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

[Echard]

Important tax question as a follow-on from an earlier tax question about tax on interest in an after-tax/taxable investment account:

1. Zero coupon bonds have imputed interest that you have to pay every year on your taxes, even though you didn't receive the interest yet.

2. It is also my understanding that debt/bonds with coupons below the IRS minimum interest rate also creates an imputed interest tax liability. This minium interest rate is published monthly by the IRS and usually is around treasury rates.

So, if you buy low coupon bonds is the brokerage calculating imputed interest for your 1099-INT every year? Or, do you have to do it manually? Or, are people ignoring this?

I never hear anyone talk about this. Clearly, the IRS isn't going to provide a "free tax lunch" to investors by allowing all of the gains of a bond bought below par to be taxed at capital gains rates just because the coupon rates were low.

 

[Born2Fish]

Callables I assume will be called, so I assume they mature at the call date.

Can be attractive. But I think you also want to fill out the long end of your ladder.

Monte - can you provide direction to fill out the long end?

I am buying from New Issues. Offerings now either provide lower yields for a short duration or higher yields that are callable after a year or so, with durations >8 years. It looks good to buy the high yield, but one could end up handcuffed if we have a prolonged period of runaway inflation.

How "LONG" is "LONG"?

 

[Montecfo]

Monte - can you provide direction to fill out the long end?



I am buying from New Issues. Offerings now either provide lower yields for a short duration or higher yields that are callable after a year or so, with durations >8 years. It looks good to buy the high yield, but one could end up handcuffed if we have a prolonged period of runaway inflation.



How "LONG" is "LONG"?

I have found it better to fish in the secondary market. These callables are pervasive now, but not so much a couple of years ago and earlier.

Do you need the income? As coupons are lower in those older issues but prices also lower, often to more than compensate.

I have gone out 8 years. That seems long enough to me now.

But if you have an 8 year ladder your weighted average duration is 4ish which seems reasonable.

I have quite a bit maturing later this month, so will look more as that gets closer, probably after next Fed raise.

But now is good too I think as longer yields have been pretty sticky.

 

[Echard]

Does anyone use a tool to traction their bond ladder? I have spreadsheets but I find it lacking and wondered whether there are any canned tools already available that can address projected income, capital gains, amounts maturing each year, etc. I've been roughly estimating in spreadsheets but would like to have it more exact.

 

[Freedom56]

Keep in mind, prior to the "war on savers" that started in 2010, 5.8%-6% was the norm for 10 year "A" rated notes and much higher for 15-30 year notes even back in 2010. Individual bond investors should avoid buying any high grade bond with durations above 10 years unless the coupons are at least 6.25%+. We should be able to lock 6%+ yields though 1-7 year durations fairly soon with high grade corporate bonds and CDs will yield above 5.25+ stretching out to 5 years duration. Investors will be dumping their bond funds as they still only pay 1.5-2.7% in distributions. This will put pressure on yields. Money market funds should hit 5% yield in a few months if not sooner. The market is still hoping for rate cuts in mid 2024 (from mid 2023 last month). Pretty soon they will push rate cut hopes off until 2025 unless something breaks.

 

[Freedom56]

Does anyone use a tool to traction their bond ladder? I have spreadsheets but I find it lacking and wondered whether there are any canned tools already available that can address projected income, capital gains, amounts maturing each year, etc. I've been roughly estimating in spreadsheets but would like to have it more exact.

Fidelity has fixed income analysis tools that helps track your fixed income portfolio (bonds/CDs). I use excel to project and track my coupon payments by month.

 

[Born2Fish]

I have found it better to fish in the secondary market. These callables are pervasive now, but not so much a couple of years ago and earlier.

Do you need the income? As coupons are lower in those older issues but prices also lower, often to more than compensate.

I have gone out 8 years. That seems long enough to me now.

But if you have an 8 year ladder your weighted average duration is 4ish which seems reasonable.

I have quite a bit maturing later this month, so will look more as that gets closer, probably after next Fed raise.

But now is good too I think as longer yields have been pretty sticky.

I don't have a planned "ladder". My investments are skewed. Early on I bought a lot of T-Bills that are now maturing weekly (40% of my fixed income are T-bills 6 month or less). I need to flesh out the ladder as the T-Bills mature.

85% of my Fixed Income investments are in tIRAs.

This is my current weighted average yield distribution. Any recommendations for weighting are appreciated.

% Portfolio	Maturity
44%	<1 yr
33%	2-5 yrs
17%	4-6 yrs
7%	7-10 yrs

 

[Toocold]

I'm thinking that if they can come up with a pricing model for options (Black-Scholes), maybe one of those Chicago business school types have a model for callable bonds.

Fabozzi's book on fixed income analysis has formulas for this. It's basically standard bonds minus the price of the call. The price of the call option is derived from binominal model. That's how traders price it. The inputs are somewhat similar to black-scholes (eg. time, volatility, current price of asset).

