Fixed Income Investing II

[COcheesehead]

I have found building out my ladder kind of fun and easy over the last 8 months. I now have about 50% of our portfolio in a ladder that extends out about 10 years…. 5 year average duration, yielding a bit over 5.25%. Good quality investment grade corporates.

My question is to those that have laddered for a while. Let’s say in 2-3 years the 10 year treasury is down under 2% and investment grade corp bonds with 8-10 year maturity are yielding just under 3%. Are you flat out mechanical in managing your ladder and buying 10 year bonds at those low yields or do you find yourself shortening your ladder duration and buying bonds with much shorter maturities?

I’ve been laddering since about 2015.

Here’s my experience. You pick your spots. As Freedom used to say, no one is going to buy sub 1% bonds, but funds do - they have to.
In March of 2020 munis went on sale because every municipality was going to go broke - which didn’t happen. I loaded up the boat on some long call/no call window, 5%-6% coupon, double tax free bonds. I still have those and they pay well and will pay well for years.

At other times when bonds matured I looked at longer durations, lower quality, etc to get the “best” available at the time. I still have never had a bond default.

Keep in mind if you have a longer duration ladder and it sounds like there are some folks like me on here, your rungs do not all mature at once and rate cycles change.

Even though I started laddering in the bad old days, I still was able to almost double my income in the last year and a half or so. I also jettison bad bonds from time to time.

Locking in decent longer term rates right now isn’t a bad thing. We are nearing the end of the rate hike cycle. People playing the short term game, IMHO are playing musical chairs and may not have a seat when the music stops.

 

[gayl]

This year is my 1st major foray into fixed income investing so I'm still trying to figure out why I'm doing it and how much I should do it with. Currently roughly 16% fixed income / 84% stocks. Used to be 95% stocks

 

[GravitySucks]

I have found building out my ladder kind of fun and easy over the last 8 months. I now have about 50% of our portfolio in a ladder that extends out about 10 years…. 5 year average duration, yielding a bit over 5.25%. Good quality investment grade corporates.

My question is to those that have laddered for a while. Let’s say in 2-3 years the 10 year treasury is down under 2% and investment grade corp bonds with 8-10 year maturity are yielding just under 3%. Are you flat out mechanical in managing your ladder and buying 10 year bonds at those low yields or do you find yourself shortening your ladder duration and buying bonds with much shorter maturities?

The plan was to mechanically reinvest the ladder but it’s not a religion.

I had an 8 year ladder but in 2018 I decided to buy 1 and 2 year corporates with rebalancing and maturing bonds as the yields were so low and the Fed was trying to raise rates. Finally started to rebuild the ladder last November. About 40% of my FI will mature by September 2024. Hope to fill in the ladder with these better rates and add some 10 year TIPS.

 

[mcbraemer]

I’ve been laddering since about 2015.

Here’s my experience. You pick your spots. As Freedom used to say, no one is going to buy sub 1% bonds, but funds do - they have to.
In March of 2020 munis went on sale because every municipality was going to go broke - which didn’t happen. I loaded up the boat on some long call/no call window, 5%-6% coupon, double tax free bonds. I still have those and they pay well and will pay well for years.

At other times when bonds matured I looked at longer durations, lower quality, etc to get the “best” available at the time. I still have never had a bond default.

Keep in mind if you have a longer duration ladder and it sounds like there are some folks like me on here, your rungs do not all mature at once and rate cycles change.

Even though I started laddering in the bad old days, I still was able to almost double my income in the last year and a half or so. I also jettison bad bonds from time to time.

Locking in decent longer term rates right now isn’t a bad thing. We are nearing the end of the rate hike cycle. People playing the short term game, IMHO are playing musical chairs and may not have a seat when the music stops.

I built an initial 10-year, now up to 12-13 year ladder, all "investment grade" corporates. By that I mean corporate bonds with ratings above the high risk line as presented by default on the Vanguard fixed income site; no lower rated than BBB-, BBB-, Baa3, as rated by Fitch, S&P and Moodys, respectively.
The ladder is set up such that I have small bunches of bonds maturing roughly every quarter (3 months) from next quarter through 2035. Did this so that I have several thousand bucks available as emergency money every 3 months. If needed, I can use it, otherwise it's used to purchase more bonds at the far end of the ladder. If there are no bonds of interest with maturing dates in that timeframe, I open the search filter to find a decent set of bonds to buy that mature reasonably close to the target. Do this over and over every quarter. All bonds are held to maturity and Callable bonds are avoided.
A substantial percentage of our total investment pool is in the ladder. We use the bond dividends to supplement our other modest income streams, including SoSec. This has worked very well to date, having set this up in 2017. Started with DW's converted 401k after DW retired, and added my own converted 401k monies when retired in 2018. Entire ladder is in her and my IRAs. We used 2 individual accounts as if they were one so far as the ladder is concerned.
Question for COCheesehead: you referred to "lower quality" bonds above. How low do you typically go? We have not suffered any bond defaults either staying within the bond ratings that I stated above.
Just curious ...

