Fixed Income Investing II

[bythedock]

I really liked the old thread except for the bickering and other crap between a few posters. I hope Freedom56 is still going to be here offering his valuable insights on what may be affecting interest rates and such going forward. He's led me to some good investments through his unselfish work.

+1

 

[dobig]

There were many great contributors on the old thread but we lose a lot without Freedom moving forward. Just like our Fidelity account, I like everything consolidated in one place.

 

[bythedock]

I’d also be interested in the Reddit link if someone has it. Feel free to PM me.

I wasn’t participating, but actively consuming and the thread got me to rethink my allocation towards fixed income. I’ve always been heavy in equities, with no regrets, but I’ve never lived in a period where you can get 5-6%+ guaranteed with no loss of principal.

That’s truly amazing, especially considering how hard it was to get a meager 1-2% return not that long ago.

Same here. I’m also interested in the Eddit link.

 

[Echard]

I've been tuning my fixed income allocations. Obviously corporate bonds have played a major role in my asset allocation. However, I've been reading a lot of articles that indicate: a) corporate bonds don't belong in a retired person's portfolio because of it's correlation with equities; and b) TIPS should be a substantial percentage of fixed income holdings, with many saying 50% or more.

I'd be interested to hear the views of others, and have a polling of how everyone's fixed income is allocarted.

I'll start. This is a suboptimal allocation that I need to change, but am doing it over time as asset prices evolve:

Fixed vs Equities - 57% fixed, 43% equities (will change this over time to higher equity when valuations of equity are more reasonable, probably to 40/60)

Fixed Treasuries/Agencies - 6% of the total portfolio, mostly short-termish
Fixed Corporate Invest Grade - 12% of the total portfolio laddered
Fixed High Yield - 5% of the total portfolio (too high)
Fixed Alternative - 6% of the total portfolio (too high, in private debt LLCs)
Fixed Inflation TIPS, iBonds - 2% of total portfolio (too low)
Fixed Cash - 17% of the total portfolio (too high)
Fixed CDs - 9% of the total portfolio (bought when CD's stayed elevated after bonds dropped)

 

[dobig]

One thing that needs to be thought out based on ones particular income needs is “reinvestment risk”. It gets glossed over a bit being the short end is so high and easy pickings from the tree, but it is just as real a risk as duration and credit risk.
For example if you ladder out to 5 years on say CDs and they are callable, they could get redeemed at an inopportune time on the yield curve and next thing you are reinvesting several hundred bps lower on something you were counting on for a few more years.
I tend to buy noncallables. And if you buy bonds with duration that are noncallable you get your cake or eat it too if yields fall. If you buy callables, you could wind up with fork in hand and nothing to eat. Lets take an example “Back in the day”. Around the turn of century Walmart issued a 7.55% noncallable bond that matures 2030.
Based on what went on, you would have had the option to continuously clip the coupon until 2030, or take a massive cap gain, as Walmart has continuously over the years offered tenders 50% above purchase price to knock them out. If one had bought a callable bond, they would have been redeemed, suffered reinvestment risk considerably lower, and no cap gain from it being redeemed. Just something to consider if one is not cognizant of it.
And each persons situation is different. I got my friend to get his dad out of over $500k sitting in basically zip savings accounts into rolling 1 and 3 month Tbills. His biggest excitement of the month is my friend printing the statement off and showing him his income deposited into his bank account. But he doesnt care about reinvestment risk at 86. He doesnt spend it anyways and would just put it back in savings if tbills ever went to zero. Its not changing his life either way because he doesnt spend any of it anyways.

I'm very new to fixed income but this is exactly why I locked in a bunch of non callable JPM 20 year notes at 5.625% a little under par, some WFC.PRL preferreds at 6.6% and smaller portions in some utilities you have recommended. I would have likely made even more purchases if I could ever figure out your terminology and/or had a better understanding of some of the utlities you were buying . Utes, babies, wrappers, subordinates,.....took me 3 weeks to get thru that thread just trying to comprehend.

