We are entering a "Golden Period" for fixed income investing

[Montecfo]

Holding funds hoping for higher rates is amateur stuff.

Smart money ladders and importantly Stays Fully Invested.

 

[Freedom56]

Holding funds hoping for higher rates is amateur stuff.

Smart money ladders and importantly Stays Fully Invested.

Cash in MM funds at 5% yields more that the vast majority of bond funds that are still only distributing 1.5% - 2.7% and managed by self proclaimed "professionals". So you aren't exactly penalized for holding cash now. The vast majority of fixed income investors market time. I hoarded cash from coupon payments and maturities from mid 2020 through mid 2022 waiting for fixed income to be investible again. Meanwhile those self proclaimed "professionals", after dumping their bonds at 70 to 80 cents on the dollar in March of 2020, they proceeded to buy them back above par starting in mid 2020 and then doubled down and continued to buy treasury's at near zero rates all through 2021 into 2022. Just look at the mess the created for the funds they manage.

 

[Freedom56]

The results of the 2023 bank stress tests are in.


"The 2023 stress test shows that the 23 large banks subject to the test this year have sufficient
capital to absorb more than $540 billion in losses and continue lending to households and businesses under stressful conditions. In the immediate years after the 2007–09 Global Financial
Crisis, banks subject to the stress test substantially increased their capital, which has remained
largely level for the past few years (see figure 2). The aggregate and individual bank post-stress
common equity tier 1 (CET1) capital ratios remain well above the required minimum levels
throughout the projection horizon."


The issue is not these large banks but the remaining 4500 or so smaller banks.



https://www.federalreserve.gov/publications/files/2023-dfast-results-20230628.pdf

 

[Montecfo]

Suggest we dispense with the bond fund straw man and demonizing people- fund managers again this time.

It's about individual bonds.

 

[Freedom56]

I suggest you stop referring to people holding some cash in MM funds yielding over 5% waiting for opportunities as "amateurs". They are clearly earning more than those so called full invested "professionally managed" funds. Those are the undeniable facts.

 

[RetiredAndLovingIt]

You two, (Freedom and Montecfo) need to shake hands, go back to your corners and agree to disagree before we get this valuable thread closed down again.

 

[Montecfo]

Again the thread is about bonds. Let's stick to topic please.

 

[Mulligan]

I bet you would back up the truck if you got bonds like the JP Morgan 8% non-callable at par. I'm going to start hoarding cash from coupon payments and just hold them in MM funds unless I see low risk 6%+ yields. I was concerned about my 6.25% - 6.75% notes from TD Bank, Bank of America, Goldman Sachs, being called this October/November but after listening to Powell today, not only am I not worried about call risk, It gives me hope that we will see 7%+ coupons from Goldman Sachs.

Im personally not as excited on bank debt. I am one that doesnt need overkill on credit stack either. But if JPM ever has an 8% issue (I doubt we get there), I suspect I would be able to get 10% from a subordinate debt issuance from a ute A3/BBB+ senior unsecured stack and bet they dont go bankrupt. You cant kill a regulated ute. Look at worst case PCG preferreds. Been bankrupt twice in 20 years and not only the debt but the preferreds also been made whole each time with the accumulated divis.

 

[Vincenzo Corleone]

My 2 cents:

The topic of this thread refers to "fixed income investing", and it happens to concentrate on individual bonds and CDs. As far as I'm concerned, bond funds fall into "fixed income investing".

Some may not agree with the language being used to describe bond funds and those who manage them, but I think the topic has real merit as it helps those who are less experienced to see that bond funds don't necessarily behave like individual bonds and to understand why.

I, for one, find the subject enlightening. Maybe those who do not appreciate the language being used can start their own thread.

 

[Aerides]

You two, (Freedom and Montecfo) need to shake hands, go back to your corners and agree to disagree before we get this valuable thread closed down again.

Wise words, take it down a notch folks.

 

[Phroig]

The results of the 2023 bank stress tests are in.


"The 2023 stress test shows that the 23 large banks subject to the test this year have sufficient
capital to absorb more than $540 billion in losses and continue lending to households and businesses under stressful conditions. In the immediate years after the 2007–09 Global Financial
Crisis, banks subject to the stress test substantially increased their capital, which has remained
largely level for the past few years (see figure 2). The aggregate and individual bank post-stress
common equity tier 1 (CET1) capital ratios remain well above the required minimum levels
throughout the projection horizon."

https://www.federalreserve.gov/publications/files/2023-dfast-results-20230628.pdf

I don’t know if I’m reading this correctly, but does Schwab have the best numbers, despite all noises to the contrary, followed by Credit Suisse?

