5.75% that are probably ripe for being called.

My 2¢. YMMV. Take what you wish and leave the rest.

 

[pb4uski]

+1 I don't avoid them if I can get a reasonable premium over non-callables and depending on their coupon rate and when the first call is and my target is a 1% or more yield premium.

I have 52 callables out of 87 total positions. But 15 of those are what I refer to as non-callable callables... with coupons that are low enough that it is very unlikely that it will ever be called... 12 have coupons of 3.25% or lower. Another 3 are corporate bonds that I learned something new about... they are technically callable but the first call is less than 6 months prior to maturity so there is lots of uncallable term left in them.

I've had 4 calls over the last month or so... 3 agency bonds and a partial call of a preferred. The 3 agency bonds were high yield payers that I didn't really expect to last long.

My experience is that agency issues have higher call risk than corporate issues.

 

[imbatman]

I buy lots of callables because that is almost all of the market out there today, and I don't mind if the call is years out or I buy a low rate that is very unlikely to be called. Buying my own fixed income, I have slowly loosened all my screening filters over time as I have learned how to live with different situations and use them to get some above market income. But I don't mind spending the time and will make the effort even just for an extra 1%..........just this week I bought a 6.3% agency callable in September because otherwise my "fire sale" standby cash is only earning 5% via MM. I don't see my having any problems selling the 6.3% bond if I need the money sooner.

 

[Rianne]

I'm starting to look into agencies. It's easy to click "noncallable" and find several 4-year, purchase prices < 100, with 4%+ coupons. There were 75 noncallable available but I paid attention to the purchase price, coupon, and maturity date. I"ll have to call VG bond desk to walk me through buying these.

 

[jazz4cash]

Glad to see some alternative ideas to ‘never buy callables’. I had been cautious about buying deeply discounted bonds due to de minumus rules but just realized I can get around that buying within IRA. I see plenty of low coupon discounted bonds esp munis

 

[Al18]

I don’t understand why you would buy a state tax free municipal bond inside an IRA, because would end up paying Federal and State taxes when you withdraw it from the IRA.

 

[imbatman]

There are TAXABLE municipal bonds that pay higher rates than the exempt versions. I got some great AA1-AA3 in my Roth IRA paying 6.1 - 6.5%.

 

[savory]

I buy lots of callables because that is almost all of the market out there today, and I don't mind if the call is years out or I buy a low rate that is very unlikely to be called. Buying my own fixed income, I have slowly loosened all my screening filters over time as I have learned how to live with different situations and use them to get some above market income. But I don't mind spending the time and will make the effort even just for an extra 1%..........just this week I bought a 6.3% agency callable in September because otherwise my "fire sale" standby cash is only earning 5% via MM. I don't see my having any problems selling the 6.3% bond if I need the money sooner.

Thanks for teaching me this several months ago. It has been a significant lesson for buying bonds!

 

[euro]

+1 I don't avoid them if I can get a reasonable premium over non-callables and depending on their coupon rate and when the first call is and my target is a 1% or more yield premium.

I have 52 callables out of 87 total positions. But 15 of those are what I refer to as non-callable callables... with coupons that are low enough that it is very unlikely that it will ever be called... 12 have coupons of 3.25% or lower. Another 3 are corporate bonds that I learned something new about... they are technically callable but the first call is less than 6 months prior to maturity so there is lots of uncallable term left in them.

I've had 4 calls over the last month or so... 3 agency bonds and a partial call of a preferred. The 3 agency bonds were high yield payers that I didn't really expect to last long.

My experience is that agency issues have higher call risk than corporate issues.

Thanks for providing a perspective on how frequent such calls actually are. Of course, it will depend on the direction and magnitude of interest rate changes, but as I suspected, calls seem to be relatively rare on average, so it isn't THAT big of a risk. Plus, the downside is really quite limited anyway.

 

[Montecfo]

I generally avoid callables because they tend to return money to you in a lower rate environment than when you invested, which is at odds with my investment objective.

I do sometimes buy "cushion callables" e.g., those issued long ago at lower rates and thus unliklely to be called. But those also tend to have little to no rate premium.

 

[MichaelB]

I have some callable bonds, and in the past month Fidelity has sent me 2 call notices for bonds that subsequently were not redeemed. Very odd.

 

[pb4uski]

Yes that is odd. I've never had that happen before.

 

[L-5Player]

I have intentionally bought a few callable agency and corporate bonds whose initial call dates match my planned use for the money. The agency bonds also have the benefit of being state tax-exempt, so I don't have qualms about holding them in a taxable account, where the yield handily beats money market funds.

Unless inflation sticks so much that rates don't drop for the entirety of 2024 and 2025, these bonds should get called in a timely manner for me to use the proceeds as I intend. And if for some reason this doesn't happen, I have other sources. That's key. Otherwise there would be too much risk of the bonds not being called.

If I were buying these particular bonds for long term income and/or hedging against equities, then the risk of being called disrupts that objective. So like most areas of investing, there is nuance here and one must invest in pursuit of one's goals.

 

[Badger]

I have avoided callable CD's like the plague. One of the things that attracted me to fixed income instruments was the predictability. (Really the guarantee) My crystal ball works perfectly on my non callable CD's.

+1 I look at callable CD's as a little like a semi-crap shoot. I'm adverse to gambling.

 

[big-papa]

I never directly hold a callable security regardless of where interest rates are going. I have indirectly held them in Muni bond funds and an ultrashort bond fund I currently hold has some underlying bonds that are callable.

Cheers.

 

[Stormy Kromer]

To me the callable portion destroys the whole concept of fixed income.

 

[Surewhitey]

We have 4 of 25 callable CDs and 3 have passed the 1st date surprisingly. 2 are 5 yr @ 4.75 & 5.25%. Kinda surprised the 5.25 didn't get called.

We don't mind callables if you get a couple of years before 1st date & more than the 2 yr non callable. Generally I don't prefer them though for the certainty of the 5-10 yr non callable. We have a decent 5 yr ladder going & liking the 4.58% average guarantee.

 

[TickTock]

Most of our bonds are callable (some CDs, as well). To date, one bond has been called (Citigroup, 6%, this January, maturity this August).

We'll see what happens. I'm still pretty new (~18 months) at the individual FI instead of funds...

Learned a lot from these boards, and continue to learn more. Thanks, all!