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

[COcheesehead]

It seems like A and BBB bond yields in the 7-10 year range are about ~.2-.3% higher

And way above treasuries.

 

[dobig]

Bought equal amounts of short term Farm credit GSE (cusip 3133EPKT1) callable 8/23 at 6.22% and some 20 year reasuries at 4.11% with 4% coupon. Would like to buy some of those new Allstate perpetual preferreds (ALLJL) but would like a little pullback first.


Tryyyying to stay patient because what Freedom says makes sense but I have less than 15% of my fixed income portfolio set up and don't want to be stuck in that much cash if the fixed income market turns south.

 

[Echard]

The US will need to issue a higher than normal amount of treasuries once the debt ceiling is lifted. That should raise rates

 

[Montecfo]

Dobig,

Definitely have some risk but interesting barbell.

A preferred will act more like equity than debt in terms of being volatile.

But this may be pretty good timing for longer dent and high quality preferreds with rates heading lower.

 

[dobig]

Dobig,

Definitely have some risk but interesting barbell.

A preferred will act more like equity than debt in terms of being volatile.

But this may be pretty good timing for longer dent and high quality preferreds with rates heading lower.

Still not exactly sure what I want to do so just spreading around between short and long term.

Went ahead and put almost 30% of my cash into the Farm Credit GSE that will most likely be called Aug 24. Hoping that 6.2% for a few months is a good place to park some money for now.

 

[imbatman]

Definitely some surprising deals popping up, I picked up some FHLB 5.69% 15-year (no call until 2025, so 2 year lock) at a slight discount on ML (3130AW6U9), as well as FFCB 5.18% 15-year (no call until 2026, so 3 year lock) at a slight discount on ML/ Fido (3133EPJT3)

 

[copyright1997reloaded]

Spreads on commercial mortgage backed securities (CMBS) of intermediate quality (e.g. BBB lower end of investment grade tranche) is blowing out, now almost at March 2020 (Covid peak) levels.

 

[Echard]

Here is a Seeking Alpha author's view on bond holding strategy in retirement, answered in response to a question about holding VCIT. TL/DR his references indicate that you eliminate the interest rate and reinvestment risk if you hold to your investment horizon. I don't see how that works, but here is his response...

1. A fixed income investor has to manage three (3) risks:
-Interest rate risk
-Re-investment risk
-Credit risk (a concern when considering corporate bond ETFs).

On credit risk...
Bonds with a rating of BBB- (on the Standard & Poor's and Fitch scale) or Baa3 (on Moody's) or better are considered "investment-grade." Bonds with lower ratings are considered "speculative" and often referred to as "high-yield" or "junk" bonds.
Vanguard (VCIT) has traditionally been a very conservative bond fund manager, and it appears the portfolio is largely investment grade.
Check that out here: investor.vanguard.com/...

2. You should enjoy good diversification, good liquidiity, and ease of management using an ETF like VCIT.

3. When financial planning, it's important to distinguish between an "emergency fund" and short-term savings versus a long-term "investment portfolio".
- Savings vehicles are CDs, money market funds, bank accounts, etc.
Savings would be an "emergency fund" plus any assets to be spent in the next three years or so.

-Savings should be invested in very stable and safe accounts, ones where the risk of principal loss is low, and additionally the account is insured by the FDIC.

4. What remains outside of your emergency fund and/or your savings accounts is your "investment portfolio".

When considering bond ETF options for an "investment portfolio", a good starting place is coming up with an estimate for your investment horizon. An investing horizon is the approximate mid-point of your retirement spending.

You can get an estimate of your approximate life expectancy here:
www.blueprintincome.com/...

SSA.gov also has an actuarial life table, and it is likely to be more conservative.
www.ssa.gov/...

5.Here are a few examples of investment horizons from the first calculator by Blueprint Income...

