Interest Rates and Bonds

[Jim in PA]

I read these posts and they make me feel so ignorant.. Some of you seem to able able to make 7% to 15% with low risk..Yesterday I purchased a $50,000.00 Treasury with a ytm of 1.443% maturing 11/15/22..I wish I knew how to do better.

Have you considered Series I savings bonds? You’re limited to buying $10,000 per calendar year, but they are government bond and currently yield 9.62%. Yes, for a government guaranteed bond. Rate is variable and linked to inflation. You buy them directly at treasury direct.gov
Check it out.

 

[Freedom56]

All I know to do is to look at the bond offerings that Schwab offers on their offerings page..Where do you find what you want? I can pull up other bonds by CUSIP but I don't know a good resource for identifying other bonds.

I'll make it easy for you. Just track these corporate notes. They are all from solid companies that are very profitable with very good interest expense coverage and free cash flow. Some are even secured bonds. The yields are not good enough for me to buy them at this point. I know from history that the panic selling driven by funds has not even started. Bond funds are selling their lowest yielding notes/bonds first. Back in February, the yields were averaging around 3% for short and medium term notes. Now they are averaging near 5%. Soon they will be averaging 6% and when the panic sets in, you will see 7-9%. Those moments are the times to buy aggressively and boost your returns and preserve and boost your capital and let the bond funds take the losses.

 

[Chuckanut]

Some of you seem to able able to make 7% to 15% with low risk..

It all depends on your definition of low-risk.

The people who state these things may believe it. But, that doesn't make it true in my mind. Except for I-bonds. And we already know about them.

 

[daylatedollarshort]

Are you sure about that?

From what I could find Great Western Bank was acquired by Washington Mutual in 1997. 11 years later, in 2008, WaMu was placed into receivership by the OTC and was ultimately purchased by JPM.

Sorry, faulty memory. We had an account with Great Western that changed to Washington Mutual then to Chase. It was WaMu, not GW when it failed and was sold off to Chase.

 

[daylatedollarshort]

It all depends on your definition of low-risk.

The people who state these things may believe it. But, that doesn't make it true in my mind. Except for I-bonds. And we already know about them.

TIPS bought at positive yields have higher total returns currently than 0% real yield I-bonds. I-bonds have some advantages over TIPS, but TIPS have no annual purchase limits.

 

[Sunset]

TIPS bought at positive yields have higher total returns currently than 0% real yield I-bonds. I-bonds have some advantages over TIPS, but TIPS have no annual purchase limits.

What advantage does I-bonds have over TIPS ?

 

[Dash man]

What advantage does I-bonds have over TIPS ?

IBonds are tax deferred until redeemed. TIPS need to be kept in an IRA to defer taxes.

 

[daylatedollarshort]

IBonds are tax deferred until redeemed. TIPS need to be kept in an IRA to defer taxes.

And also I bonds can be redeemed at par value at any time, with at most a small penalty. If you buy a 30 year TIPS bond at 0% real return and real rates went to 2%, you will have to sell at a loss on the secondary market if you want to sell prior to maturity. I bonds also have more deflation protection.

 

[mickeyd]

My bonds are in my AA to tamp down volatility of the whole deal. Long term AA is 45/45/10 ZZZZZ.

 

[lawman]

I'll make it easy for you. Just track these corporate notes. They are all from solid companies that are very profitable with very good interest expense coverage and free cash flow. Some are even secured bonds. The yields are not good enough for me to buy them at this point. I know from history that the panic selling driven by funds has not even started. Bond funds are selling their lowest yielding notes/bonds first. Back in February, the yields were averaging around 3% for short and medium term notes. Now they are averaging near 5%. Soon they will be averaging 6% and when the panic sets in, you will see 7-9%. Those moments are the times to buy aggressively and boost your returns and preserve and boost your capital and let the bond funds take the losses.

Copied and printed..I will begin the journey..Thanks!

 

[lawman]

I'll make it easy for you. Just track these corporate notes. They are all from solid companies that are very profitable with very good interest expense coverage and free cash flow. Some are even secured bonds. The yields are not good enough for me to buy them at this point. I know from history that the panic selling driven by funds has not even started. Bond funds are selling their lowest yielding notes/bonds first. Back in February, the yields were averaging around 3% for short and medium term notes. Now they are averaging near 5%. Soon they will be averaging 6% and when the panic sets in, you will see 7-9%. Those moments are the times to buy aggressively and boost your returns and preserve and boost your capital and let the bond funds take the losses.