 

[Mulligan]

I'm very new to fixed income but this is exactly why I locked in a bunch of non callable JPM 20 year notes at 5.625% a little under par, some WFC.PRL preferreds at 6.6% and smaller portions in some utilities you have recommended. I would have likely made even more purchases if I could ever figure out your terminology and/or had a better understanding of some of the utlities you were buying . Utes, babies, wrappers, subordinates,.....took me 3 weeks to get thru that thread just trying to comprehend.

The yield, credit risk, and duration risk are certainly individual decisions. The smartest bond gurus are wrong a lot, so I certainly cant make claims to know more. 5.6% for 20 years is a bit low for me duration risk. But that is just my personal preference which means zip. And if everything is allocated to a responsible level, one issue shouldnt make or break any portfolio for income. I am not without sin either. I just bought yesterday a 100 shares of HAWLM at $17.40 for a 6.02% yield. Its perpetual QDI, so its duration is potentially longer than your JPM note. And since its been callable for over 60 years I doubt it ever will be ha.
But I got it at 2005 pricing, so I like the relative value here.
If there is a term that is not understood, dont be afraid to ask. As it may be something you dont want to invest in. One really needs to make sure they understand the potential good, bad, and the ugly on any income investment they make before they hit that link to purchase!
I still have the majority of my money hiding out in CDs, treasuries, and IBonds. I still think there will be shots for opportunity down the road yet still. But who knows…..

 

[Montecfo]

The poster of the original thread has left us for another forum which is really too bad.

True.

 

[Mulligan]

True.

I must have missed it. As I have never seen Freedom post anything delete worthy and appreciated his posts. Income investing provides many opportunities that are based on various assumptions. And everyones assumptions arent the same. Robust healthy debate should be encouraged without group think. Its a shame some evidently wanted to make it personal when its not anything to get personal about.

 

[Montecfo]

One thing that needs to be thought out based on ones particular income needs is “reinvestment risk”. It gets glossed over a bit being the short end is so high and easy pickings from the tree, but it is just as real a risk as duration and credit risk.
For example if you ladder out to 5 years on say CDs and they are callable, they could get redeemed at an inopportune time on the yield curve and next thing you are reinvesting several hundred bps lower on something you were counting on for a few more years.
I tend to buy noncallables. And if you buy bonds with duration that are noncallable you get your cake or eat it too if yields fall. If you buy callables, you could wind up with fork in hand and nothing to eat. Lets take an example “Back in the day”. Around the turn of century Walmart issued a 7.55% noncallable bond that matures 2030.
Based on what went on, you would have had the option to continuously clip the coupon until 2030, or take a massive cap gain, as Walmart has continuously over the years offered tenders 50% above purchase price to knock them out. If one had bought a callable bond, they would have been redeemed, suffered reinvestment risk considerably lower, and no cap gain from it being redeemed. Just something to consider if one is not cognizant of it.
And each persons situation is different. I got my friend to get his dad out of over $500k sitting in basically zip savings accounts into rolling 1 and 3 month Tbills. His biggest excitement of the month is my friend printing the statement off and showing him his income deposited into his bank account. But he doesnt care about reinvestment risk at 86. He doesnt spend it anyways and would just put it back in savings if tbills ever went to zero. Its not changing his life either way because he doesnt spend any of it anyways.

I am of the same view. It is easy to take the short term deals and just think "when rates top out I will extend maturities". But the moment rates top out the yield curve changes. Really tough to time that.

And if you get a callable you feel like you are getting away with something. But as you point out, they will get called when the market has dropped and those non-callable longer term deals that you passed on are are no longer out there.

Food for thought.

 

[imbatman]

Both parties are "gambling" with callable instruments, it isn't one sided. No one knows for sure what rates will do and for how long and what the investor's goal was for the funds.

I think it is particularly important to remember callable status/ dates when buying discounted secondary bonds. I just bought some 3% bonds at $83 with no call and maturity in 2029. With a 3% face amount, those are likely not going to be called so I knew I would likely be riding them out - but happy to do so at a 6.3-6.4% locked in (half prepaid as a discount) for the next 6 years.

