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

[Freedom56]

The more people learn that bonds are not some esoteric financial instruments, the more confident they will be in the future. I started investing in only investment grade but over time I learned that bond issuer ratings is just one data point. The company financials are the most important. With time many will venture into the high yield market which is far more speculative but the returns can be phenomenal. Many people I know thought I was crazy buying Advanced Micro Devices 8/15/22 7.5% notes back in 2016 when it was rated CCC+. I saw a company in a turn-around situation with the introduction of Ryzen CPUs. I bought $100K face value bonds for about $62K and it paid a coupon of 7.5%. They matured last week at par. AMD bonds are rated A now. So my $62K investment returned $100K capital 45K in interest payments.

 

[lawman]

Yes there are opportunities for the lower coupon bonds. Many investors buy them for their IRAs. Funds normally sell those first when it's time to liquidate. They fall pretty hard and fast when funds liquidate them. I would not buy them unless you receive at least a 1-2 points premium to higher coupon issues with similar durations from the same issuer.

You have touched on this a couple of times..I don't understand what difference the coupon makes as long as the YTM is acceptable and you expect to hold it until maturity..Am I missing something?

 

[Freedom56]

You have touched on this a couple of times..I don't understand what difference the coupon makes as long as the YTM is acceptable and you expect to hold it until maturity..Am I missing something?

If you are an income investor and want cash flow to cover expenses, the higher coupons are better. Many people I know live on their interest/dividend income from bonds/notes, CDs, and preferred stocks without touching their capital until it matures when it is re-invested. For many income investors, there is no such thing as selling funds to cover annual living expenses.

 

[Spock]

You have touched on this a couple of times..I don't understand what difference the coupon makes as long as the YTM is acceptable and you expect to hold it until maturity..Am I missing something?

I can invest more cash if the bond throws off income to live on periodically vs. waiting years for a zero coupon bond to mature.

 

[ejman]

The more people learn that bonds are not some esoteric financial instruments, the more confident they will be in the future. I started investing in only investment grade but over time I learned that bond issuer ratings is just one data point. The company financials are the most important. With time many will venture into the high yield market which is far more speculative but the returns can be phenomenal. Many people I know thought I was crazy buying Advanced Micro Devices 8/15/22 7.5% notes back in 2016 when it was rated CCC+. I saw a company in a turn-around situation with the introduction of Ryzen CPUs. I bought $100K face value bonds for about $62K and it paid a coupon of 7.5%. They matured last week at par. AMD bonds are rated A now. So my $62K investment returned $100K capital 45K in interest payments.

According to Portfolio Visualizer, an investment of $62,000 in VFINX on January 2016 would have a value of $140,406 at the end of July 2022, so not too different from the $145,000 total value you mentioned. It seems to me that from your description the Advanced Micro issue was considered risky at the time of your purchase. How is the risk different from investing in a diversified Stock Index Fund? Thank you.

 

[alaska55]

He's wrong on the dates for AMD Ryzen 1st gen release dates. The Ryzen 7 cpus were released 1st in March 2017 followed by Ryzen 5 and Ryzen3. I bought a Ryzen 5 1600 in June of 2017.

 

[COcheesehead]

I can invest more cash if the bond throws off income to live on periodically vs. waiting years for a zero coupon bond to mature.

He isn’t talking about zero coupons, but rather lower than current market coupons. Those bonds will give you income and appreciation. It just depends what your goals are. In my taxable, I live off the income from my muni bonds so I want income. In my IRA I can live with total return, so I buy below par bonds with lower coupons. There are some deals out there right now for 2 year bonds yielding close to 6%.

 

[lawman]

For those newbies like me here is a link that was at the bottom of my confirmation of a bond I bought yesterday..It does a good job of explaining the basics about bonds..https://bondfacts.finra.org/06748XNQ0?

 

[Born2Fish]

He isn’t talking about zero coupons, but rather lower than current market coupons. Those bonds will give you income and appreciation. It just depends what your goals are. In my taxable, I live off the income from my muni bonds so I want income. In my IRA I can live with total return, so I buy below par bonds with lower coupons. There are some deals out there right now for 2 year bonds yielding close to 6%.

