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

[Spock]

Does it make sense that buying lower coupon bonds at a now discounted price affords some call protection? Or, if called, you effectively accelerate realizing the yield you would have otherwise gotten over the remaining term. I understand some may buy for the coupon payment and the lower coupon would not be desirable, but if looking for total return it seems like a good way to go(?)

Personally I'm fine with low/zero coupons on short duration 1yr or less... preferably less. On the other extreme, I avoid a near 0 coupon 10 year even if the YTM is higher as all of the income (in the form of capital gains) is all in the last year. It might be purely psycho(logical), but I highly prefer to see forward progress on a somewhat regular basis.

 

[pb4uski]

I'll be traveling next week and visiting family for the holidays the week after that and it was raining today so I finished filling out my bond ladder for our tIRA and Roths and figured that I would share my results.

	2022	2023	2024	2025	2026-2027	2028+	Total
Maturing in	1.1%	31.3%	21.1%	24.9%	12.4%	9.1%	100.0%
Yield	3.8%	4.3%	4.6%	4.7%	5.9%	6.4%	4.8%

The 1.1% in 2022 is simply my settlement accounts in a 3.8% MM.

I have a little more call risk than I would like, but I think I'm being fairly compensated for it and I don't think that rates will fall so much in the next couple years that the calls will happen for a while, but at the same time a year ago I would not have thought that rates would increase where I would redeem CDs early, so who knows.

I would have hit 5% yield overall if not for a 3% CD that it doesn't make sense to redeem early that matures in Apr 2023. 94% are CDs, UST or Agencies and 6% are a couple A-rated corporates.

Actually, this excludes our i-bonds and with those we would be well over 5% overall.

 

[Hilltopper]

Personally I'm fine with low/zero coupons on short duration 1yr or less... preferably less. On the other extreme, I avoid a near 0 coupon 10 year even if the YTM is higher as all of the income (in the form of capital gains) is all in the last year. It might be purely psycho(logical), but I highly prefer to see forward progress on a somewhat regular basis.

Thanks for your take on this. My thought on the "forward progress" is that you'd see this in the form of changing (increasing) market value of the bonds as they approach maturity. I.e., the discount will become smaller over time, all else being equal, eventually reaching par value at maturity. If you sell prior to maturity, you'd still realize the incremental capital gain.

Screening the bonds on offer today I noticed that some of the discounted bonds have big spreads between the bid and ask prices, so that might be a watch-out if not willing/able to hold the bond to maturity.

 

[Chuckanut]

.Just today I bought a new CD at 4.8% which replaces one I bought 6 months ago at 2.2%. My next CD on the maturity list yields 2.8%.


Alas, inflation means that in real terms I am still losing value.

 

[ER604me]

I posted this on another thread but wanted to express it again. Wow. Very impressed and appreciative of all the knowledge and insights that people on the forum are willing to share. It has been a big help and I've learned a ton.

 

[COcheesehead]

I tried to buy modest amounts of two new agency bonds this morning and could not. The order quantity exceeded the inventory. Get’em while you can.

 

[Spock]

Here is some background on GSEs.

https://www.fhfaoig.gov/Content/Files/History of the Government Sponsored Enterprises.pdf

Kinda makes me want to deallocate/sell my GSEs.

 

[COcheesehead]

AAA rated gse bonds have a 0% default rate.

 

[Hilltopper]

I have several recent-issue GSE bonds with maturities from 2024-2037, and yields from 5.15 to 6.5%. That's great for now, but I assume most of these will be called at some point. Wondering if it makes more to buy a degree of call protection with discounted issues on the secondary market instead, with YTW in the range of 4.6% for issues that are 7-8 years out from maturity. Not a bad problem to have given what rates were a year ago, but that's my dilemma... relative certainty vs FOMO!

 

[COcheesehead]

I have several recent-issue GSE bonds with maturities from 2024-2037, and yields from 5.15 to 6.5%. That's great for now, but I assume most of these will be called at some point. Wondering if it makes more to buy a degree of call protection with discounted issues on the secondary market instead, with YTW in the range of 4.6% for issues that are 7-8 years out from maturity. Not a bad problem to have given what rates were a year ago, but that's my dilemma... relative certainty vs FOMO!