All of these come up on Schwab when I plug in the CUSIP. The YTM is slightly lower but perhaps that is where Schwab makes their money..Where did you get this list?

 

[lawman]

I'll make it easy for you. Just track these corporate notes. They are all from solid companies that are very profitable with very good interest expense coverage and free cash flow. Some are even secured bonds. The yields are not good enough for me to buy them at this point. I know from history that the panic selling driven by funds has not even started. Bond funds are selling their lowest yielding notes/bonds first. Back in February, the yields were averaging around 3% for short and medium term notes. Now they are averaging near 5%. Soon they will be averaging 6% and when the panic sets in, you will see 7-9%. Those moments are the times to buy aggressively and boost your returns and preserve and boost your capital and let the bond funds take the losses.

Do you have a similar list for tax free municipals?

 

[Freedom56]

All of these come up on Schwab when I plug in the CUSIP. The YTM is slightly lower but perhaps that is where Schwab makes their money..Where did you get this list?

I made the list myself by searching for the highest coupon short and medium term bonds of Fortune 500 companies that earn money today and will do so in the future and are mostly free cash flow businesses. People will always drink beer recession or not so Anheuser Busch made the list and will keep their internet and cell phones so Verizon is on the list. I stay away from sectors that historically had the highest number of bankruptcies such as energy, retail, airlines, and mining. Those sectors are just not worth the risk as they have left a trail of dead bodies.

 

[Freedom56]

I don't have a list for muni bonds. I am just tracking some closed end funds (CEFs) both leveraged and non leveraged. I only invest in muni bonds if the the yields make sense. Right now they don't. The yields are currently 3.4% for non-leveraged and 5.4% for leveraged funds. The just don't make sense right now.

 

[lawman]

I don't have a list for muni bonds. I am just tracking some closed end funds (CEFs) both leveraged and non leveraged. I only invest in muni bonds if the the yields make sense. Right now they don't. The yields are currently 3.4% for non-leveraged and 5.4% for leveraged funds. The just don't make sense right now.

You definitely have my attention..I'll be watching some of the higher rated
companies on the list..Not sure I have the nerve to go below investment grade. Keep us posted on your work..THANKS FOR SHARING!

 

[Freedom56]

You definitely have my attention..I'll be watching some of the higher rated
companies on the list..Not sure I have the nerve to go below investment grade. Keep us posted on your work..THANKS FOR SHARING!

Don't be fooled by investment grade ratings. The rating agencies are one big conflict of interest as the issuer of the debt pays them to rate it. Do you remember all the AAA rated debt backed by subprime loans in 2008 that evaporated into thin air? We have similar situations today. We have Boeing bonds still rated investment grade but Boeing has had negative cash flow and losses for about two years. Whereas Seagate Technology and Western digital are highly profitable and in a sector (storage technology) that continues to have strong demand. Both companies have low debt levels relative to operating earnings and are basically a cash business and yet they are rated high yield. Boeing was rated A+ prior to the MAX debacle now it's rated BBB- and many bond investors are perplexed given their poor financial which is deteriorating. The bottom line is I would buy high yield rated bonds of many technology companies that are highly profitable and in stable and growing sectors before buying investment grade bonds from Boeing or even GE.

 

[lawman]

Don't be fooled by investment grade ratings. The rating agencies are one big conflict of interest as the issuer of the debt pays them to rate it. Do you remember all the AAA rated debt backed by subprime loans in 2008 that evaporated into thin air? We have similar situations today. We have Boeing bonds still rated investment grade but Boeing has had negative cash flow and losses for about two years. Whereas Seagate Technology and Western digital are highly profitable and in a sector (storage technology) that continues to have strong demand. Both companies have low debt levels relative to operating earnings and are basically a cash business and yet they are rated high yield. Boeing was rated A+ prior to the MAX debacle now it's rated BBB- and many bond investors are perplexed given their poor financial which is deteriorating. The bottom line is I would buy high yield rated bonds of many technology companies that are highly profitable and in stable and growing sectors before buying investment grade bonds from Boeing or even GE.

This is why I have always used bond funds instead of individual bonds..Little did I realize I could lose so much with an investment grade bond fund..It's people like me that enable people like you to do so well..

 

[mathjak107]

The most dangerous segment of the bond market is investor grade .

Why ? Most of the investment grade stuff is in the BBB RATING .

that is the last rung of investment grade .

Any slip in credit in a recession and every institution, insurer , fund , etc that is required to stay in investment grade will be dumping this huge sector with few takers.