 

[Freedom56]

I don’t know if I’m reading this correctly, but does Schwab have the best numbers, despite all noises to the contrary, followed by Credit Suisse?

Both have strong capital reserves and both remained well above regulatory minimums of capital ratios under extreme stress scenarios. But tier 1 capital ratios do not include unrealized losses for securities held to maturity. To that end, Banks of America is the most vulnerable among the largest banks. The issue we had with SVB and other banks was a bank run as they scrambled for liquidity. No bank can sustain a total run on deposits so it's all about confidence and trust in the bank. Many short sellers were spreading rumors on social media causing runs on banks resulting in falling share prices and thus banking profits for themselves. The rumors spread about Schwab were total nonsense. However, it is true that cash sorting will impact net income for Schwab and many other banks. Credit Suisse will soon fall under UBS. Among the largest banks in North America, TD Bank is currently the healthiest all due to the excess capital they have following failure to get regulatory approval for the all-cash acquisition of First Horizon. They have filed with Canadian banking regulators to buy bank and cancel 30 million shares.

 

[Free bird]

I suggest you stop referring to people holding some cash in MM funds yielding over 5% waiting for opportunities as "amateurs". They are clearly earning more than those so called full invested "professionally managed" funds. Those are the undeniable facts.

If this thread goes sideways & you decide you won’t post anymore please leave a forwarding address. I appreciate your contributions. If opinions you or anyone else express don’t mention any names or specific companies or funds I don’t think our opinions about investing style should be viewed as an attack on anyone. But this isn’t my house. It’s just a place I come to learn something. Thanks to everyone here who’s helping this pilgrim find his way through the wilderness

 

[Freedom56]

Here is a summary from Barron's on the stress tests.

Banks Pass Fed’s Stress Test. Now the Focus Is Dividends.

"Holding onto deposits has been a challenge for many banks as the Fed’s rapid interest-rate hikes have pushed savers to ways to earn more interest on their nest eggs. That said, the banks that are most susceptible to flighty deposits tend to be smaller, regional banks, which aren’t subject to the Fed’s annual test. The large banks that are subject to the tests, such as JPMorgan Chase (ticker: JPM) and Bank of America (BAC) actually saw their deposit bases grow during the turmoil this spring."


https://www.barrons.com/articles/bank-stress-tests-results-e7936e99

 

[jldavid47]

This morning at Schwab the best non-callable 1-year CD is yielding 5.3%. After-market treasuries maturing in one year have a YTM of around 5.45%. That's a 15 basis point advantage to treasuries. There are callable 1-year CDs yielding 5.55% but if you want more guaranteed return over the next 12 months, treasuries are the way to go. Today. Next week may be different.

 

[Freedom56]

This morning at Schwab the best non-callable 1-year CD is yielding 5.3%. After-market treasuries maturing in one year have a YTM of around 5.45%. That's a 15 basis point advantage to treasuries. There are callable 1-year CDs yielding 5.55% but if you want more guaranteed return over the next 12 months, treasuries are the way to go. Today. Next week may be different.

As we approach the next hike, it will be raining CDs again as more people shift funds to MM funds from their bank accounts and the banks will be scrambling to raise liquidity. CDs normally trade with a 40 basis point premium over treasury's so now is not the time to buy CDs. The next CPI report should show a drop below 4 but nowhere near the 2% target. So the Feds original terminal rate before the SVB bank collapse stands.

 

[Montecfo]

It might take another mini-banking crisis for high rate CDs to "rain" but that could be a welcome development.

PCE out tomorrow is the Fed's favored metric. It has been sticky so most folks will be hoping for relief.

 

[Rianne]

Wow, all this has me thinking...the end of 2023 we have many laddered short-term notes and CDs maturing. Do a large Roth conversion from tIRA and buy those long-term 6% CDs in the Roth. The monthly interest payments drop into the settlement acct. That for sure covers the monthly pension we gave up for the lump sum payment.

 

[Chuckanut]

We are entering a "Golden Period" for fixed income investing

This morning at Schwab the best non-callable 1-year CD is yielding 5.3%. After-market treasuries maturing in one year have a YTM of around 5.45%. That's a 15 basis point advantage to treasuries. There are callable 1-year CDs yielding 5.55% but if you want more guaranteed return over the next 12 months, treasuries are the way to go. Today. Next week may be different.

