"Game Over" (for bonds) - Jonathan Clements

[OldShooter]

... Why are they paying such a premium over an equivalent duration Treasury? ...

Maybe because of this: "Callable on 13 Dec 2022 at 100." Heads Apple wins, tails you lose.

 

[audreyh1]

And mistakes will be made, since no one can predict the future. So my strategy is to sit tight on our globally-diversified, 50/50 portfolio of index funds and try to maintain a 20 year-plus view. By then, hopefully, what ever needs to cycle through, will cycle.

Yep, just keep rebalancing. I’m not letting go my bond funds! Rebalancing takes care of appreciation/depreciation.

 

[pb4uski]

....you can instead get a decent rate of return by just buying a well rated Corporate Bond... if you compare a " Safe " Treasury Bond to a " Safe " Corporate Bond like say, Apple that is AA1 rated and pays a coupon of 4.65%...

I see our one-trick pony who doesn't understand the difference between coupon and yield has resurfaced.

From the Forbes article:

...The company’s bonds were sold with coupons of 0.55% for the five-year maturity, 1.25% for the 10-year maturity, 2.4% for the 30-year maturity and 2.55% for 40-year maturity. Its credit is rated AA+, the second-best rating available. ...

 

[dixter]

Maybe because of this: "Callable on 13 Dec 2022 at 100." Heads Apple wins, tails you lose.

actually " NO " here is the data from Fidelity... the call date is 2045 and matures in 2046...

Call Schedule
APPLE INC NOTE CALL MAKE WHOLE4.65000% 02/23/2046 ISIN #US037833BX70 SEDOL #BYN2GF7
Call Defeased
NO
Continuously Callable
YES
Callable After
08/23/2045
Next Call Date *
08/23/2045
Extraordinary Redemption
NO
Make Whole Call
YES
Conditional Call
NO
* The Next Call Date is, where applicable, the earlier of either the continuously callable effective date calculated from the current business day, or the next scheduled call date.
Call Date Call Price Call Type
08/23/2045 100.000 Par Call

 

[dixter]

Ok... lets go over to the secondary Treasury Bonds.... here's what shows there.... its better than a bank, better than a CD.. its call protected but... and there's always a but that gets pointed out by " you know who from the trailer park " ...its cost is above par...

UNITED STATES TREAS SER BONDS
3.37500% 11/15/2048 BDS
Buy Sell
Hypothetical Trade | Fixed Income Alerts
OverviewPrice & Performance
Details
CUSIP 912810SE9
Pay Frequency SEMI-ANNUALLY
Coupon 3.375
Maturity Date 11/15/2048
Moody's Rating AAA
S&P Rating --
Bond Type Treasury

and for the yld sensitive, the yld to maturity is

Basic Analytics
Price (Bid) 141.328
Price (Ask) 141.412
Depth of Book View
Ask Yield to Worst 1.550%
Ask Yield to Maturity 1.550%
Current Yield 2.386%
Third Party Price 141.594
Spread to Treasuries 0.000
Treasury Benchmark 28 YR.(3.375% 11/15/2048)

not bad...

 

[dixter]

From the Forbes article:

Better to look at all the Bonds Apple has outstanding than to quote a Forbes article that singles out a few bonds showing small coupon rates....
yep, Apple is smart to take advantage of the near zero percent environment we are in today... cheap money... If buying Apple Bonds, I'd get the ones paying the higher coupons like 4.65%

 

[npage]

Not sure I would lump muni's in with this article. Most articles seem to talk about "bonds" as if they are all the same.

 

[aja8888]

Better to look at all the Bonds Apple has outstanding than to quote a Forbes article that singles out a few bonds showing small coupon rates....
yep, Apple is smart to take advantage of the near zero percent environment we are in today... cheap money... If buying Apple Bonds, I'd get the ones paying the higher coupons like 4.65%

Those bonds maure 25 years from now. A lot can happen between now and then. Things like Apple, Inc. goes to pot, interest rates rise quickly and the NAV of the bond drops like a rock, etc. You could easily get stuck holding a long term bond @4.65% with a NAV way lower than par when everyone else is making 8% on CD's.

There is no free lunch and lots of risk.

Oh, there is also a default risk, low probability, but real.

Just my 2 cents.

 

[dixter]

Not sure I would lump muni's in with this article. Most articles seem to talk about "bonds" as if they are all the same.

Those are not " muni " bonds... so far in the thread we are showing Investment Grade Corporate Bonds and US Treasury Bonds...

