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

[Montecfo]

Jldavid47 I appreciate you sharing your views. For the first time I think I see now why some folks stay short.

But I took a different tack and laddered out to 8 years (speaking only of individual issues.)

But I did it all since Oct of last year and all at 5-5.5% plus or minus.

Folks that did not ladder when rates were higher are in a more difficult position.

I do think rates are going lower but you may get some opportunities if you are active and look at all parts of the market.

But the whole idea of a ladder is not to speculate. Jazz4Cash has this right in my view and CoCheesehead says you can find deals if you shop. I think so too.

But consider this bet hedger: a "barbell" strategy. Balance your short term holdings with some quality long term holdings and fill the rest as you go. If rates go down at least the long end is sitting prettiest. If rates rise, short is good and you can extend the ladder.

Just an idea.

 

[Echard]

One of the issues I'm wrestling with is the fact that a majority of my funds are in after-tax accounts. So, establishing an asset allocation that is tax efficient is very difficult. If I want 40% in bonds, for example, I end up with quite a bit of taxable bonds every year at income tax rates.

One thing I've been thinking about is moving some portion of the bond allocation into preferred stock that has qualified dividends. I get lower tax rates and higher yields, of course at a higher risk. I already have some funds in preferred's but thinking about moving more into preferreds to be tax efficient. Has anyone built out their portfolio this way to be more tax efficient?

 

[COcheesehead]

One of the issues I'm wrestling with is the fact that a majority of my funds are in after-tax accounts. So, establishing an asset allocation that is tax efficient is very difficult. If I want 40% in bonds, for example, I end up with quite a bit of taxable bonds every year at income tax rates.

One thing I've been thinking about is moving some portion of the bond allocation into preferred stock that has qualified dividends. I get lower tax rates and higher yields, of course at a higher risk. I already have some funds in preferred's but thinking about moving more into preferreds to be tax efficient. Has anyone built out their portfolio this way to be more tax efficient?

Are tax free munis not an option for you? Have you weighed the after tax returns of taxable bonds and preferreds in comparison?

 

[Car-Guy]

At home I have 5 ladders. 2 ft step. 4 ft. step. 6 ft. step. 12 ft. convertible. 28ft extension.

In the fixed income discussion, not all ladders are equal. Upstream there was talk about ladders failing to capture rates if inverted. I say it depends on what kind of ladder.

One could go mad trying to keep their ladder short or long. I go for the low middle. I'm not going for the extension ladder. Maybe an 8 ft. step is good right now. Maybe not. I don't know.

Just like there are short, intermediate and long term bond funds, we can build different kinds of ladders.

At home, I have similar sized work ladders but I try to stay off anything over ~10' because it just too dangerous as I've gotten older... Funny, I try to keep my CD ladders short too... Why? Longer ladders may be too tall for me to climb to the top and get to the "fruit" in my remaining years.

 

[Echard]

Are tax free munis not an option for you? Have you weighed the after tax returns of taxable bonds and preferreds in comparison?

I’ve been able to keep income down into the 22-24% tax bracket, so when I compare taxable vs muni, there isn’t a muni advantage. I guess it is good that I’ve been able to keep income down in those brackets by having significant tax efficient stock holdings.

 

[Free bird]

Are tax free munis not an option for you? Have you weighed the after tax returns of taxable bonds and preferreds in comparison?

Hi Cheese. How far out does your bond ladder go out? I wonder if anyone here has a 20 year ladder with holdings from before the financial crisis circa 2008

 

[Mulligan]

One of the issues I'm wrestling with is the fact that a majority of my funds are in after-tax accounts. So, establishing an asset allocation that is tax efficient is very difficult. If I want 40% in bonds, for example, I end up with quite a bit of taxable bonds every year at income tax rates.

One thing I've been thinking about is moving some portion of the bond allocation into preferred stock that has qualified dividends. I get lower tax rates and higher yields, of course at a higher risk. I already have some funds in preferred's but thinking about moving more into preferreds to be tax efficient. Has anyone built out their portfolio this way to be more tax efficient?

Echard, the thing you have to remember is “preferred stock” has as much varied meaning as the weather does. There are baby bonds, term dated, and perpetual QDI that also have floating and reset terms in addition to the fixed rate variety. Plus they are lower cap stack and tend to trade on the long end of the yield curve (the perpetuals). Plus they tend to be more violent in their trading as compared to bonds.
At times they trade like common stocks when market is dropping and trade like bonds when the bond market is sinking. That being said I own some and trade some. But I personally dont view them as part of my “quasi ladder” I have with income issues now.

 

[COcheesehead]

I’ve been able to keep income down into the 22-24% tax bracket, so when I compare taxable vs muni, there isn’t a muni advantage. I guess it is good that I’ve been able to keep income down in those brackets by having significant tax efficient stock holdings.

Understand. Munis may offer longer non call periods if that is worth a little less yield to you.