Thanks for the heads up. I happen to have an old lower interest CD from last year maturing this week. Getting almost 2% more starting next week will be nice even at the small amounts I invest compared to the big-hitters.

Hmmm…. Callable 1 year CDs at 5.55%. Non callable at 5.4%. IMO, 0.25% extra yield is not enough compensation for the increased risk of being called. They can keep their extra 0.25% and I will keep my money in Treasuries, non-callable CDs and MM accounts.

 

[Rianne]

If this thread goes sideways & you decide you won’t post anymore please leave a forwarding address. I appreciate your contributions. If opinions you or anyone else express don’t mention any names or specific companies or funds I don’t think our opinions about investing style should be viewed as an attack on anyone. But this isn’t my house. It’s just a place I come to learn something. Thanks to everyone here who’s helping this pilgrim find his way through the wilderness

+1

 

[Freedom56]

Think of what a 5.75% terminal rate means to fixed income investors going forward as you re-invest your first maturities and coupon payments.

1- Short term treasury's will yield 5.75-5.9%
2- CD yields will breach 6%
3- MM funds will yield about 5.5%
4- Agency notes will yield consistently above 6%
5- High grade corporate notes will yield 6.25-7.25%

We exited the pandemic with record high cash savings in bank accounts. Right now there is almost $7 trillion sitting in MM funds and swelling. MM funds or cash in the bank yielded on average .01% at the beginning of 2022. Today it is earning 5% and adding $350 billion of cash into the hands of investors and the system. The annual stimulus alone from MM fund income is significant but when you add the increase of income from CDs, treasury's, and corporate notes, you have close to $1T per year in additional buying power/stimulus. As long as the Fed fails to understand that increasing rates is adding more fuel to the fire, rates will stay elevated for a long time.

 

[imbatman]

While the new stuff has been a little slim pickings this last week at Fido, I found a couple of nice secondary buys this morning:

91159HHW3 - USB (A3/A-) 3.00% 07/30/2029 maturity (no call until 04/30/2029), trading at $84.61....so basically a 6.05% rate lock for the next 6 years with a well-rated $50B market cap bank

174610AK1 - CFG (BAA1/BBB) 4.30% 12/03/2025 maturity (no call until 11/03/2025), trading at $93.02...so basically a 7.51% rate lock for 2.5 years with a decent rated $13B market cap bank

 

[Freedom56]

While the new stuff has been a little slim pickings this last week at Fido, I found a couple of nice secondary buys this morning:

91159HHW3 - USB (A3/A-) 3.00% 07/30/2029 maturity (no call until 04/30/2029), trading at $84.61....so basically a 6.05% rate lock for the next 6 years with a well-rated $50B market cap bank

174610AK1 - CFG (BAA1/BBB) 4.30% 12/03/2025 maturity (no call until 11/03/2025), trading at $93.02...so basically a 7.51% rate lock for 2.5 years with a decent rated $13B market cap bank

New issues are hitting the secondary market slightly below par. Investors can be selective with MM funds at 5% and climbing. I have a lot of low ball bids in looking for someone to sell A rated notes at 6.5%-7% yields with 2-4 year durations. If they fill fine, if they don't I continue to earn 5% on cash balances. One thing that is certain, is that that the Fed will continue to raise rates and another wave of fund redemptions will boost yields on the secondary market. New issues will then price with higher coupons.

 

[Midpack]

My 2 cents:

The topic of this thread refers to "fixed income investing", and it happens to concentrate on individual bonds and CDs. As far as I'm concerned, bond funds fall into "fixed income investing".

Some may not agree with the language being used to describe bond funds and those who manage them, but I think the topic has real merit as it helps those who are less experienced to see that bond funds don't necessarily behave like individual bonds and to understand why.

I, for one, find the subject enlightening. Maybe those who do not appreciate the language being used can start their own thread.

+100. This is where most of my fixed income asset allocation would have been if not for threads like this. I am 5-6 $ figures better off than I would have been.

 

[Freedom56]

^^^ The sad reality is that the worst is yet to come for a fund like that with a significant probability of even more horrific losses are in the horizon when long duration yields move up. When you buy a CD, treasury, agency, or a corporate note, you are stuck with that yield for the duration of that note, but 100% of your capital is returned to you at maturity. Sure CD, treasury, agency, corporate note prices fluctuate from the time you buy it to maturity, but the 100% return of capital is real and the basis for growing your capital with fixed income investing. With risk free yields approaching 6%. We are approaching the period of "no brainer" fixed income investing.