You can also buy call protected bonds and non callable CDs to smooth things out. I latched onto some 5% non callable CDs and have a number of make whole call provision bonds. Buying under par bonds is an option just be aware of the lower cash flow and potential taxation issues.

 

[Hilltopper]

You can also buy call protected bonds and non callable CDs to smooth things out. I latched onto some 5% non callable CDs and have a number of make whole call provision bonds. Buying under par bonds is an option just be aware of the lower cash flow and potential taxation issues.

Good points. In my case I'm building up the longer-term issues in a traditional IRA that I don't have to touch until RMD's kick in (~12 years out), but for someone looking for the income stream the under-par bonds might not be so appealing.

 

[youbet]

Yes, but I slowed way down. Call it timing, or whatever, it just felt like when you are literally at 0.05%, it just didn't make sense to pile in. The money market was just as good and more flexible. I still kept some rungs just to not lose the discipline completely. And reminder, I'm talking treasuries, not corporates.

Your posts look good side-by-side!

Originally Posted by JoeWras View Post
I timed nothing. It is just a discipline I've had for 20+ years.

But hey, I understand! DW is baking some of her famous sour dough bread this afternoon. I'm disciplined and won't have any with the crock pot beef stew at supper since I'm watching calories over the holidays! (Yeah right! ) I'm disciplined like you!

 

[rkser]

Following this informative thread, trying to learn......

 

[JoeWras]

Your posts look good side-by-side!




But hey, I understand! DW is baking some of her famous sour dough bread this afternoon. I'm disciplined and won't have any with the crock pot beef stew at supper since I'm watching calories over the holidays! (Yeah right! ) I'm disciplined like you!

Ha ha ha! You got me!

Well, I didn't completely abandon my ladder. I just "deferred maintenance." Timing?

And now with the yield curve going into the mother of all inversions, do I use my extension ladder or stay with the step ladder?

What to [-]time[/-] do?

 

[jazz4cash]

I have several recent-issue GSE bonds with maturities from 2024-2037, and yields from 5.15 to 6.5%. That's great for now, but I assume most of these will be called at some point. Wondering if it makes more to buy a degree of call protection with discounted issues on the secondary market instead, with YTW in the range of 4.6% for issues that are 7-8 years out from maturity. Not a bad problem to have given what rates were a year ago, but that's my dilemma... relative certainty vs FOMO!

It’s why I posted a reminder to check on MYGA’s. The bond and CD offers are so dynamic. MYGA’s change terms at a snail’s pace. I am in the middle of taking a free withdrawal from a MYGA I just bought in April. That process is slow too!

 

[NomDeER]

I'm curious to know how people here are diversifying their corporate bonds. All of the corporate bonds I've been buying are banking, and I'm not sure that's a great idea. Which sectors do you buy in? Anything beyond banks? How do you go about researching particular corporations? In general, what are the ways you diversify?

 

[Freedom56]

I'm curious to know how people here are diversifying their corporate bonds. All of the corporate bonds I've been buying are banking, and I'm not sure that's a great idea. Which sectors do you buy in? Anything beyond banks? How do you go about researching particular corporations? In general, what are the ways you diversify?

The corporations in the Dow 30 or S&P 500 are a good place to start. Banks are big issuers of corporate bonds. Other sectors that are cash businesses such as Pharma, telecom, e-commerce, or technology are a good way to diversify. Some companies such as Boeing should be avoided due to balance sheets bloated with debt and lack of profitability. I also avoid the auto manufacturing sector. The two largest issuers GM and Ford are too leveraged and the safe plays like Toyota or Honda are overpriced. I also avoid energy as it is too cyclical and now is being viewed as a "sunset" sector over the long term. Look for companies that generate free cash flow and profits and those are your best bets. The brick and mortar retail sector and mall operators should be avoided. Remember you are not looking for profit growth but interest payment coverage. This is why many stocks go nowhere and are painful to own but their bond investors do fine.

