Is this the worst possible time to buy a bond fund?

[dshibb]

Auction!!!, prices are better especially ones with an *, which means that they are selling a surplus amount. This needs to be weighted with the tax benefits of buying in a tax sheltered account.

If anybody has any information on how to purchase from an auction using a tax sheltered vehicle I'm all ears. Even if it means selling you're higher coupon TIPS through an intermediary and buying them back through the tax sheltered account.

The time horizon on bonds is very short. I think its like playing with fire. You can attempt to market time(i.e. buy now and sell within a few months after the default risk subsides, but before the inflation gets priced in), but its a very short window that you have, and if you miss it you will regret it. I'm not that balsy, so I wouldn't do it myself.

In terms of bond funds. The outlook is even scarrier. I'm not perfect on my pricing lingo, but I think the future would be constituted the same as contango. The bond fund will continue to buy up bonds at higher and higher interest rates(each more expensive than the last) to see that the previous ones have been devalued and the ones they are purchasing become devalued to. Its like dollar cost averaging into a storm; it will suck dearly until you get on the other side of the inflation mix(thats years down the road).

[clifp]

Quote:

Originally Posted by Stevewc I've also been thinking short term is probably best. Not sure if anyone answered the OP's question but it sure instigated plenty follow up questions. When it comes to bonds, the more discussion the better as for my thinking. I'm sure that will help all that are interested. Steve

I stated my opinion that I think it is a bad time to buy government bonds or bond funds. As Ha Ha said, is it the worst time ever? that can't be known.

So lets inject a bit of data into the discussion. Right now the Vanguard Total Bond index SEC yield is 4.17%. Is that high or low? The 5 year total returns on the fund are 4.08% and the 10 year and lifetime (22+ year) returns are 5.45 and 6.81% respectively. The price of 10.11 is slightly above the average which has varied between 9.46 and 10.58 over the last 10 years.
So based on this historical information it doesn't look like a horrible time to buy the fund.

Of more interest to me is to break down the bond market into various parts. These are all Vanguard bond SEC yield figures (Admiral shares where available add another ~.1%). Of course yield is not equal to the total return due to price changes in the fund, but most Vanguard bond funds trade in a fairly narrow range of $10 +/- $.50 over long periods.

Type	Short	Intermediate	Long
Bond Index	2.39%	4.55%	5.43%
Treasury	1.88%	2.29%	3.52%
Corporate (A)	4.60%	6.01%	6.68%
Municipal	.62%	3.42%	4.02%
GNMA	N/A	4.29%	N/A
Hi Yield	N/A	10.04%	N/A
Hi Yield Muni	N/A	N/A	4.8%

I find the difference in yields between the Treasury and Municipal/Investment grade corporates to be remarkable wide (and one can find lots of info on the web documenting this),especially at the intermediate duration.

Now is the prospect of 6% yield on corporate enough to compensate for the risk of prolonged recession increased corporate defaults AND the prospect of high inflation down the road? I don't know with great confidence, but if I am looking at 4% SWR that rate does allow for 2% inflation close to the historical average. If I was still working and had a household income near the 250K range, I'd find the 3.42% or 4% Muni bond funds at least marginally attractive. For those with a higher risk tolerance, if you think this government stimulation will work, as I do, the double digit yields of the High Yield look very attractive.

Finally, any question about bond funds has to be put in the context of compared to what. The stock market is up more than 20% in the last 6 weeks, while there are glimmers of hope in the economy, it is entirely possible this is all an illusion. CD offer safety the certainly don't offer much in the way of returns Vanguard show CD rates as follows 1 year 1.35% 2 year 2.75% 3 year 3.35% and 5 years 3.5%, significantly lower than any non-treasury bond fund.

[mathjak107]

we got 2.25 on 1 year cd,s 2 weeks ago.... at the time both fidelity and vanguard cd's were far lower..... we opened up cd's at 3 local banks , all were within .25% of each other

[clifp]

Quote:

Originally Posted by mathjak107 we got 2.25 on 1 year cd,s 2 weeks ago.... at the time both fidelity and vanguard cd's were far lower..... we opened up cd's at 3 local banks , all were within .25% of each other

Yes Bankrate shows similar rate for 1 year CD and slightly higher rates for longer term.

