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

[Freedom56]

Earlier in the year, I stated that 2022 was going to be one of the best periods to create or add to a bond ladder. We are almost half way through the year and yields are moving up nicely and we are entering a period where savers can once again generate income without taking too much risk. The coupons for new CDs, treasuries, and high grade corporate notes are being issued at rates that we have not seen for over five years. In the secondary markets for short term corporate bonds/notes yields are increasing to levels not seen since March 2020 as bonds funds face redemptions. This trend will continue through the year until the Fed changes course. The distribution yields from bond funds are far too low relative to safer investments where there is no risk to capital, forcing passive bond funds into a "buy high" and "sell low" mode. This will continue until money starts flowing back into bond funds. This is unlikely to happen when even CDs and treasuries are yielding more than many bond funds.

At this phase of rate hikes buy the highest coupon and shortest duration fixed income instruments. Don't go beyond five years at this point.

If you want to take zero risk buy CDs and treasuries and high grade corporate notes (A rated) when they are issued and always compare the yields. Keep in mind when you buy these types of instruments, you are paid the coupon and you capital is returned at maturity. Corporate notes from major banks in North America are the safest.

If you want better yields than what brokerage firms are offering, buy CDs, treasuries, and corporate notes on the secondary market using limit orders. Remember you have the upper hand in a rate hike cycle. For newly issued corporate notes, brokerage firms typically take 2% commission that is reflected in the coupon you are receiving. So many investors wait for new issues to hid the secondary market, when demand is weak or muted, and attempt to buy issues below par value. Brokerage firms normally don't want to hold inventory and will dump issues below par sacrificing some of their commission. The same is true for CDs. This is why you sometimes see your corporate note or CD drop below the price you paid. However at maturity your capital is returned at par. Your yield is fixed at the time you buy the CD, treasury, or corporate note and your capital is returned at maturity.

Here are some new corporate issues coming to market this week (see attached image). Of the nine issues, only the first three (Credit Suisse 4.25%, Credit Suisse 4.5%, CIBC 4.47%) are worth buying. The 42 month note from CIBC is the safest followed by the two notes from Credit Suisse.

Avoid the issue from Prospect Capital completely. This one will crash and burn in the secondary market. Shorter duration notes from this company are already trading at yields over 7% in the secondary market.

The coupons on the Dow Chemical offerings are too low and you are likely to see the prices fall and yields move up when they hit the secondary market.

The coupons on the Verizon and National Rural issues are too low and the durations are too long. These issues will fall well below par in the secondary market in this environment. So avoid these new issues at this time.

 

[Quattro73]

Thank you.
I appreciate the fixed income advice you and a couple others are sharing.

 

[npage]

Is there a general rule of thumb or experience on how often ones like the Credit SUisse offerings are called?

 

[OnTheBeach]

I was speaking with my advisor yesterday and he is recommending TLT - 20 year treasury ETF yielding 3+%

 

[Freedom56]

Is there a general rule of thumb or experience on how often ones like the Credit SUisse offerings are called?

In general rates would have to drop below what the market is willing to pay for that grade and duration. There are underwriting expenses associated with any re-financing. You can look at it like home re-financing (for those who still have mortgages). How low do rates have to drop before you would consider re-financing considering all closing costs? In all three cases of the "A" rated bank notes from Credit Suisse and CIBC, you have 18 months of call protection at yields spreads higher than normal versus treasuries for an 18 month duration. Given that all nine of the notes listed are callable, the underwriters and issuers are betting that rates are not going to stay elevated for a long period of time.

 

[aja8888]

I was speaking with my advisor yesterday and he is recommending TLT - 20 year treasury ETF yielding 3+%

YTD TLT is down 22%. I wonder why he would recommend that ETF? Did your advisor give you a reason?

 

[Freedom56]

I was speaking with my advisor yesterday and he is recommending TLT - 20 year treasury ETF yielding 3+%

TLT is down over 24% YTD and has a current distribution yield 2.04%. Your financial advisor clearly does not understand the difference between SEC yields and distribution yields. SEC yield is compute based on all securities held in the ETF held to maturity which will never happen with an ETF. The duration is too long in this environment. The only thing TLT has going for it is the number of investors shorting it and short sellers can be squeezed when the Fed changes course. Why don't you just buy a 5 year treasury note at auction or secondary market or a 5 year CD? In both cases you will earn more income with zero risk to capital.