That is about 60% of the investment grade bond market ..it’s trillions

 

[lawman]

The most dangerous segment of the bond market is investor grade .

Why ? Most of the investment grade stuff is in the BBB RATING .

that is the last rung of investment grade .

Any slip in credit in a recession and every institution, insurer , fund , etc that is required to stay in investment grade will be dumping this huge sector with few takers.

That is about 60% of the investment grade bond market ..it’s trillions

The problem is this investment grade fund (https://advisors.vanguard.com/inves...2GPvRe9GN1qNk1dYmpBoCMFoQAvD_BwE&gclsrc=aw.ds) is now yielding 4.23% ..For me to get bonds paying that I would need to move pretty far down the quality scale..And I don't know what I am doing.

 

[mathjak107]

The problem is this investment grade fund (https://advisors.vanguard.com/inves...2GPvRe9GN1qNk1dYmpBoCMFoQAvD_BwE&gclsrc=aw.ds) is now yielding 4.23% ..For me to get bonds paying that I would need to move pretty far down the quality scale..And I don't know what I am doing.

More than half that fund is in BBB.

BBB is a greater risk than high yield ..
..

High yield is not owned by all the institutions that can only invest in investment grade bonds

So they are not in danger of being dumped in mass

 

[lawman]

More than half that fund is in BBB.

BBB is a greater risk than high yield ..
..

High yield is not owned by all the institutions that can only invest in investment grade bonds

So they are not in danger of being dumped in mass

My plan is to use what I had in VFIDX and buy individual tax free municipal bonds or investment grade corporate bonds around the end of the year..At least that's my current plan..

 

[Mulligan]

I see cumulative preferred stocks as a "red flag" since only only blue-chip companies with strong dividend histories can issue non-cumulative preferred stock without increasing the cost of capital.

Freedom, the vast majority of non cumulative preferreds are financial entities. And now by regulatory law must issue non cumulative with a few exclusions in some tiny pockets. They used to issue cumulatives, but Dodd/Frank eliminated cumulative preferreds from Tier 1 capital after the 2008-09 financial crisis.
So even a poorly capitalized bank would still have to issue a non cumulative. And they do, but they of course have to issue a higher issuance yield because of it.

 

[Freedom56]

Freedom, the vast majority of non cumulative preferreds are financial entities. And now by regulatory law must issue non cumulative with a few exclusions in some tiny pockets. They used to issue cumulatives, but Dodd/Frank eliminated cumulative preferreds from Tier 1 capital after the 2008-09 financial crisis.
So even a poorly capitalized bank would still have to issue a non cumulative. And they do, but they of course have to issue a higher issuance yield because of it.

Mulligan,

Many companies that issue cumulative are just to "sketchy" for me to even consider buying. When investing in preferred stock, I tend to focus on large money center banks that are well capitalized. The preferred stock universe is littered with too many corpses. I think this year will be another great year to load up on invest grade preferred stocks however unlike the past, the coupons are about 2% lower so they have much further to fall during periods of capitulation. They will also take longer to recover than this time. The same problem exists for corporate bonds. The coupon rates of outstanding high investment grade corporate notes are extremely low relative to the past. Bond funds are holding a lot of this low coupon debt and are in a more precarious position than the past.

 

[Freedom56]

The problem is this investment grade fund (https://advisors.vanguard.com/inves...2GPvRe9GN1qNk1dYmpBoCMFoQAvD_BwE&gclsrc=aw.ds) is now yielding 4.23% ..For me to get bonds paying that I would need to move pretty far down the quality scale..And I don't know what I am doing.

Before buying a bond fund, understand the difference between SEC yield and distribution yield. The distribution yield on your fund is 2.94% and the SEC yield is 4.23%. The distribution yield is based on the trailing 12 months distribution (i.e. what you actually receive in your account). SEC yield is an estimate based on the assumption that each bond that the fund holds will be held to maturity (which just won't happen). SEC yield can be extremely misleading. Unlike individual bonds, the distribution of a bond fund is not guaranteed. There also is no return of capital. Bond funds are not bonds period. To me they are complete scams to extract fees from investors and financial community has convinced many investors that they offer portfolio protection. They do not.

 

[COcheesehead]

My plan is to use what I had in VFIDX and buy individual tax free municipal bonds or investment grade corporate bonds around the end of the year..At least that's my current plan..

Based on your posts on here over the last few months that jump all over the place, I don’t think you have a plan or understand bonds.