But that does beg the question how does one fund or sustain a retirement with 1 year CD of 2.25% or even longer term ones at 3.5%?

This would require a portfolio of 2-3 million to fund the typical spending levels on the board and would provide no protection from future inflation.

Perhaps a more interest question if CD returns 3.5% and inflation averages 3% and taxes are roughly 1/3 either now or once you retire, how does one possible save enough money to retire?

[mathjak107]

thats the question right now we all have

[haha]

Quote:

Originally Posted by clifp Perhaps a more interest question if CD returns 3.5% and inflation averages 3% and taxes are roughly 1/3 either now or once you retire, how does one possible save enough money to retire?

Speculate, speculate, oh lolly lolly gonna speculate...

[brewer12345]

No doubt I am going out on a limb here, but with respect to corporates (both investment grade and junk) I feel like a kid in a candy store. Why? My fondest wish is to have a portfolio return rate of 8%. So much the better if I can do more, of course. I used to have to buy equities to have a hope of getting that kind of return, but now I can buy bonds with maturities of as low as 5 years and lock in 8% to 10% to 20% returns and have less risk than equities.

So what am I buying? How about a few examples, one investment grade, one crossover, one junk:

- Axis: This is a Bermuda-based insurer/reinsurer, equity symbol is AXS. This company is run by one of the most adept underwriters in the world (who also went through a messy public divorce with the largest award to a spouse in UK history). They have continued to make money hand over fist throughout these times of woe and want, and they were actually upgraded (not a typo) by S&P in the last 6 months. I have happily been buying their senior unsecured debt maturing in 2014 at about a 10% YTM. This is an investment grade company. Their exchange traded preferred stock yields even more.

- Methanex: This is a Canadian domiciled company that is the world's largest producer of methanol (symbol is MEOH). They have more cash than debt and remain solidly cash flow positive. Over the long term, they stand to benefit from the growth of China, India, etc. as methanol is a precursor chemical for, well, almost anything. If you bought the entire company at its trading price, you would be getting their plants at less than replacement cost. If they went bust and the bondholders took the plants in return for their bonds, they would be buying the plants at less than 50% of replacement cost. In the very likely event that the company doesn't default, the 2015 bonds yield in the 14% range. Ths company is rated investment grade by one agency and is a BB name by the other (crossover).

- Navios Maritime: This dry bulk shipping company has high long term charter coverage on its vessels and is cash flow positive. They will be taking delivery of 7 large ships which are all chartered for 5 to 10 years at very attractive rates. Importantly, all of their charters are guaranteed by an agency of a AA+ rated EU government (Belgium, if I am any judge). Cash flow positive and able to pay down their debt over their time from internally generated cash flow. I have been buying the senior unsecured bonds due 2014 at north of a 20% yield. This is a junk name.

Obviously, some of these investments require a certain amount of risk tolerance. But with credit risk, diversification is a great aid and materially reduces risk. A bunch of individual bonds or the simple expediency of a fund can allow one to lock in equity-like returns at materially lower risk than equities offer. And much of the return is in the form of cash coupons.

[Ed_The_Gypsy]

to OP: yes.

[dshibb]

Mathjak, I've got a question for you. How does it make sense to get cds at 2.25 when you can track down liquid accounts that are paying out at least twice as much?

Brewer, you do know the difference between return and REAL return, right? Real return takes into account inflation rate. The only place that debt aquistion banks are buying right now is very high default rate debt. As the risk is probably substantially overpriced and that can be significantly higher than any future inflation rate. An example of that is buying up a bankrupt companies debt at 3 cents on the dollar because if the market has downgraded the debt so much and the company gets liquidated you can make 4 cents on the dollar and get 33 percent return. That can't be eroded by inflation. In the case the default risk completely eclipses the inflation risk, so that doesn't need to be a factor in the equation. This is also the same reason that the big banks actually want to hold onto their "toxic" assets.

[mathjak107]

my wife wanted to put the money we owe for next years taxes into a cd..... we sold some investment property and already have a whopper of a tax bill for 2009....

i myself like ginnie mae funds and have been using ffrhx fidelity floating rate high yield....

[clifp]

Dshibb, Brewer is a Wall St professional and specializing in fixed income/credit so the short answer is hell yes he know about real returns. Even bankrupt companies (e.g. GM) debt tends to trade closer to $.10 on the dollar than to 3 or 4 .