 

[COcheesehead]

Does anyone use a tool to traction their bond ladder? I have spreadsheets but I find it lacking and wondered whether there are any canned tools already available that can address projected income, capital gains, amounts maturing each year, etc. I've been roughly estimating in spreadsheets but would like to have it more exact.

I use the Fidelity Fixed Income Analysis. Shows cash flow by month and year, tax status, maturity and call dates, credit quality and ladder summary data. Pretty robust.

 

[Freedom56]

SVP financial group stock getting slammed on bond losses. This is what happens when you have clueless people piling records amount of cash into treasuries yielding next to nothing in 2021 before the rate hikes started. Contrast this with JP Morgan who held record amounts of cash in the summer of 2021 earning zero rather than invest in treasuries.

"SVB, the parent of Silicon Valley Bank, late Wednesday said it would book a $1.8 billion after-tax loss on sales of investments and seek to raise $2.25 billion by selling a mix of common and preferred stock. The bank’s assets and deposits almost doubled in 2021, large amounts of which SVB poured into U.S. Treasurys and other government-sponsored debt securities. Soon after, the Federal Reserve began its rate-hiking campaign."

https://www.wsj.com/articles/bond-l...arent-to-raise-capital-125e89d4?siteid=yhoof2

How many other financial institutions did this?

 

[pb4uski]

Fidelity has fixed income analysis tools that helps track your fixed income portfolio (bonds/CDs). I use excel to project and track my coupon payments by month.

Schwab has an Investment Income report that shows estimated investment income from your current holdings by month in a bar graph or a table by holding with totals... Income for 2022 or 2023 or next 12 months.

Just found this yesterday. I wish they had a similar table for maturities.

 

[pb4uski]

I use the Fidelity Fixed Income Analysis. Shows cash flow by month and year, tax status, maturity and call dates, credit quality and ladder summary data. Pretty robust.

Is there a way to include your non-Fidelity outside holdings in the tool?

 

[latexman]

^^^^^
I just looked at it and it says you can add non-Fidelity holdings in an Excel format.

Here's their info.

 

[pb4uski]

^^^^^
I just looked at it and it says you can add non-Fidelity holdings.

Yes, I did that by linking my Schwab accounts. They show up in the Net Worth Tool and my Net Worth on the Planning Summary but it still didn't show up in the Fixed Income Analysis Tool.

But I got it to work by downloading my fixed income portfolio from Schwab, culling it to a list of CUSIPs and Quantities and saving it as an .xls file and then importing the spreadsheet as a portfolio in the Fixed Income Analysis Tool.

 

[COcheesehead]

Yes, I did that by linking my Schwab accounts. They show up in the Net Worth Tool and my Net Worth on the Planning Summary but it still didn't show up in the Fixed Income Analysis Tool.

But I got it to work by downloading my fixed income portfolio from Schwab, culling it to a list of CUSIPs and Quantities and saving it as an .xls file and then importing the spreadsheet as a portfolio in the Fixed Income Analysis Tool.

Wow, that’s pretty good.

 

[Freedom56]

More new issues. Texas Instruments 10 and 30 year bonds will begin trading soon (ratings AA3, A+) with coupons of 4.9% for the 10 year and 5% for the 30 year. The coupons are far too low for this issue to stay above par when they hit the secondary market.

https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=FTXN5552752&symbol=TXN5552752

https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=FTXN5552752&symbol=TXN5552752

 

[Montecfo]

SVP financial group stock getting slammed on bond losses. This is what happens when you have clueless people piling records amount of cash into treasuries yielding next to nothing in 2021 before the rate hikes started. Contrast this with JP Morgan who held record amounts of cash in the summer of 2021 earning zero rather than invest in treasuries.



"SVB, the parent of Silicon Valley Bank, late Wednesday said it would book a $1.8 billion after-tax loss on sales of investments and seek to raise $2.25 billion by selling a mix of common and preferred stock. The bank’s assets and deposits almost doubled in 2021, large amounts of which SVB poured into U.S. Treasurys and other government-sponsored debt securities. Soon after, the Federal Reserve began its rate-hiking campaign."



https://www.wsj.com/articles/bond-l...arent-to-raise-capital-125e89d4?siteid=yhoof2



How many other financial institutions did this?

You have never told us what bonds you were buying from 2008 to 2021. You have stated you are fully into bonds. The way you criticize professional bond buyers then as " clueless", I am curious what the smart money was doing?

 

[Montecfo]

I don't have a planned "ladder". My investments are skewed. Early on I bought a lot of T-Bills that are now maturing weekly (40% of my fixed income are T-bills 6 month or less). I need to flesh out the ladder as the T-Bills mature.

85% of my Fixed Income investments are in tIRAs.

This is my current weighted average yield distribution. Any recommendations for weighting are appreciated.

