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

[JBTX]

Quote:

Originally Posted by Exchme I was going to join the discussion with what I predict and then realized that I had no consistent set of thoughts, just a jumble of positive and negative possibilities about the future outlook. Then it dawned on me that I was exactly right. The world is too complex, self interacting and full of random events for me to make actionable predictions that are better than what the sum of everyone else already sees. I guess I'll just stick to my boring plan.

For the most part I follow this philosophy, but I think one can make a reasonable conclusion that the crowd consensus does not line up with would seem like a reasonable probability matrix and perhaps exposes you to greater risk than you would like.

While I am a general believer in efficient markets, the following are examples of some biases that may be inherent in crowd consensus:

- The crowd tends to have recency bias. Most of the crowd has only ever experienced lowering inflation and decreasing interest rates. Thus that is normal, and many seem to think we must quickly revert to that normal
- people have a hard time getting their arms around nominal vs real. For years people complained about low yields on bonds yet there was little inflation. Now some are excited about modestly higher yields with much higher inflation.
- trying to make actionable moves based on Ray Dalios musings is fraught with ambiguity. But he has been and continues to be pretty dogmatic that “cash is trash” and we are moving into a long term more inflationary cycle
- for years the conventional wisdom was that you invest in portfolios that tend to benefit from continual lowering of interest rates. That may not be the new reality now. For years many kind of turned their noses at the likes of TIPS and ibonds.

So how is any of that actionable? In my case I’ve been lowering my EF cash stake and loading up on as many ibonds as possible. Also, I already had a decent stake in TIPS, and have increased it, and may increase it more. Nothing dramatic. I may buy some additional small amounts of gold or commodities, but only around the fringes.

In my case, it isn’t that I necessarily perceive I have superior knowledge, it is more about mitigating risk, at a state approaching retirement.

[walkinwood]

I, for one, have been enjoying the more detailed posts here. Very informative. One of the reasons I like this forum.


I have no intention of managing my own bond portfolio, so will continue to keep the money I already have in bond funds in place (I'm ER'd, so no new money except when rebalancing). I don't need that money (its all in IRAs) any time soon.


These posts did make me go back and read the various discussion on how bond funds behave. I'm comfortable with my decision, but its still good to read what others who have thought about this seriously (and have nothing to sell to me) are saying.

[copyright1997reloaded]

Quote:

Originally Posted by Freedom56 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.

Freedom,
I find your post intriguing and thought provoking.

My running theory is and has been that the fed is trying to fight inflation, but will pivot (or be forced to pivot from political pressure) sooner rather than later and declare victory on inflation. Yes, will will have had a "moderating" of inflation (when this happens), but the pivot will return into an even more simulative monetary policy (and longer term inflation down the road). Even now, with markets dropping and macro trends quickly deteriorating, the real federal fund rates are negative.

So far, I've been correct in that when the talking heads were saying that inflation wasn't going to happen, then "transitory", I felt it was...well bull crap.

But again, I find your thesis interesting and appreciate your thoughts and comments.

One more possibility - some are saying what we are seeing is a "whip saw" effect as a result of the pandemic. That is, deep dive (pandemic), followed by inflation, followed again by deflationary (recession) dive, etc. for a number of years post pandemic. Any thoughts on this?

[Chuckanut]

Quote:

Originally Posted by OldShooter +100 On some of these threads, I am frequently reminded of the Dunning Kruger effect. The gist of it is that the people that know the least are the ones who are most certain of their opinions.

Yes, times like these bring out a lot of Dunning-Kruger in people. I have exhibited a bit of it myself. I try to remember that I don't know what it is that I don't know. It's a humbling thought.

Quote:

The more I know, the less I understand All the things I thought I knew, I'm learning again

[bmcgonig]

Quote:

Originally Posted by OldShooter +100 On some of these threads, I am frequently reminded of the Dunning Kruger effect. The gist of it is that the people that know the least are the ones who are most certain of their opinions.

And how certain are you of that opinion?