More importantly do you got a link to 4.5% liquid account, I'd be very interested in such an investment. Albeit a bit dubious about its safety.

[clifp]

Quote:

Originally Posted by haha Speculate, speculate, oh lolly lolly gonna speculate...

To answer my rhetorical question it is very impossible to save amount for retirement without taking some risk. I used a retirement calc on Schwab (FIRECalc was too sophisticated) and came up with a figure that somebody age 30 wanted to retire on at age 60 at a comparable salary needed to save 35,000 out of their 100,000 salary with 4% nominal return. Even for this LYBM board that would be quite a feat.

Now I know must of us know this, but I think it is worth repeating. One of the consquences (I think it is very much intended) of the unprecedent Fed and treasury actions over the last 6 months is to dramaticallly reprice risk.

An associate of Warren Buffett, said the only asset class this century not in a bubble was risk. The pendulum has swing the other way. I think safe assets are overpriced and risky are underpriced.

As Brewer said in his example they are lots of equity like returns available in corporate bonds right now. And bonds unlike stocks the risk of losing everything is fairly remote even during very tough times.

[brewer12345]

Quote:

Originally Posted by clifp As Brewer said in his example they are lots of equity like returns available in corporate bonds right now. And bonds unlike stocks the risk of losing everything is fairly remote even during very tough times.

Actually, I would say that the most valuable feature of bonds is that they mature. You know when you buy a bond that if the issuer does not default you have locked in a certain yield until maturity. In contrast, when you buy an equity, the return might or might not materialize over a particular time period. I spent a few years accumulating a position in a company that was very heavily shorted even though it was a cash cow and ran a generally low risk business. I knew they would eventually buy up enough shares to trigger a short squeeze, but I didn't know when or how far it would go. It eventually happened, but with a bond at an equivalent yield I would have had certainty of timing and a clear indication when to sell (at par or above).

[Gearhead Jim]

Quote:

Originally Posted by clifp ... But that does beg the question how does one fund or sustain a retirement with 1 year CD of 2.25% or even longer term ones at 3.5%? ...

With inflation running about -2%, a 3.5% nominal yield is a real yield of 5.5%; not too bad. Inflation will probably pick up some day, but then the CD rates will trend up. Not a way to get rich, but not as bad as you might think.

Quote:

Originally Posted by brewer12345 Actually, I would say that the most valuable feature of bonds is that they mature. You know when you buy a bond that if the issuer does not default you have locked in a certain yield until maturity. ...

That was my point in a previous post, and I can't figure out a way to make a bond fund perform like individual bonds. It could be done if the fund owned only bonds maturing on a certain date and held them to maturity, but no one seems to do that. Thus, my reluctant interest in CD's.

[clifp]

Quote:

Originally Posted by Gearhead Jim With inflation running about -2%, a 3.5% nominal yield is a real yield of 5.5%; not too bad. Inflation will probably pick up some day, but then the CD rates will trend up. Not a way to get rich, but not as bad as you might think. That was my point in a previous post, and I can't figure out a way to make a bond fund perform like individual bonds. It could be done if the fund owned only bonds maturing on a certain date and held them to maturity, but no one seems to do that. Thus, my reluctant interest in CD's.

Well according to the BLS the CPI for the first 3 months of the year is running at an annualized at positive +2.2.% and in 2008 it was +.1% for the whole year. Other than housing, gas, and selected food prices I am not seeing many price declines.

You may want to check out bond unit investment trust which is a unmanaged collection of bonds with a fixed maturity and termination date. They aren't as popular as they use to be but maybe worth investigating, because I agree that known bond maturity is a very important factor.

[dshibb]

ClifP, How about almost all of them? Best Nationally Available High APY Liquid Accounts
Redneck, Advantage, and AmericanNet apparently have fallen, but Coulee is now at the top with 5.01, and 1st Arkansas is at 4.44. Those are reward checking so you need to have a direct deposit(there are ways to fake that if you search that forum) every month. And like 10-15 debits a month. You buy the small items that you need and then go to the gas station a few times and put in like 10 cents to make-up your required debits.

If you don't want the hassle there are two high yield savings at 3.05 and 3.00.

There also have been a few installment accounts that are paying like 5-6 percent, look on the forum(fatwallet) for those.