 

[COcheesehead]

Hi Cheese. How far out does your bond ladder go out? I wonder if anyone here has a 20 year ladder with holdings from before the financial crisis circa 2008

The bulk to 2032 when max social security benefits kick in, but I have some bonds that go beyond that.

 

[Free bird]

The bulk to 2032 when max social security benefits kick in, but I have some bonds that go beyond that.

I have the hardest time looking out so far now. I watched a lady on CNBC & she thought this latest yield spike was a gift. She’s convinced now is the time to extend maturity dates. So mid 4% on CDs is the end of the road. I’m trying to get a feel for what’s happening. Mid 4% isn’t that great. I guess like someone said you gotta hood your nose & buy what’s there. If the debt ceiling argument drags out couldn’t that change the interest rate environment skewing yields higher?

 

[COcheesehead]

I have the hardest time looking out so far now. I watched a lady on CNBC & she thought this latest yield spike was a gift. She’s convinced now is the time to extend maturity dates. So mid 4% on CDs is the end of the road. I’m trying to get a feel for what’s happening. Mid 4% isn’t that great. I guess like someone said you gotta hood your nose & buy what’s there. If the debt ceiling argument drags out couldn’t that change the interest rate environment skewing yields higher?

I’ve posted this before. Maturing funds are invested long - best available that fits my ladder. I buy wide, using all investment grade bond classes/what is appropriate for an account type.
New money goes into short.
I can’t buy what might happen. I buy what is.
Virtually all my cash is invested now. I have $30k maturing June 1 and another $55k before year end. That’s really it. I am all in.
My fixed income a year ago was fighting hard to get to $100k in annual interest. I am now earning $195k - pretty safely and about $130k of that tax free.

 

[jazz4cash]

I guess like someone said you gotta hood your nose & buy what’s there.

I think that was me, but REALLY mid 4% is not stinky at all depending on the terms (maturity, callable, quality, etc). Look back where we’ve been for the last 10 plus yrs and these rates are decent. WRT getting comfortable going to longer maturities you could take a tiny position to start. One thing that gets missed is that if you get a 5 yr term for 4.5% maybe it is just OK now but in 3 yrs you’ll have a 2 yr note paying 4.5% that is likely to be very good compared to a new issue 2 yr.

 

[dobig]

I have the hardest time looking out so far now. I watched a lady on CNBC & she thought this latest yield spike was a gift. She’s convinced now is the time to extend maturity dates. So mid 4% on CDs is the end of the road. I’m trying to get a feel for what’s happening. Mid 4% isn’t that great. I guess like someone said you gotta hood your nose & buy what’s there. If the debt ceiling argument drags out couldn’t that change the interest rate environment skewing yields higher?

That was Gabriela Santos of JPMorgn asset management. What I find odd about her interview is she directly contradicted her boss Jamie Dimon who just a short time earlier argued we might see rates move to 6 - 7%.

She did suggest you could possibly see high single digit returns on longer duration like with treasuries and investment grade bonds.

Video.

https://www.cnbc.com/video/2023/05/...g-forward-says-jpmorgans-gabriela-santos.html

 

[swk7907]

I’ve posted this before. Maturing funds are invested long - best available that fits my ladder. I buy wide, using all investment grade bond classes/what is appropriate for an account type.
New money goes into short.
I can’t buy what might happen. I buy what is.
Virtually all my cash is invested now. I have $30k maturing June 1 and another $55k before year end. That’s really it. I am all in.
My fixed income a year ago was fighting hard to get to $100k in annual interest. I am now earning $195k - pretty safely and about $130k of that tax free.

With an inverted yield curve, doesn't laddering and always investing on the long end mean you are always missing higher rates? If the curve stays inverted for a long period of time it feels like you are just giving up yield.

It feels like it would make more sense to keep some of those maturing funds in short term or money markets and get higher yields. As the curve flattens or normalizes then you could move it to longer dated maturities.

Sure the risk is that long term rates go down from here and short term rates plummet (and go below long term rates) but it feels like that is less likely than the curve staying inverted for some time.

I'm keeping a lot of my fixed income allocation in very short term items. As longer term rates rise or short term rates fall I will start moving my funds to longer dated maturities. In the meantime I am getting 75-125 extra bps which will certainly add up.

 

[COcheesehead]

With an inverted yield curve, doesn't laddering and always investing on the long end mean you are always missing higher rates? If the curve stays inverted for a long period of time it feels like you are just giving up yield.

It feels like it would make more sense to keep some of those maturing funds in short term or money markets and get higher yields. As the curve flattens or normalizes then you could move it to longer dated maturities.

Sure the risk is that long term rates go down from here and short term rates plummet (and go below long term rates) but it feels like that is less likely than the curve staying inverted for some time.

I'm keeping a lot of my fixed income allocation in very short term items. As longer term rates rise or short term rates fall I will start moving my funds to longer dated maturities. In the meantime I am getting 75-125 extra bps which will certainly add up.

Read post 4449.

 

[swk7907]

Read post 4449.

Fair enough. So you can increase credit risk to get longer dated options to match yield of shorter dated treasuries. Increasing credit risk on shorter dated maturities doesn't really increase yield very much.