[emoji16]

[OldShooter]

Quote:

Originally Posted by bmcgonig And how certain are you of that opinion? [emoji16]

Well, it's a bit recursive isn't it? My basic deductive sequence is to conclude, about anyone talking with certainty about events in the future, that they don't know what they are talking about. That's why I thought @Exchme's post was so insightful and gave it the +100. I think humility in the face of uncertainty is very suitable. Ignoramus et ignorabimus, y'all.

[GenXguy]

Quote:

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

Update:

https://tipswatch.com/2022/06/23/5-y...gative-yields/

"5-year TIPS reopening auction gets a real yield of 0.362%, breaking a string of negative yields"

[Freedom56]

Quote:

Originally Posted by copyright1997reloaded Freedom, I find your post intriguing and thought provoking. My running theory is and has been that the fed is trying to fight inflation, but will pivot (or be forced to pivot from political pressure) sooner rather than later and declare victory on inflation. Yes, will will have had a "moderating" of inflation (when this happens), but the pivot will return into an even more simulative monetary policy (and longer term inflation down the road). Even now, with markets dropping and macro trends quickly deteriorating, the real federal fund rates are negative. So far, I've been correct in that when the talking heads were saying that inflation wasn't going to happen, then "transitory", I felt it was...well bull crap. But again, I find your thesis interesting and appreciate your thoughts and comments. One more possibility - some are saying what we are seeing is a "whip saw" effect as a result of the pandemic. That is, deep dive (pandemic), followed by inflation, followed again by deflationary (recession) dive, etc. for a number of years post pandemic. Any thoughts on this?

The problem with these career civil servants is that they have no experience running a business. Their jobs are pretty secure and they have generous pensions. Government employees don't have to worry about bookings, sales, expenses, and profits that many people who manage businesses do. So for the most part the market sees the Fed and the Treasury comments as lagging indicators. Yields were moving up long before the first hike and they are settling down even though the Fed has signaled a 3.8 target Fed funds rate in 2023.

As I stated before we had 6 trillion in stimulus that fueled this bubble. It turned the market into a casino where even companies that filed for bankruptcy were soaring (i.e. Hertz). The two thirds of the population who live paycheck to paycheck reverted to their spending habits after the lockdowns ended with free money. Six trillion is a lot of money in the system that will take time to unwind. However even reverting back to normal demand will appear as a "whipsaw" effect. We are starting to see that now in many sectors. It will appear like a dive as we shift from unusually high demand reverting back to normal trends.

[David3]

This thread prompted me to take a look at the new issues page on Fidelity earlier today. Saw a Citibank (I think) issue paying 4.0% maturing in Dec 23 and made a mental note to ask the folks here about it this afternoon. 4% on an 18 month note seemed pretty attractive to me. When I got around to asking, it was gone... Oh well, I'm sure there will be more options in the days ahead.

[madatrub]

Quote:

Originally Posted by David3 This thread prompted me to take a look at the new issues page on Fidelity earlier today. Saw a Citibank (I think) issue paying 4.0% maturing in Dec 23 and made a mental note to ask the folks here about it this afternoon. 4% on an 18 month note seemed pretty attractive to me. When I got around to asking, it was gone... Oh well, I'm sure there will be more options in the days ahead.

Was it Credit Suisse? 4.25% coupon 24 month.

[Freedom56]

Quote:

Originally Posted by David3 This thread prompted me to take a look at the new issues page on Fidelity earlier today. Saw a Citibank (I think) issue paying 4.0% maturing in Dec 23 and made a mental note to ask the folks here about it this afternoon. 4% on an 18 month note seemed pretty attractive to me. When I got around to asking, it was gone... Oh well, I'm sure there will be more options in the days ahead.

This note is now available:

CITIGROUP INC SER G MTN
5.00000% 06/30/2027 A3/BBB+

It is callable like all of these notes being issued but you get 5% for at least two years. Other notes from Citigroup maturing in 2027 have similar yields but at lower coupons. I put an order in for this one.