[dshibb]

Correction those Witchita(Redneck, Evantage, etc.) banks are still the best, some idiot edited them down, but according to their websites they are still paying 5.25%. They also don't require a direct deposit and only require 10 debits a month.

I wouldn't worry about safety they are FDIC insured, and the math on rewards checking accounts usually allows the bank to make out okay. The average person having them has way less than the max, and when they use their debit card the bank gets fees back from the seller; that accounts for like 2.5% annually(don't confuse that amount for the % fee they are charging the merchant). After that from what I can tell most of these high yield banks are offering those for one of two reasons. The first is that they are in expansion and acquisition mode right now and its still cheaper credit than what other companies get for floating a bond. At least that was the case when the WSJ did an article on Beal Bank.The second and more common is that they are teaser rates that are subject to change significantly in like a year.

[dshibb]

Hey brewer, sorry for the comment earlier, I'm not the biggest fan of corporate bonds that yield less than 15% in this environment. Primarily because of the inflation factor and the fact that the stock market is very high beta and when they have a bull they really have a bull, but of course that goes the other way too.

I am curious to hear any other higher risk/higher yielding bonds that you would recommend.

[brewer12345]

Quote:

Originally Posted by dshibb I am curious to hear any other higher risk/higher yielding bonds that you would recommend.

To be clear: I am recommending nothing to anyone. I mentioned some individual issues I have bought as an illustration of what is out there, not because I am recommending anything to anyone.

Other stuff on the menu lately:

- Aspen preferred: AHL preferred series A. This is exchange traded with a $25 par and a 7.4% coupon. I have ben buying between $12 and $12.50 for a 15% yield. The coupon is a qualified dividend. They are similar to Axis capital, and have continued to make money during this mess. Interestingly, they recently bought about a third of this issue of preferred at $12.50, which suggests they have ample cash and capital.

- Ford Motor "baby bonds": These are 202X $25 par bonds that are exchange traded. They come up as F+A at Schwab. I bought at $10 and under on the view that an 18% yield on a bond issued by a company I think will ultimately "make it" was worth a modest fling. If they do end up going BK, the govt isn't involved so won't be pulling a cramdown like they are with Chrysler and GM. There are similar issues from Ford Motor Credit under tickers FCZ and FCJ. I view Ford Credit as a better credit than Ford Motor, and likely to stay out of BK even if Ford Motor files.

- ArcelorMittal: Today I bought some senior unsecured bonds maturing in 2018 at about a 10% yield. This is the world's largest steel company which has vertically integrated into both raw materials (coal, iron ore, zinc, etc.) and downstream (steel service centers, value added products, etc.). They are BBB rated and appear to have sufficient cash and liquidity to ride out the recession. If not, as a bondholder I would get an equity stake in the largest steel company in the world. I only bought a little of this and am watching to see if I get a chance to buy a material amount at a more attractive price.

There are lots and lots of very attractively priced bonds out there and this is just a sampling. Go look at what your broker has to offer.

[clifp]

Quote:

Originally Posted by dshibb ClifP, How about almost all of them? Best Nationally Available High APY Liquid Accounts Redneck, Advantage, and AmericanNet apparently have fallen, but Coulee is now at the top with 5.01, and 1st Arkansas is at 4.44. Those are reward checking so you need to have a direct deposit(there are ways to fake that if you search that forum) every month. And like 10-15 debits a month. You buy the small items that you need and then go to the gas station a few times and put in like 10 cents to make-up your required debits. If you don't want the hassle there are two high yield savings at 3.05 and 3.00. There also have been a few installment accounts that are paying like 5-6 percent, look on the forum(fatwallet) for those.

The reward checking seem very gimmicky to me, sort of like trying to play the balance transfer game (another popular pastime at Fat Wallet) with lots of restriction including a limit of 10K to get maximum interest for the Redneck bank.

I've been moderately burned several times with teaser rates disappearing or in the case of Netbank, disappearing completely (FDIC takeover) and going through the moderate hassle of seeing my account transferred to ING direct.

On other hand the 3% savings account do seem like they would be a reasonable alternative to CD. After a bit of searching I also found that Schwab bank now offers a high yield savings 2% which is higher than the best Schwab Money Market. And for me worth the trouble of setting up yet another account.