 

[COcheesehead]

Nothing lower than BBB- and I kept them shorter duration.

 

[jazz4cash]

Locking in decent longer term rates right now isn’t a bad thing. We are nearing the end of the rate hike cycle. People playing the short term game, IMHO are playing musical chairs and may not have a seat when the music stops.

+1000

Various segments offer value at various times. I try to look for value among several segments including CDs, treasuries, munis, corporates, and MYGAs. It is not my plan to be mechanical, I just want value. I’ll double up on a rung if that term offers better value. I am avoiding anything under 18 mo and prefer 3 yrs or more. I am also using principal returns to fund the annual spend. YMMV.

 

[ShokWaveRider]

I pulled 10% out of my 4.5% annuity today, will be putting it into SNAXX at 5.1%. Will do the name this year (Year 2 of the annuity). Glad I had the 10% rider. It is not a huge amount but still ......

 

[G-Man]

I pulled 10% out of my 4.5% annuity today, will be putting it into SNAXX at 5.1%. Will do the name this year (Year 2 of the annuity). Glad I had the 10% rider. It is not a huge amount but still ......

Looks like the minimum investment for SNAXX is $1M.

 

[ShokWaveRider]

Looks like the minimum investment for SNAXX is $1M.

Not if you already have some left over cash in there. you can add to it anytime even if you only have $10 in there.

 

[COcheesehead]

Bought a taxable muni*02765UEF7 A1 rated, 5+ year duration. Yield is only 5.3%, but the coupon is 7.2%. Here's my rationale. Decent enough yield, but that coupon when rates turn, even if two years from now will pop the value. So I am looking at it as a pay me now, flip you later play.

 

[Montecfo]

Good point cocheesehead.

 

[aja8888]

Bought a taxable muni*02765UEF7 A1 rated, 5+ year duration. Yield is only 5.3%, but the coupon is 7.2%. Here's my rationale. Decent enough yield, but that coupon when rates turn, even if two years from now will pop the value. So I am looking at it as a pay me now, flip you later play.

Did you buy this in a tax deferred account?

 

[pb4uski]

I guess that I don't get the play there and where the pop comes from. It shows up on Schwab as trading at 112.383 for a 4.656% yield. From the trade history I can see a buy today at 109.112 yielding 5.294%, which I assume is COcheesehead's purchase.

Let's say that tomorrow that rates rise and the market yield for a taxable muni of that credit and remaining term is 7.2%. Wouldn't it then trade at 100?... for a 9.112 loss? Where would the pop come from?

 

[COcheesehead]

Did you buy this in a tax deferred account?

Yes

 

[COcheesehead]

I guess that I don't get the play there and where the pop comes from. It shows up on Schwab as trading at 112.383 for a 4.656% yield. From the trade history I can see a buy today at 109.112 yielding 5.294%, which I assume is COcheesehead's purchase.

Let's say that tomorrow that rates rise and the market yield for a taxable muni of that credit and remaining term is 7.2%. Wouldn't it then trade at 100?... for a 9.112 loss? Where would the pop come from?

I flip bonds fairly regularly. I just flipped a lower investment grade bond this morning for a few hundred bucks having held it for a few weeks. So here’s my take on the taxable muni. It pays about what a CD of similar duration pays, but the CD is callable. So I get paid a decent return for the duration and when/if rates drop even two, three years out I have an opportunity for capital gain on a flip.

 

[Echard]

I've slowly been adding to the longer end of the ladder in years 7-10. What makes my fixed income ladder difficult to build is that I also want to hold some bond funds. I don't want to have to manage all of my fixed income all year long. I want some of it on autopilot. So, I have some intermediate term and short term corporate and total bond funds too.

So building the ladder is tricky, because ideally you want to take into account the maturities of those funds too. So I have some spreadsheets where I have some "good enough for government work" calculations to figure out where to add individual securities in the ladder.

The other complicating part of my ladder is it is comprised of treasuries, CD's, corporate bonds, high yield bonds (inc baby bonds), inflation bonds, in the flavors of individual securities, ETF's, CEF's, and mutual funds.

If my wife ever has to take this over, it's going to need significant simplication.

 

[COcheesehead]

I've slowly been adding to the longer end of the ladder in years 7-10. What makes my fixed income ladder difficult to build is that I also want to hold some bond funds. I don't want to have to manage all of my fixed income all year long. I want some of it on autopilot. So, I have some intermediate term and short term corporate and total bond funds too.