 

[sengsational]

^As I read this, I wondered about the large, established utilities, but then thought their big dividend stock almost acts like a bond, held long term.

 

[GravitySucks]

I'm curious to know how people here are diversifying their corporate bonds. All of the corporate bonds I've been buying are banking, and I'm not sure that's a great idea. Which sectors do you buy in? Anything beyond banks? How do you go about researching particular corporations? In general, what are the ways you diversify?

I also have been wondering about all the banks discussed in this thread. I have Financial sector bonds but wonder if the political will for bank bailouts will be there next time.
On corporates I don't go out farther than 5 years. Technology changes are too fast to let me feel comfortable going long. I also like companies with real assetts that could be sold to payoff bond holders.

 

[jazz4cash]

Focusing on issues with call protection I see many with 1st call 1-6 months before maturity. Seems favorable to me but curious why issuer would set them up that way. Most of these also feature Make Whole Call provision. What are pros and cons?

 

[Montecfo]

^As I read this, I wondered about the large, established utilities, but then thought their big dividend stock almost acts like a bond, held long term.

yet much more rate sensitive since one take on duration is 100 divided by the yield.

 

[NomDeER]

The corporations in the Dow 30 or S&P 500 are a good place to start. Banks are big issuers of corporate bonds. Other sectors that are cash businesses such as Pharma, telecom, e-commerce, or technology are a good way to diversify. Some companies such as Boeing should be avoided due to balance sheets bloated with debt and lack of profitability. I also avoid the auto manufacturing sector. The two largest issuers GM and Ford are too leveraged and the safe plays like Toyota or Honda are overpriced. I also avoid energy as it is too cyclical and now is being viewed as a "sunset" sector over the long term. Look for companies that generate free cash flow and profits and those are your best bets. The brick and mortar retail sector and mall operators should be avoided. Remember you are not looking for profit growth but interest payment coverage. This is why many stocks go nowhere and are painful to own but their bond investors do fine.

Thanks. What do you consider the most reliable source for determining whether a company generates free cash flow and profits? Are there particular sectors that have more of these types of companies?

^As I read this, I wondered about the large, established utilities, but then thought their big dividend stock almost acts like a bond, held long term.

I'm not sure I understand this. Does this mean that utilities are not good choices for bonds. I see a number of utility bonds being offered on the secondary market, though they have varying ratings.

Focusing on issues with call protection I see many with 1st call 1-6 months before maturity. Seems favorable to me but curious why issuer would set them up that way. Most of these also feature Make Whole Call provision. What are pros and cons?

I've been wondering the same thing.

 

[sengsational]

I'm not sure I understand this. Does this mean that utilities are not good choices for bonds. I see a number of utility bonds being offered on the secondary market, though they have varying ratings.

It was an attempt to understand more about 'what corporate bonds' to consider. I thought that utilities are somewhat unique because if they're not making enough money, they push through a rate hike and we're all just going to have to get used to it. So that seems like a low default risk sector to me. The comment about how utility stock acts a bit like a bond can be ignored.

 

[beachfire]

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

Couple of thoughts. My observation has been that bonds showing a call date close to the maturity date have turned out to be Make Whole Call bonds. I have found going into the finra site and researching bond details revealed better info on a bonds call feature than is sometimes available on brokerage site.

With regards to diversification and safety of various issuers, it seems this becomes more important as you go out further in terms of maturity. As an example, I get the thought that some of the autos have had problems in the last 15 years and there is no telling what the future holds. But I am not sure that means that I would not consider buying a GM bond maturing in a year or so.

 

[Montecfo]

Northern States Power Senior Secured 6.5% coupon due 3-1-28 offered at 4.94%
non-callable

Northern Sts Pwr Co Minn
Price
107.057 Qty Available
100 YTM
4.94 YTW
4.94
CUSIP 665772BQ1 Coupon 6.5
Type Corporates First Coupon 9/1/1998
Sector Utilities Next Coupon 3/1/2023
Moody/S&P Aa3 / A Dated