 

[Montecfo]

Both parties are "gambling" with callable instruments, it isn't one sided. No one knows for sure what rates will do and for how long and what the investor's goal was for the funds.

I think it is particularly important to remember callable status/ dates when buying discounted secondary bonds. I just bought some 3% bonds at $83 with no call and maturity in 2029. With a 3% face amount, those are likely not going to be called so I knew I would likely be riding them out - but happy to do so at a 6.3-6.4% locked in (half prepaid as a discount) for the next 6 years.

The Fed is mostly done raising. So to me buying a callable now is a poor bet, except for the fact set you give. I agree that makes sense.

 

[Mulligan]

I am of the same view. It is easy to take the short term deals and just think "when rates top out I will extend maturities". But the moment rates top out the yield curve changes. Really tough to time that.



And if you get a callable you feel like you are getting away with something. But as you point out, they will get called when the market has dropped and those non-callable longer term deals that you passed on are are no longer out there.



Food for thought.

Its very tough, Montecfo. Perfect example for me was the 5 year noncallable CDs at plus 5%. Last fall they briefly creeped over and I got greedy and they collapsed back under instantly. I got another shot a couple months ago at 5.15% during regional bank crisis and I didnt dither that time. Hope to get another crack at that mark again. As that 5 yearish range is still a bit of a hole for me.

 

[Phroig]

Unfortunately, nobody’s issuing non-callables anymore, even CDs. Secondary non-callables vanish before you can enter an order. I’ve done a few low-coupons. Perhaps preferreds and intermediate bond funds are the way to go as interest rates top out.

 

[Gumby]

Moderator note: The topic of this thread is fixed income investing, not complaining about other threads. Please stay on topic.

 

[Montecfo]

Unfortunately, nobody’s issuing non-callables anymore, even CDs. Secondary non-callables vanish before you can enter an order. I’ve done a few low-coupons. Perhaps preferreds and intermediate bond funds are the way to go as interest rates top out.

And just think: why would everything be callable?

Speaking more broadly, there are non-callables in the secondary market, treasuries are noncallable, etc.

But callables have become fashionable.

 

[COcheesehead]

With my ladders, I balance trying to get the best yield with having reliable income - the whole purpose of my ladder. I may give up a little in yield by going longer or with non call or longer call window bonds, but in return I get income I know is going to be there. So reinvestment risk, while there with any maturing bond, does not hurt me as much. I am almost equally balanced between short, intermediate and long bonds with a few percentage point leaning to short. All investment grade. The ladder throws off almost 145% of our spending needs. Equities remain untouched and may stay that way forever.

 

[Echard]

With my ladders, I balance trying to get the best yield with having reliable income - the whole purpose of my ladder. I may give up a little in yield by going longer or with non call or longer call window bonds, but in return I get income I know is going to be there. So reinvestment risk, while there with any maturing bond, does not hurt me as much. I am almost equally balanced between short, intermediate and long bonds with a few percentage point leaning to short. All investment grade. The ladder throws off almost 145% of our spending needs. Equities remain untouched and may stay that way forever.

How long is long?

 

[Mulligan]

Unfortunately, nobody’s issuing non-callables anymore, even CDs. Secondary non-callables vanish before you can enter an order. I’ve done a few low-coupons. Perhaps preferreds and intermediate bond funds are the way to go as interest rates top out.

They still are issuing noncallable 5 year CDs. They just arent at the yield people had a shot at a few months back. Discover Bank and United Fidelity Bank presently have 5 year noncallables for sale with coupon yields of 4.45% and 4.5%.

 

[COcheesehead]

How long is long?

I started at 10 years duration, now down to 9, but back in the old days when yield was hard to find, I went a little longer. Still have some of those. Muni bonds with 5% - 6% coupons and long call windows. They still pay me well.

 

[Mulligan]

And just think: why would everything be callable?