The article is just show casing Apple has decided to borrow funds while the money is cheap to get... a very good business decision... the actual value of the bond for us to purchase will be lower at those coupon rates than a same type bond paying the higher coupons that are also available...

but even if you pay above par for a bond then the objective would be to sell the bond at above par values before they mature... this is what will affect the actual yld when you sell and how long you held the bond and collected the coupons... so the actual yld isn't determined until you see what price you sell the bonds for... Bonds aren't like a CD that you buy and hold until maturity... you have the choice to keep or sell a Bond before maturity...

 

[pb4uski]

... If buying Apple Bonds, I'd get the ones paying the higher coupons like 4.65%

You go ahead and do that. How much does it cost to buy that 4.65% coupon bond and what is the effective yield?

 

[dixter]

Those bonds maure 25 years from now. A lot can happen between now and then.

25 yrs... a lot of folks here won't be around in 25 yrs from now too...

 

[SecondCor521]

You go ahead and do that. How much does it cost to buy that 4.65% coupon bond and what is the effective yield?

My new FIRE safety strategy: Buy 4.65% Apple bonds at par and hold to maturity!

Nobody has accepted my bid yet, though.

 

[dixter]

My new FIRE safety strategy: Buy 4.65% Apple bonds at par and hold to maturity!

Nobody has accepted my bid yet, though.

need to adjust your strategy a bit.... 4.65% is what those bonds pay per yr that you hold... so if you buy today and like you say, hold to maturity you would get per bond $46.50/yr for the duration of 26 more yrs... so $46.50 x 26= $1209 per bond and you will also get the par value at maturity of $1000... so $1000 + $1209 = $2209 total per bond... and lets say you invest $139K today... your investment over the 26 yr span is now $220,900.00

 

[dixter]

My new FIRE safety strategy: Buy 4.65% Apple bonds at par and hold to maturity!

Nobody has accepted my bid yet, though.

Some folks don't like to play the game of over par so there are always options to this road block... tho not at the same coupon, you don't have to worry about that over par value and them not accepting your bids.... its not a used car lot..

here ya go... just a smiggin under par... and its yld is 2.569%

APPLE INC NOTE CALL MAKE WHOLE
2.55000% 08/20/2060
Buy Sell
Hypothetical Trade | Fixed Income Alerts
OverviewPrice & Performance
Basic Analytics
Price (Bid) 98.607
Price (Ask) 99.233
Depth of Book View
Ask Yield to Worst 2.581%
Ask Yield to Maturity 2.581%
Current Yield 2.569%

 

[Lsbcal]

Some folks don't like to play the game of over par so there are always options to this road block... tho not at the same coupon, you don't have to worry about that over par value and them not accepting your bids.... its not a used car lot..

here ya go... just a smiggin under par... and its yld is 2.569%

APPLE INC NOTE CALL MAKE WHOLE
2.55000% 08/20/2060
Buy Sell
Hypothetical Trade | Fixed Income Alerts
OverviewPrice & Performance
Basic Analytics
Price (Bid) 98.607
Price (Ask) 99.233
Depth of Book View
Ask Yield to Worst 2.581%
Ask Yield to Maturity 2.581%
Current Yield 2.569%

This goes along with the Apple bond article I linked to above:

The company’s bonds were sold with coupons of 0.55% for the five-year maturity, 1.25% for the 10-year maturity, 2.4% for the 30-year maturity and 2.55% for 40-year maturity. Its credit is rated AA+, the second-best rating available.

But 40 years? That is too long for most people here. I think most people here would be better off with an intermediate bond duration. That would be a duration of around 5-6 years. For instance, the SEC yield for VFIDX (VG intermedate investment grade, 6.7 yr effective maturity) is currently 1.58%.

 

[dixter]

But 40 years? That is too long for most people here. I think most people here would be better off with an intermediate bond duration. That would be a duration of around 5-6 years. For instance, the SEC yield for VFIDX (VG intermedate investment grade, 6.7 yr effective maturity) is currently 1.58%.

Here is an experiment for you.... go and buy 1 single bond... this one...it has a maturity date that goes out to 40 yrs.... so you go and buy it tomorrow...
it costs you $1000 and change for that single bond.... on 11/22/20 which is exactly 1 month... go and sell it back... you will get the interest for 1 month and you will get your $1000 back... thats whats so nice about corporate bonds... you buy them now, you get to keep them for as long or as short of a time frame as you want, as long as you don't expect to keep them past the maturity date... this is NOT like a CD...