"Beginning on June 30, 2024, we have the right to call the notes for mandatory redemption, in whole and not in part, on any redemption date and pay to you 100% of the principal amount of the notes plus accrued and unpaid interest to but excluding the date of such redemption. If we decide to redeem the notes, we will give you notice at least five business
days before the redemption date specified in the notice."


It is much better than this one:

MORGAN STANLEY FIN LLC MTN
5.00000% 06/29/2032 A1/A-

[Chuckanut]

Quote:

Originally Posted by OldShooter Well, it's a bit recursive isn't it? My basic deductive sequence is to conclude, about anyone talking with certainty about events in the future, that they don't know what they are talking about. That's why I thought @Exchme's post was so insightful and gave it the +100. I think humility in the face of uncertainty is very suitable. Ignoramus et ignorabimus, y'all.

+1

Discussing humility, especially that shown from a talented person, reminds me of this exchange between Hercule Poirot and the loyal but rather dull witted Captain Hastings.

Hercule Poirot - "I am learning, Hastings. It is more English, yes, the humbleness? So, I am learning. I shall be the most humble person in the world. No one will match Hercule Poirot for his humbility."

[David3]

Quote:

Originally Posted by madatrub Was it Credit Suisse? 4.25% coupon 24 month.

No - the thing that caught my eye was monthly interest payments, and it was definitely 4.0% and 18 months. Thanks though.
I did just put in an order for some of the Citibank 5.0% 2027's. Thanks @Freedom56

[Freedom56]

Quote:

Originally Posted by David3 No - the thing that caught my eye was monthly interest payments, and it was definitely 4.0% and 18 months. Thanks though. I did just put in an order for some of the Citibank 5.0% 2027's. Thanks @Freedom56

No problem. Any time you convert cash earning 0.90% to 5% with minimum risk, it's a good day.

[walkinwood]

Quote:

Originally Posted by GenXguy Update: https://tipswatch.com/2022/06/23/5-y...gative-yields/ "5-year TIPS reopening auction gets a real yield of 0.362%, breaking a string of negative yields"

I saw that. What does it mean that TIPS are paying a positive real yield after paying negative real yields for so long?



I *think* it means that the market believes that nominal treasury bonds (with similar maturity dates) are going to yield more than inflation (inflation + .362%). Otherwise, why buy TIPS? I'd really like an opinion on this from someone who understands bonds way better than I do (which isn't saying much)



Given current nominal treasury yields, is this a signal that the market believes that the current inflation will come down soon or that nominal yields are going to rocket up past current inflation? Or a bit of both?

[JBTX]

Quote:

Originally Posted by Freedom56 This note is now available: CITIGROUP INC SER G MTN 5.00000% 06/30/2027 A3/BBB+ It is callable like all of these notes being issued but you get 5% for at least two years. Other notes from Citigroup maturing in 2027 have similar yields but at lower coupons. I put an order in for this one. "Beginning on June 30, 2024, we have the right to call the notes for mandatory redemption, in whole and not in part, on any redemption date and pay to you 100% of the principal amount of the notes plus accrued and unpaid interest to but excluding the date of such redemption. If we decide to redeem the notes, we will give you notice at least five business days before the redemption date specified in the notice." It is much better than this one: MORGAN STANLEY FIN LLC MTN 5.00000% 06/29/2032 A1/A-

Seems like if I were going to go that route I’d prefer a TIPS 2 Years out, trading at only a small premium, and resulting in close to inflation. So what are the odds that TIPS average 5% over the next two years? Seems pretty good, plus you get a govt backed security vs a BBB+ private note.

https://www.wsj.com/market-data/bonds/tips

[Freedom56]

Quote:

Originally Posted by JBTX Seems like if I were going to go that route I’d prefer a TIPS 2 Years out, trading at only a small premium, and resulting in close to inflation. So what are the odds that TIPS average 5% over the next two years? Seems pretty good, plus you get a govt backed security vs a BBB+ private note. https://www.wsj.com/market-data/bonds/tips