So building the ladder is tricky, because ideally you want to take into account the maturities of those funds too. So I have some spreadsheets where I have some "good enough for government work" calculations to figure out where to add individual securities in the ladder.

The other complicating part of my ladder is it is comprised of treasuries, CD's, corporate bonds, high yield bonds (inc baby bonds), inflation bonds, in the flavors of individual securities, ETF's, CEF's, and mutual funds.

If my wife ever has to take this over, it's going to need significant simplication.

Are you at Fidelity? Their fixed income analysis tool gives you really good insight into your ladder(s). Pretty straight forward for an outsider to step in and see cashflow, maturing bonds, etc.

 

[Healthy Lifestyle]

I've slowly been adding to the longer end of the ladder in years 7-10. What makes my fixed income ladder difficult to build is that I also want to hold some bond funds. I don't want to have to manage all of my fixed income all year long. I want some of it on autopilot. So, I have some intermediate term and short term corporate and total bond funds too.

So building the ladder is tricky, because ideally you want to take into account the maturities of those funds too. So I have some spreadsheets where I have some "good enough for government work" calculations to figure out where to add individual securities in the ladder.

The other complicating part of my ladder is it is comprised of treasuries, CD's, corporate bonds, high yield bonds (inc baby bonds), inflation bonds, in the flavors of individual securities, ETF's, CEF's, and mutual funds.

If my wife ever has to take this over, it's going to need significant simplication.

I am thinking along similar lines as my wife shows little interest.

 

[Echard]

Are you at Fidelity? Their fixed income analysis tool gives you really good insight into your ladder(s). Pretty straight forward for an outsider to step in and see cashflow, maturing bonds, etc.

Yes but...another complicating factor. Funds are spread across a few different brokers. At one point in time I tried to consolidate under one, but it didn't meet all of our needs, so we are back to many.

 

[COcheesehead]

Yes but...another complicating factor. Funds are spread across a few different brokers. At one point in time I tried to consolidate under one, but it didn't meet all of our needs, so we are back to many.

I have everything at Fido. I personally do not see risk in doing that and see more benefit for administration and taxes.
I would also try and talk you out of bond funds, but this board has been down that road too many times.

 

[Montecfo]

Yields not looking real good today post the CPI release. I fear we are going to see lower rates and more inverted middle of the curve.

The 2, 5 and 10 year Treasury yields have dropped sharply this week.

 

[dobig]

I flip bonds fairly regularly. I just flipped a lower investment grade bond this morning for a few hundred bucks having held it for a few weeks. So here’s my take on the taxable muni. It pays about what a CD of similar duration pays, but the CD is callable. So I get paid a decent return for the duration and when/if rates drop even two, three years out I have an opportunity for capital gain on a flip.

That was my strategy (thanks to you) which is why I loaded up on GSE's and JPM 20 year non callables. But why sell now? Especially seeing the action on the 2 and 10 year after the inflation print this morning?

I just checked and I could sell my JPM 20 year notes (cusip 46625HJM3) and make $7,500 but I'd really hate to do that when I'll make $10k a year off the coupon and stand to make a larger capital gain in 1 - 3 years when rates will likely come down. Am I not thinking of this correctly?

I know I'm not selling any of my Wells Fargo preferreds (WFCPRL) unless they get back up to $1,400. That 6.6% yield is just too juicy.

 

[COcheesehead]

Yields not looking real good today post the CPI release. I fear we are going to see lower rates and more inverted middle of the curve.

The 2, 5 and 10 year Treasury yields have dropped sharply this week.

MM rates may be close to their highs too. So what happens when people see their cash earning less? Musical chairs. Who will be left without a seat?

 

[dobig]

Yields not looking real good today post the CPI release. I fear we are going to see lower rates and more inverted middle of the curve.

The 2, 5 and 10 year Treasury yields have dropped sharply this week.

Which means the nav on our bonds and notes should be pretty happy no?

 

[COcheesehead]

That was my strategy (thanks to you) which is why I loaded up on GSE's and JPM 20 year non callables. But why sell now? Especially seeing the action on the 2 and 10 year after the inflation print this morning?

I just checked and I could sell my JPM 20 year notes (cusip 46625HJM3) and make $7,500 but I'd really hate to do that when I'll make $10k a year off the coupon and stand to make a larger capital gain in 1 - 3 years when rates will likely come down. Am I not thinking of this correctly?

I know I'm not selling any of my Wells Fargo preferreds (WFCPRL) unless they get back up to $1,400. That 6.6% yield is just too juicy.

Truth be told I don’t touch 99% of my ladder even with big profits in mark to market prices. I want the income.
I buy flyers from time to time for fun. Usually lower investment grade because they are so liquid. Make a few hundred bucks. It’s just a game to me.