% PortfolioMaturity

44%<1 yr

33%2-5 yrs

17%4-6 yrs

7%7-10 yrs

It sounds like you want to develop a plan. The idea of a ladder is you always have funds maturing, whether your ladder rungs are annual, quarterly, monthly, etc. So thus you are always reinvesting some funds at long rates to get a crack at the (usually) higher yields. That way you can stay "interest rate agnostic".

Right now you are skewed to the short end as many are (myself included).You may want to consider evening the rungs of the ladder out to whatever your desired term is.

For example, I have a 20 quarter "step ladder" in my taxable account. Rungs are all the same, tied to my regular spending plans. As they mature they go into my checking account.

In my IRA I have an "extension ladder" with annual rungs. The lower near term rungs are thicker, with more money coming due this month, for example. I plan to redeploy that to begin to even out the rungs (though they need not be exactly the same) and to fill out missing rungs. This ladder is mainly high quality corporates (higher yielding than treasuries). These are just examples.

Rest assured, the yield curve will not be inverted forever. And when it normalizes you will very likely hear people that stayed short bellyaching about the "war on savers", when in fact they had opportunities to grab historically high longer rates but simply chose not to.

Good Investing!

 

[swk7907]

Insane the move in the bond market today. I realize it is just moving ahead of tomorrow's job report but a 17 bps move in the 2 yr (from 5.07 to 4.895) seems crazy. I'm not saying it should be at one or the other but the swings in the bond market recently seem absurdly excessive. Did that much change from yesterday?

 

[Montecfo]

Down across the board.

 

[pb4uski]

Wierd.

 

[Mulligan]

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

Insane the move in the bond market today. I realize it is just moving ahead of tomorrow's job report but a 17 bps move in the 2 yr (from 5.07 to 4.895) seems crazy. I'm not saying it should be at one or the other but the swings in the bond market recently seem absurdly excessive. Did that much change from yesterday?

The long end is begrudgingly inching up then dropping any excuse it can get. I reached a new low today. Bought a 5% 3 year monthly paying noncallable CD from UBS.

 

[Freedom56]

You have never told us what bonds you were buying from 2008 to 2021. You have stated you are fully into bonds. The way you criticize professional bond buyers then as " clueless", I am curious what the smart money was doing?

From 2008 to 2021 I owned bonds from GE, Citigroup, Bank of America, JP Morgan, Capital One Financial, Johnson & Johnson, AMD, Seagate, eBay and many others. I also bought CDs. I also bought investment grade preferred stocks from JP Morgan, Capital One, Bank of America, and others. I also bought CEFs like PDT, FPF, and FFC in 2013 and later sold out in 2016. Why don't you go back are review the preferred stock thread dating back over the last 10 years. I posted what I was doing and have consistently timed the market. I only buy when funds are in a forced selling mode. Better yet while people were panicking in March 2020 (go back to that period and see for yourself), I was aggressively buying. I did the same in 2018, 2016, and 2013. You can see all my posts from those periods. There were even times when I posted that I sold most of my holdings as the premiums over par exceeded 18 months of coupon payments and held cash waiting for the next sell-off.

In early 2022, I warned investors to get out of their passive bond funds as they were and still are bloated with too much low coupon debt and they would be unable to increase distributions to keep up with rate hikes and they had nowhere to go but down. So was that a correct call? Several months later in 2022, the some in the financial media started to recommended ditching bond funds. I also stated that we are entering a period of one of the best bond buying opportunities. So who was right, the self proclaimed Wall Street professionals who bought historically low coupon and long duration treasuries in 2021 or the investor who had the discipline to stay in cash and wait for yields to rise? Nobody with common sense would buy bond with negative yield or near zero yield and yet those dumb Wall Street bond traders did it without hesitation. Why not? They are only losing "other peoples money". A ten year treasury with a coupon of 0.6% or a 30 year bond with a coupon of 1.25% is not based on any medium to long term economic reality. Don't assume that bond and equity funds are the only road to building wealth. To me the stock market is one big casino. Valuations are completely out of touch with reality. Many people, like myself have done quite well investing in real estate and fixed income only. It may surprise you to learn, that many people in this forum are strictly income investors and understand that bond funds that pay 1.5 -2.7% in distributions are not great investments when cash yields 4.5%.

 

[Freedom56]

The long end is begrudgingly inching up then dropping any excuse it can get. I reached a new low today. Bought a 5% 3 year monthly paying noncallable CD from UBS.

The worst that can happen is you earn, 5% for the next three years with that investment.

 

[Freedom56]

Insane the move in the bond market today. I realize it is just moving ahead of tomorrow's job report but a 17 bps move in the 2 yr (from 5.07 to 4.895) seems crazy. I'm not saying it should be at one or the other but the swings in the bond market recently seem absurdly excessive. Did that much change from yesterday?

It's called a flight to safety as the equity markets fell and also traders positioning themselves before the labor report tomorrow. Many traders have been shorting treasuries over the past few weeks, driving yields up, some are covering their short positions ahead of the report.