The downside to the above strategy is if there is a recession the credit risk increase could become pretty costly. Or if longer term rates do risk you are locked into current short term rates (5-6%) and miss out on being able to roll into even higher rates (spreads between treasuries and lower quality debt grows with higher rates)

 

[COcheesehead]

Here is my duration over my ladders. The black dot is the total market. The green dot is me. So I lean slightly short-intermediate. 100% investment grade.

 

[COcheesehead]

Fair enough. So you can increase credit risk to get longer dated options to match yield of shorter dated treasuries. Increasing credit risk on shorter dated maturities doesn't really increase yield very much.

The downside to the above strategy is if there is a recession the credit risk increase could become pretty costly. Or if longer term rates do risk you are locked into current short term rates (5-6%) and miss out on being able to roll into even higher rates (spreads between treasuries and lower quality debt grows with higher rates)

There are folks who seek locking in the very best rate and they will sit on their hands with analysis paralysis and do nothing and then there are people like me who accept that I may not capture the very best yield, but yet get a pretty good yield all the while collecting cash. That is really all I care about.
You also miss the point of the very nature of a ladder. I will always have maturing funds to reinvest.

 

[Montecfo]

With an inverted yield curve, doesn't laddering and always investing on the long end mean you are always missing higher rates? If the curve stays inverted for a long period of time it feels like you are just giving up yield.

It feels like it would make more sense to keep some of those maturing funds in short term or money markets and get higher yields. As the curve flattens or normalizes then you could move it to longer dated maturities.

Sure the risk is that long term rates go down from here and short term rates plummet (and go below long term rates) but it feels like that is less likely than the curve staying inverted for some time.

I'm keeping a lot of my fixed income allocation in very short term items. As longer term rates rise or short term rates fall I will start moving my funds to longer dated maturities. In the meantime I am getting 75-125 extra bps which will certainly add up.

Historically, yield curve usually reverts with short rates falling. Rates along the short end of the yield curve follow. Long rates move up some or down some.

For these reasons I think staying short is fool's gold.

But of course this time could be different, also inflation could suddenly rise sharply etc. But that is what I see now.

I ladder. So no need to speculate.

 

[Freedom56]

Let me reiterate. The 10, 20, 30 year treasury rates are still too low. The 20 year treasury is once again over 4%. It's only a matter of time before the 10 and the 30 year do the same. With the national debt rising, the credit risk increases with time, the market forces will push long rates up. Holding low coupon long duration debt is a dangerous proposition as many banks have realized and also holders of intermediate and long duration bond funds. Rates are not going to zero anytime soon. The 5%+ CDs will soon become the norm.

 

[pb4uski]

Here is my duration over my ladders. The black dot is the total market. The green dot is me. So I lean slightly short-intermediate. 100% investment grade.

What terms are short, intermediate and long on this analysis? What is the weighted average remaining term to maturity of your portfolio?

One source I looked at said the weighted average maturity of the Barclays bond index was 8.76 years. Is your weighted average maturity about 8 years?

 

[COcheesehead]

What terms are short, intermediate and long on this analysis? What is the weighted average remaining term to maturity of your portfolio?

One source I looked at said the weighted average maturity of the Barclays bond index was 8.76 years. Is your weighted average maturity about 8 years?

I am at about that duration based on maturity dates, but that is somewhat of a misnomer. I hold some high coupon agency bonds that I would be shocked if they weren’t called soon. So the real duration is likely more in the 6-7 year range.

 

[Echard]

I think about the ladder in terms of delivering 5% interest, because at that rate I have excellent coverage of my living expenses (and then some), and because long-term rates treasury rates (10 yr+) are probably not going to going to go much higher than ~4-5% max imo. So, while any intermediate to longer-term bonds I hold may decrease in value until maturity, I can cover living expenses, and they won't drop so much that I'd be losing out on a ton of upside. I more worry about getting stuck with longer term rates of 3.5-4%, which isn't as good for covering living expenses.

 

[COcheesehead]

I think about the ladder in terms of delivering 5% interest, because at that rate I have excellent coverage of my living expenses (and then some), and because long-term rates treasury rates (10 yr+) are probably not going to going to go much higher than ~4-5% max imo. So, while any intermediate to longer-term bonds I hold may decrease in value until maturity, I can cover living expenses, and they won't drop so much that I'd be losing out on a ton of upside. I more worry about getting stuck with longer term rates of 3.5-4%, which isn't as good for covering living expenses.

If you are buying for income and intend to hold to maturity, the coupon matters a lot. So I agree. If the mark to market bounces and some bank bonds promoted on here have had some wild m to m swings, it doesn’t really matter.

The other important factor for me is reliability. The tax free ladder I have has very little in it that can get called in the near term. That’s the ladder we live off of.

 

[Echard]

It seems like A and BBB bond yields in the 7-10 year range are about ~.2-.3% higher than they've been in the last few weeks. edit: Debt ceiling related?