 

[Mulligan]

TLT is down over 24% YTD and has a current distribution yield 2.04%. Your financial advisor clearly does not understand the difference between SEC yields and distribution yields. SEC yield is compute based on all securities held in the ETF held to maturity which will never happen with an ETF. The duration is too long in this environment. The only thing TLT has going for it is the number of investors shorting it and short sellers can be squeezed when the Fed changes course. Why don't you just buy a 5 year treasury note at auction or secondary market or a 5 year CD? In both cases you will earn more income with zero risk to capital.

Freedom, thanks for a sharing, always appreciate your thoughts. Here is a question I dont really have an answer for. Yes yields are higher now, but so is inflation. All things being equal is a HQ 4 year 4% bond with 8% inflation better than a 2% one with 4% inflation? We still are getting negative real returns. It is what it is I get it.
I will soon most likely look for some shorter term duration debt, like you mentioned. But I still will hit some different durations.
I held my nose recently and bought some A3/BBB- split 2033 (issued 2003) 5.75% PECO subordinate debt right near par. I personally like subsidiary ute debt as opposed to hold co debt due to the regulatory oversight of the subsidiary. If Im wrong, I still get principal back in 11 years. I wont even be kissing 70 yet, so if Im not around then, I got screwed worse on life expectancy than the bond no matter what it does.

 

[daylatedollarshort]

Thanks for sharing your insights, Freedom56. You always make good points. I don't know a lot about corporate bonds but maybe it is time for me to learn more.

 

[Freedom56]

Freedom, thanks for a sharing, always appreciate your thoughts. Here is a question I dont really have an answer for. Yes yields are higher now, but so is inflation. All things being equal is a HQ 4 year 4% bond with 8% inflation better than a 2% one with 4% inflation? We still are getting negative real returns. It is what it is I get it.
I will soon most likely look for some shorter term duration debt, like you mentioned. But I still will hit some different durations.
I held my nose recently and bought some A3/BBB- split 2033 (issued 2003) 5.75% PECO subordinate debt right near par. I personally like subsidiary ute debt as opposed to hold co debt due to the regulatory oversight of the subsidiary. If Im wrong, I still get principal back in 11 years. I wont even be kissing 70 yet, so if Im not around then, I got screwed worse on life expectancy than the bond no matter what it does.

He Mulligan,
By the end of the year the inflation narrative will shift to excess inventory/oversupply and then deflation. This is why. We had $4 trillion of stimulus in 2020 followed by another $1.8 trillion in stimulus in 2021 to zero in 2022. That supercharged the economy that is 72% dependent on consumer spending. People were also locked up in their homes spending less money on travel, dining, and entertainment. It created unprecedented demand for goods and services and fueled a massive stock market bubble and record inflation. We had and still have technically bankrupt companies with no hope of earning money rocketing up to massive valuations. We had another massive scam of crypto currency and so called disruptive technologies that are now deflating. Once again valuations and earnings didn't matter until they do. The EU and UK had their own COVID stimulus and make no mistake, inflation is a global problem now but that is already discounted in the market. I saw that first hand when we were in Europe last November. However things are slowing down everywhere. It only looks crowded everywhere because people were staying at home for over a year.

Now that there is no more free money on the way, the demand for goods and services will start dropping back to normal levels and inventories will build up. Next we have the dollar appreciating versus global currencies which will put downward pressure on prices of imported goods.

You can earn .62% to .82% for cash balances now or you ease your way into short term high quality debt and earn 4-6x more. I personally am buying BB to BBB- short term (1-2 year notes) at YTMs of 7% to 8%. However I'm willing to take more risk. Personally I don't think a company like Western Digital or Seagate technology who are in a sector where demand is robust and will continue for several years will default on their notes. Bond fund redemptions are creating these yield surges as they liquidate due to redemptions and their normal stupidity of maintaining their fund durations (i.e. sell the shortest term and buy longer term). However for the average investor who wants the absolute security of a CD, the high grade short corporate notes are a better alternative to holding cash. Buying treasuries, CDs, and high grade corporate notes at these yields is much better than buying bond funds that are yielding on average 2-2.5% on a real distribution basis. At some point it will be time to buy longer durations and preferred stocks but we are not there yet.