CUSIP Numbers

 

[COcheesehead]

cusip numbers

09261hab3

 

[sengsational]

That's a small bank. I thought 6% on a muni was too good.

 

[COcheesehead]

That's a small bank. I thought 6% on a muni was too good.

I never said it was a muni.

 

[aja8888]

09261hab3

Texas buyer not eligible.

 

[COcheesehead]

Texas buyer not eligible.

I wonder why. I just bought some living in Colorado.

 

[Freedom56]

He's wrong on the dates for AMD Ryzen 1st gen release dates. The Ryzen 7 cpus were released 1st in March 2017 followed by Ryzen 5 and Ryzen3. I bought a Ryzen 5 1600 in June of 2017.

AMD announced the Ryzen processors in 2016. They were well through testing in late 2016 before they made the announcement. The market was well aware what was coming before the official release date. This is the same for the Zen 4 release later this year. The testing has been going on since mid 2021.

 

[Born2Fish]

Texas buyer not eligible.

I wonder why. I just bought some living in Colorado.

OK, I froze after looking at the risk.

COcheesehead - How are you comfortable selecting Baa3/BBB- Corp bond during the ongoing mess?

I have little experience in evaluating risk, but it looks like Corporates have a significant risk compared to the risk of the same rated Muni (chart on page 12)


https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/fixed-income/moodys-investors-service-data-report-us-municipal-bond.pdf

 

[COcheesehead]

OK, I froze after looking at the risk.

COcheesehead - How are you comfortable selecting Baa3/BBB- Corp bond during the ongoing mess?

I have little experience in evaluating risk, but it looks like Corporates have a significant risk compared to the risk of the same rated Muni (chart on page 12)


https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/fixed-income/moodys-investors-service-data-report-us-municipal-bond.pdf

I own a bunch of lower, but still investment grade bonds. I keep durations short and never had one default. I go longer duration with higher rated munis. I own about 200 individual bonds, corporate and muni.

 

[Turbo29]

I wonder why. I just bought some living in Colorado.

I've seen this on brokered CDs before, where they couldn't be purchased by Texas residents. Has something to do with what are called "Blue Sky Laws."

Investopedia -- Blue Sky Laws

 

[Freedom56]

According to Portfolio Visualizer, an investment of $62,000 in VFINX on January 2016 would have a value of $140,406 at the end of July 2022, so not too different from the $145,000 total value you mentioned. It seems to me that from your description the Advanced Micro issue was considered risky at the time of your purchase. How is the risk different from investing in a diversified Stock Index Fund? Thank you.

I don't buy stock index funds and would neve even consider buying them. . When you invest in a high yield bond at a large discount, you are speculating that company will continue to maintain their coupon payments to maturity. Your total gain can be projected at any time. To me individual bonds are always lower risk than stocks.

 

[DJRR]

I also greatly appreciate the discussion and the helpful insight provided by Freedom56 and others. I used this as the motivation to break a lot of low yield sub 1% CDs and get my emergency funds into rolling treasuries. I have even bought one of the financial new issues for 4.5% and a more speculative bond. Has been fun and a great learning experience.

There are some deals out there right now for 2 year bonds yielding close to 6%.

My example is 09261HAB3 It is the leverage for the Blackstone Private Credit Fund. This is a private fund for qualified investors that holds private secured loans to corporations. After reading the prospectus of the fund, I like the concept and feel comfortable owning the debt. It is designed to relatively outperform in a downturn and has restricted quarterly liquidity, so no runs on the portfolio. Backed by a good name, securitized, and low default rates currently.

Current YTM is ~ 5.8% on a 2 year maturity. The coupon is only 1.75% but I do not need current income. More risk than a CD but I only have a few $1,000 in and seems like a reasonable compensation to me vs. treasuries.

Did not know that I could get this type of asset for $1 a bond until reading this thread about a month ago. Pleased so far, which means the bond market is about to crash

 

[DJRR]

09261hab3

LOL. Great minds think alike. Definitely a sign that the golden age is coming to an end, but I feel a lot better about it with stock market getting a 3% hit today.