Speaking more broadly, there are non-callables in the secondary market, treasuries are noncallable, etc.

But callables have become fashionable.

Well we know. The market isnt comfortable having confidence the long end will stay high. So toss the asymmetric risk of duration onto the buyer not the issuer. And besides people are buying them which further incentivizes the process. I recently bought a newly issued BDC baby bond of BBB- ilk at 7.75% under par at IPO. Its duration is only 5 years but they can still call it after 2 years if they see a way to come out ahead on it. For this issue I am unconcerned as I dont really have any passion for it anyways.

 

[pletal]

The Fed is mostly done raising. So to me buying a callable now is a poor bet, except for the fact set you give. I agree that makes sense.

Good call- maybe. I am going out 5 years when I can 4.5 - 4.84 CD's. I know I can get 5% or better for a 2 year. but don't want a bunch if money coming due as rates drop. All my CD's are paying at least a1 point higher then the one maturing. Which is equal to 20-30% more return. I am OK with 4.5% I am combining maturing CD's as they come due.

 

[Chuckanut]

One thing that needs to be thought out based on ones particular income needs is “reinvestment risk”. It gets glossed over a bit being the short end is so high and easy pickings from the tree, but it is just as real a risk as duration and credit risk.
For example if you ladder out to 5 years on say CDs and they are callable, they could get redeemed at an inopportune time on the yield curve and next thing you are reinvesting several hundred bps lower on something you were counting on for a few more years.

+1 We’ll said. I’ve been thinking the same thing in regards to callable bonds. I have a few, but not enough to seriously mess up my ladder at the long end. The idea of having the rug pulled out from under me two to three years due to a significant rate decline does not mesh with my financial plans.

If this is a ‘golden age’ then I want to lock in some of those golden interest rates before we slip into the silver, bronze or lead age. Letting the banks transfer most of the interest rate risk to me is not going to help me do that. I have equities, Ibonds and a few TIPS for my inflation hedged investments. I am hoping we might even see another increase in the Ibond fixed rate before year’s end, though that is not a prediction. So, I will let my regular bonds and CDs get the best locked in rate they can get out to 5 years. Maybe 7 years if the rate deal is very good.

 

[Mulligan]

+1 We’ll said. I’ve been thinking the same thing in regards to callable bonds. I have a few, but not enough to seriously mess up my ladder at the long end.



If this is a ‘golden age’ then I want to lock in some of those golden interest rates before we slip into the silver, bronze or led age.

Chuck, and I know its looking a bit bleaker on inflation side, but I am not giving up on the IBonds we both own not so quickly either. If yields stay high for a bit and inflation lower we could catch an updraft in fixed component well over 1% mirroring more the 2007 ish era. I dont mind having a laggard that provides long term capital preservation and tax deferral. I will rotate the zeros into the fixed once they are through with the 6% and keep my supply up via the gift purchasing.
This is another situation that makes income investing more of an individual situation. Some just want X amount to income, some just for safe cash holding options, and some for an income stream to live off of.
Im a bit different in that I use income issues from capital preservation to equity type risk/performance. I own IBonds/CDs all the way to 11% delisted ute baby bonds to 12% floating adjustables like NSS. So my views are slanted in the purpose I am investing in. So its all about matching ones personal needs and goals to their own appropriate investing style.

 

[mrfeh]

One thing that needs to be thought out based on ones particular income needs is “reinvestment risk”. It gets glossed over a bit being the short end is so high and easy pickings from the tree, but it is just as real a risk as duration and credit risk.

+1

This is my main objection to the proliferation of posts praising market timing over the last 15 months.

Lots of smiles are gonna turn to frowns in the next couple years.

 

[COcheesehead]

+1

Just tuning in and am very sorry to hear that Freedom will be moving on.
I looked forward to reading everyone of his insightful posts.
I agree with pb4uski and would be interested in the Reddit link,
If anyone has it, please Pm me with the link.

It’s about the second or third link down in a search “golden age of fixed income” on the other forum.