So, lets say you decide to buy bonds that have 5% coupon and you want to get that coupon for the next 30 yrs.... so you buy a bond that lasts out to 35 or more years... when the 30yrs date comes up, you look around and say.. do I want to sell the bonds now, or keep them for a few more years... you can buy a bond today and sell it on Friday...

 

[pb4uski]

need to adjust your strategy a bit.... 4.65% is what those bonds pay per yr that you hold... so if you buy today and like you say, hold to maturity you would get per bond $46.50/yr for the duration of 26 more yrs... so $46.50 x 26= $1209 per bond and you will also get the par value at maturity of $1000... so $1000 + $1209 = $2209 total per bond... and lets say you invest $139K today... your investment over the 26 yr span is now $220,900.00

So if you invest $139,000 today, receive $4,650/year of interest for 26 years and then receive $100,000 at maturity, while you receive $220,900 of cash flow, your annual return is 2.57% [=RATE(26,4650,-139000,100000)]... not 4.65%.

 

[dixter]

So if you invest $139,000 today, receive $4,650/year of interest for 26 years and then receive $100,000 at maturity, while you receive $220,900 of cash flow, your annual return is 2.57% [=RATE(26,4650,-139000,100000)]... not 4.65%.

I am so glad that you finally caught on... GOOD JOB

 

[pb4uski]

Since I used to teach this stuff, it's not ME catching on that I'm worried about....

 

[SecondCor521]

I am so glad that you finally caught on... GOOD JOB

@dixter, pb4uski and lots of others here understand bonds, probably far better than you do. He's just too nice to spell it out directly.

And I guess you couldn't tell, but I was joking earlier. I would not expect to be able to buy 4.xx% long corporate bonds at par in the current interest rate environment - that was the (apparently way understated) point of my post.

I actually don't buy individual bonds at all; my bond component is all in VBTLX.

Good luck.

ETA: <plonk!>

 

[Out-to-Lunch]

I don't understand why anyone would even bother to mention (let along fixate upon) the coupon rate. Who cares? I only care about the yield. What information does the coupon rate convey to you that you would find valuable in making a decision? Why obfuscate a problem by mentioning the coupon?

 

[Dtail]

@dixter, pb4uski and lots of others here understand bonds, probably far better than you do. He's just too nice to spell it out directly.

And I guess you couldn't tell, but I was joking earlier. I would not expect to be able to buy 4.xx% long corporate bonds at par in the current interest rate environment - that was the (apparently way understated) point of my post.

I actually don't buy individual bonds at all; my bond component is all in VBTLX.

Good luck.

ETA: <plonk!>

It was clear to me you were joking. Nuff said.....

 

[dixter]

I don't understand why anyone would even bother to mention (let along fixate upon) the coupon rate. Who cares? I only care about the yield. What information does the coupon rate convey to you that you would find valuable in making a decision? Why obfuscate a problem by mentioning the coupon?

I'll just take this post as a joke too...

any comments PB4... you teach this kind of stuff... explain how the coupon affects yld...

 

[Out-to-Lunch]

I don't understand why anyone would even bother to mention (let along fixate upon) the coupon rate. Who cares? I only care about the yield. What information does the coupon rate convey to you that you would find valuable in making a decision? Why obfuscate a problem by mentioning the coupon?

I'll just take this post as a joke too...

any comments PB4... you teach this kind of stuff... explain how the coupon affects yld...

I believe my question was how the coupon affects your decision. And I will take your response to mean that you do not have an answer for me.

 

[OldShooter]

I'll just take this post as a joke too...

Sitting in my recliner with my coffee and my morning reading, two thoughts came to mind.

First, the admonition often attributed to Abraham Lincoln: "Better to remain silent and be thought a fool than to speak and to remove all doubt."

Second, my favorite internet cartoon: https://en.wikipedia.org/wiki/On_th...ows_you're_a_dog#/media/File:Internet_dog.jpg

any comments PB4... you teach this kind of stuff... explain how the coupon affects yld...

@pb4 is probably feeling overworked by now, but this is easy stuff even for someone who is not a bond guy.

The coupon affects yield because it is a factor in the yield calculation. Once that calculation is made, the coupon rate is of little interest other than it does affect the shape of the yield cash flow. For the same yield, a higher coupon may be of interest to someone who is using the income to cover current expenses and a lower coupon may be of interest to someone who does not want to bother very much with reinvesting the yield dollars.

To be complete, "yield" might be Yield-to-Maturity, Yield-to_Call, or Yield-To_Worst.