I want cash flow and predictable income. Buying TIPS does not do that. I really don't care about inflation. My interest income exceeds my expenses by a substantial margin plus I have a pension that covers all my expenses except excess income tax due on interest from my taxable accounts. I just want my cash to generate the highest predictable coupon during the term. The problem I have with TIPS is that I don't want to pay taxes on principal adjustments in a given year that I only receive at maturity. Also If you buy TIPS on the secondary market, you need to compare how much the current inflation-adjusted par value differs from the original par value. You are only guaranteed to receive payment up to the original face value of a TIPS. If its price is above the issue price, you could lose money if deflation drags the par value to less than you paid. I also don't trust the government's reported inflation number since it has nothing to do with my personal inflation rate.

[JBTX]

Quote:

Originally Posted by Freedom56 I want cash flow and predictable income. Buying TIPS does not do that. I really don't care about inflation. My interest income exceeds my expenses by a substantial margin plus I have a pension that covers all my expenses except excess income tax due on interest from my taxable accounts. I just want my cash to generate the highest predictable coupon during the term. The problem I have with TIPS is that I don't want to pay taxes on principal adjustments in a given year that I only receive at maturity. Also If you buy TIPS on the secondary market, you need to compare how much the current inflation-adjusted par value differs from the original par value. You are only guaranteed to receive payment up to the original face value of a TIPS. If its price is above the issue price, you could lose money if deflation drags the par value to less than you paid. I also don't trust the government's reported inflation number since it has nothing to do with my personal inflation rate.

Ok but you are buying a callable bond that is callable in 2 years. It is predictable for all of 2 years. Beyond that, if rates/inflation remain high, you will still get 5%. If rates drop, you won’t. The bond will be called.

Looking at the prices I linked you lose just under 1% per vs CPI. Whether you think cpi is accurate or not, or represents your personal inflation is largely irrelevant. What is relevant is how do they compare to a lower quality callable bond.

I’d agree on the tax inefficiency but since we are only comparing to 2 years you only have one year of paying taxes in advance.

Finally I don’t know what the attraction is to nominal fixed cash flows when inflation is running rampant. I’m more concerned with the purchasing power of the cash flow, not the nominal dollar value of cash flow.

[Freedom56]

Quote:

Originally Posted by JBTX Finally I don’t know what the attraction is to nominal fixed cash flows when inflation is running rampant. I’m more concerned with the purchasing power of the cash flow, not the nominal dollar value of cash flow.

Every situation is different. We don't see rampant inflation. We own all three homes free and clear. We have zero debt. We pay cash for our cars. We pay cash for everything including the last real estate buy. The value of our homes have surged but we own all three free and clear. The highest rate of inflation we have seen since retiring was health insurance premiums currently at $1659 a month for a Bronze PPO (no subsidies). The condo fees on our property in Florida was $648 per month in 2011 and today it's $669. Now we that we have much better yields and we can deploy our cash at higher yields. Since 1989 I have been rolling CDs, corporate notes, treasuries, and preferred stocks. I re-invest the coupons when I get favorable rates and my capital continued to compound and grow with no market risk. I have never lost on any investment during the past 33 years. Many of my high yield investments have provided amazing returns. My beloved Advance Micro Devices 7.5% notes that I bought for $62 back in early 2016 as about to mature this August at par. It was rated CCC+ in 2016 and now rated A-. I even bought some more back in March 2020. I am holding many notes/bonds with coupons at 7.5% that I purchased well below par.

[OldShooter]

Quote:

Originally Posted by walkinwood ... I *think* it means that the market believes that nominal treasury bonds (with similar maturity dates) are going to yield more than inflation (inflation + .362%). Otherwise, why buy TIPS? ...

Easy. "The market" might be wrong and be badly underestimating future inflation. DW and I hold them as insurance first, as an investment second. High inflation is the biggest risk we face as retirees.

Holding TIPS as inflation insurance, though, means holding a significant fraction of your portfolio in TIPS. Inflation protection for 5% of someone's portfolio IMO makes no sense.