 

[lawman]

Thanks Freedom..I have a pot full of money ready to invest....I plan to buy mostly C.D's and treasuries but I also want to dip my foot into the investment grade corporates..I look forward to your analysis and commentary.

 

[Freedom56]

Thanks Freedom..I have a pot full of money ready to invest....I plan to buy mostly C.D's and treasuries but I also want to dip my foot into the investment grade corporates..I look forward to your analysis and commentary.

CDs are Treasuries are a safe way to go. The corporate notes mentioned above from banks are not only investment grade but are in the top tier. Canadian Banks are very regulated and back in 2008 none of them needed bailouts. Here in this country you have to restrict yourself to the large money center banks like JP Morgan and Bank of America.

 

[mathjak107]

Nothing reacts to a recession or depression like long treasury bonds .

Investors scrambling to get in can easily drive long term rates down a percent which is a 20 plus percent gain ….

No one can predict what’s next …..but the fed likely won’t make a Japan style error and raise rates in a recession causing a multi decade deflationary spiral .

I have one model that holds 25 % Tlt right now .

If you are not holding an asset ,That you would never want to own at this time , you are likely missing out on the next horse to take the lead.

There is always stuff not even on the radar that alters the course of what we think is eminent.

Remember , all the biggest drops come when markets are breaking new highs and it looks like we are going to the moon .

All the biggest gains come from when it looks like we are in a market with no bottom that has no reason to reverse course

 

[Sasquatch1]

CDs are Treasuries are a safe way to go. The corporate notes mentioned above from banks are not only investment grade but are in the top tier. Canadian Banks are very regulated and back in 2008 none of them needed bailouts. Here in this country you have to restrict yourself to the large money center banks like JP Morgan and Bank of America.

Is there a typical dollar amount you allocate for each issue? It’s tough to resist some preferreds (I.e. JPM, SCHW, DUK close to 6% and below or near par).

 

[Freedom56]

Is there a typical dollar amount you allocate for each issue? It’s tough to resist some preferreds (I.e. JPM, SCHW, DUK close to 6% and below or near par).

It really depends on how much cash you have to invest and how much you want to lock up at that yield. For corporate notes I have positions as high as $500K on certain notes and as low as $10K. Some of my bonds are restricted to a $200K purchase minimum. For CDs I can go as high as $500K for accounts with joint tenancy. Every month I have coupon payments coming in. If I can't find anything suitable, I hold cash until something suitable to buy appears. The same thing when a note, CD, or treasury matures. I won't reinvest the capital unless there is something worth buying. So I really time all my buys.

With respect to investment grade preferred stocks. We still have not seen them wash out. The coupons are much lower than in 2013 and 2015 when JP Morgan had 6.5-7% coupon preferred stocks. As we enter tax loss selling season, unless the Fed changes course, we are going to see some incredible bargains later in the year.

 

[Freedom56]

Keep an eye on this one. It is from Dell / EMC. It has about 5 years duration left. It carries a coupon of 6.1% and is investment grade and also a First Lien Note/Senior Secured note which means that the buyer is at the front of the line in the unlikely event of default. It has fallen from $120 earlier this year down to $103-104 now. It's only a matter of time before it drops below par as bond funds continue their "buy high" and "sell low" trend. At $98 the YTM is 6.6% at $95 it jumps to 7.3% and so on.

https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C981034

 

[jazz4cash]

I am probably going to pull the trigger for a small slice of the Credit Suisse corporate note. A 4.5 yield on a 3 yr note is too tempting but now I realize I don’t even know exactly what this security is. I assume it sits on the debt ladder between a bond and a CD but really what am I buying? Not risking enough to matter, but still need to learn.

Edit: Scratching around a bit, I see this is new issue senior unsecured debt (ok, I've heard that term before) and it's rated A1.

 

[daylatedollarshort]

Remember , all the biggest drops come when markets are breaking new highs and it looks like we are going to the moon .