If you are comfortable with the amount of risk in the equity market then I think this is a relatively small leap. Buying bonds at 62% discount level is a whole lot different, and I do not have the confidence to do that yet.

 

[Montecfo]

I've seen this on brokered CDs before, where they couldn't be purchased by Texas residents. Has something to do with what are called "Blue Sky Laws."

Investopedia -- Blue Sky Laws

It costs money to meet regulatory criteria in each state. So they pick markets from which they expect demand or which are least costly.

At least that is how it works with private placements.

 

[alaska55]

AMD announced the Ryzen processors in 2016. They were well through testing in late 2016 before they made the announcement. The market was well aware what was coming before the official release date. This is the same for the Zen 4 release later this year. The testing has been going on since mid 2021.

Amd track record had been so bad the previous Bulldozer cpus were crap no one trusted them to put out anything good. The market didn't know ****. Plus they had a untested CEO,she turned out to be great. You took a flyer and got lucky. I was one of many gamer that was hoping AMD could pull it off because of intel was just sitting on their ass since the 2nd gen I core release. Don't compare the ZEN 4 release to the ZEN 1 release they have a track record now of 5 years with Ryzen. No competition was bad for the industry. Anybody that states on a forum that they never lost money on any investment ever

 

[Freedom56]

Amd track record had been so bad the previous Bulldozer cpus were crap no one trusted them to put out anything good. The market didn't know ****. Plus they had a untested CEO,she turned out to be great. You took a flyer and got lucky. I was one of many gamer that was hoping AMD could pull it off because of intel was just sitting on their ass since the 2nd gen I core release. Don't compare the ZEN 4 release to the ZEN 1 release they have a track record now of 5 years with Ryzen. No competition was bad for the industry. Anybody that states on a forum that they never lost money on any investment ever

I'm not a gamer but my entire career was in the technology sector after university and have a fairly good understanding of how this sector operates. There is no certainty or "long term" investing in this sector. Companies go through boom and bust cycles. The companies I worked for worked with all the major players in the industry, Intel, Xilinx, Broadcom, Qualcomm, Micron Texas Instruments, and others. We and other companies in the industry always had access to advanced samples of new designs that we could integrate into our products well in advance of any formal releases of the product. Industry insiders know if a product is going to work or is likely to bomb, well before it's introduced to the market. There were many signals that were out AMD was finally turning around and that their future designs were even better than the initial Ryzen release in 2017. Many design engineers I know who were diehard Intel designers, suddenly were praising AMD a company that they loathed in the past.

I never stated that I never lost any money on any investment ever. Before I became a self-directed investor, I relied on full service brokers who led me to one money losing equity investment after another. I quickly learned that there was no such thing as buy and hold for the vast majority of stocks and there was no such thing as "long term" for any company. Stocks dividends were not a certainty. I took control of my finances and dumped my full service brokers and opened an account at a discount broker where I made all the decision. After four years of investing in CDs and stocks, I quickly realized that my CDs outperforming most equities over time and stocks were great for company insiders to sell to investors but not as long term investments. Since I shifted to 100% fixed income investing, I have never lost any money. All the stock grants I received from my company were sold immediately after they vested and moved into fixed income investments. I started with CDs and treasuries and then investment grade corporate bonds. As yields continued to plunge, I shifted to preferred stocks and high yield bonds. I limit my risk by investing only in sectors I understand. Having worked in executive management in a Fortune 500 company, I understand how financial games are played when reporting earnings. Bond investors are better at assessing risk than stock investors. Bond investor are focused on coupon payments and return of capital. They are lending companies money. Stock investors are looking for a bigger fool to bid up the stock they bought.
Bond investors are concerned about operating earnings and free cash flow. Stock investors are speculating on a concept and future of company and often become disconnected from reality as the market is today.

 

[sengsational]

https://www.fidelity.com/bin-public...ors-service-data-report-us-municipal-bond.pdf

Great contribution to the thread!!

I never said it was a muni.

I should have read this more closely:

In my taxable, I live off the income from my muni bonds so I want income. In my IRA I can live with total return, so I buy below par bonds with lower coupons.