All the biggest gains come from when it looks like we are in a market with no bottom that has no reason to reverse course

I'm not sure what your point is. This isn't a stock market thread. Different logic applies. If bond funds are yielding 2%, how would you even make any huge gains from them at this point? Interest rates would have to drop in order to increase the NAV and the most they have to drop is around 2%. But the most they can lose in NAV is dependent on how high interest rates go up, which from history we know can be over 20%.


The individual bonds Freedom56 is discussing pay more than average bond funds these days, and and can be redeemed at par if held to maturity, so unlike a bond fund, there are no principal losses. If rates go up, one just gets a higher rolling average on their ladders.

 

[kevink]

TIPS are also starting to look very attractive - indeed perhaps more so than iBonds.

Worth following this site, which has long been in a league of its own on these securities:

http://https://tipswatch.com/2022/06/19/this-weeks-5-year-tips-reopening-auction-looks-like-a-winner/

 

[Freedom56]

I am probably going to pull the trigger for a small slice of the Credit Suisse corporate note. A 4.5 yield on a 3 yr note is too tempting but now I realize I don’t even know exactly what this security is. I assume it sits on the debt ladder between a bond and a CD but really what am I buying? Not risking enough to matter, but still need to learn.

Edit: Scratching around a bit, I see this is new issue senior unsecured debt (ok, I've heard that term before) and it's rated A1.

The vast majority of the debt issued is senior unsecured debt. Bond holders are paid their coupons before shareholders any dividends. While dividends can be suspended, reduced, or eliminated, bond payments cannot without declaring default. They are contractual obligations. I'll give you and example. I have owned bonds (senior unsecured) from Citibank and Bank of America over the past 15 years and common shareholders have been literally scorched with respect to loss of capital and suspension of dividend payments but I have never lost a penny of capital nor any coupon payments.

 

[daylatedollarshort]

TIPS are also starting to look very attractive - indeed perhaps more so than iBonds.

Worth following this site, which has long been in a league of its own on these securities:

http://https://tipswatch.com/2022/0...r-tips-reopening-auction-looks-like-a-winner/

I put an order in last night. We're going to start dollar cost averaging them again as the real yields go up.

 

[euro]

TIPS are also starting to look very attractive - indeed perhaps more so than iBonds.

Worth following this site, which has long been in a league of its own on these securities:

http://https://tipswatch.com/2022/06/19/this-weeks-5-year-tips-reopening-auction-looks-like-a-winner/

link is dead for me - can you check?

 

[GenXguy]

link is dead for me - can you check?

https://tipswatch.com/2022/06/19/this-weeks-5-year-tips-reopening-auction-looks-like-a-winner/

 

[Sunset]

....

....

You can earn .62% to .82% for cash balances now or you ease your way into short term high quality debt and earn 4-6x more. I personally am buying BB to BBB- short term (1-2 year notes) at YTMs of 7% to 8%. However I'm willing to take more risk. Personally I don't think a company like Western Digital or Seagate technology who are in a sector where demand is robust and will continue for several years will default on their notes. Bond fund redemptions are creating these yield surges as they liquidate due to redemptions and their normal stupidity of maintaining their fund durations (i.e. sell the shortest term and buy longer term). However for the average investor who wants the absolute security of a CD, the high grade short corporate notes are a better alternative to holding cash. Buying treasuries, CDs, and high grade corporate notes at these yields is much better than buying bond funds that are yielding on average 2-2.5% on a real distribution basis. At some point it will be time to buy longer durations and preferred stocks but we are not there yet.

I always appreciate your views on interest bearing investments, as I don't know much about how to buy them, and never really follow them, other than to see what rate online banks have versus brick and mortar.

I used the search tool and found:
https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C1015268&symbol=STX5324236

While I would tend towards the super safe bank investments, I must admit to being tempted by this type of company bond, so I'd get some and some banks.

Looking at this, is there any minimum size of purchase, and I'm guessing I'd use the CUSIP at my brokerage to view the bond and make a purchase ?

 

[Sunset]

I put an order in last night. We're going to start dollar cost averaging them again as the real yields go up.

How do you buy tips ?

Did you do it via a brokerage or treasury direct ?

The market doesn't have to be open to put in an order ?