Assumptions:
-Standard retirement at 65
-Possible life expectancy to age 90 (modify based on calculator's output for your situation).
50 years old: (90-65) / 2 + (65-50) = 27.5 yrs
60 years old: (90-65) / 2 + (65-60) = 17.5 yrs
65 years old: (90-65) / 2 = 12.5 yrs
70 years old : (90-70) / 2 = 10 yrs
75 years old : (90-75) / 2 = 7.5 yrs

6. Here's a very important financial planning concept:
"If a buy-and-hold fixed income investor with no particular view about market conditions or future returns wishes to have a fairly predictable amount of wealth at some future date, that investor should hold a bond portfolio with a blended duration that is roughly equal to their investment horizon."

Translation: Strive for a "duration gap" of zero (0 yrs), i.e. the difference between the blended duration of one's bond portfolio and one's investment horizon should be close to zero (0) years
When you do this, the other two risks, i.e. interest rate risk and re-investment risk will cancel each other.
For a deeper-dive beyond this executive summary, see: "Understanding Fixed-Income Risk and Return"
www.cfainstitute.org/...

6. Most retirement investors can get away with just two (2) bonds ETFs, one of a long-duration, and one of a shorter duration (or cash).
This quick formula can help an investor determine percent (%) to allocate to the LONGER-duration bond ETF.
Percent (%) in longest duration ETF = (H-S) / (L-S)
Key:
H = Investment horizon
L = Duration of the longest duration ETF
S = Duration of the shortest duration ETF

7. EXAMPLE: 60 year old investor with a 17.5 yrs investment horizon.
VCIT's duration (the ETF you are considering): 6.3 yrs
Find that here: investor.vanguard.com/...
VCLT (a long-term investment grade ETF): 13.2 yrs
Find that here: investor.vanguard.com/...
H=17.5 yrs
L=13.2 yrs
S = 6.3 yrs
(17.5 yrs - 6.3 yrs) / (13.2 yrs - 6.3 yrs) = 100% in VCLT
Sanity check: The 13.2 yrs duration of VCLT is slightly less than the investor's 17.5 yrs investment horizon. This is OK to be a little shorter.
IMHO: VCLT is a better choice for this investor than VCIT because its duration comes closer to his/her investment horizon, and thus will provide greater assurance of a stable income stream.

8. The risk-free asset for a long-term retirement investor is a long-term bond, NOT cash, nor short-term bonds. From the article (linked below) ...
"...the optimal portfolio replicates a long-term bond." And ...
"...highly risk-averse investors desire a stable income stream."
See: "Risk Aversion and Allocation to Long-Term Bonds "
repository.upenn.edu/...

8. Re-do the calculation each year on your birthday. (Your investment horizon slowly shrinks over time).
Hope this lends some additional perspective.

 

[Quattro73]

What are all of your thoughts on Bulletshares or iShare Ibonds?

Seems like a way to get Investment Grade and High Yield (and even Muni) diversification but still have defined maturities.

The high yield ones are over 8% for reasonable maturities.

Interested to hear thoughts from the group.

 

[Freedom56]

It's very simple now. If the fund cannot outperform a 2,3,4, or 5 year CD ladder, it's a complete loser. VCIT mentioned above is a good example of a loser fund that after 15 months of rate hikes still only distributes 3.5% and offers no capital protection. As for Bullet funds or iShare Ibonds, why bother? Distributions are not guaranteed to be fixed for the entire duration.

 

[Freedom56]

The Canadian banks are starting to report Q2 earnings. Bank of Nova Scotia and Bank of Montreal reported today. TD, RBC, and CIBC will report tomorrow. The conference call and forward looking statements will follow later today.

 

[Winemaker]

My 6 month JPMorgan 4.75% CD will be called 5/30/23, 3 months early.

 

[COcheesehead]

My 6 month JPMorgan 4.75% CD will be called 5/30/23, 3 months early.

Interesting.

 

[Freedom56]

My 6 month JPMorgan 4.75% CD will be called 5/30/23, 3 months early.

JPM must have a lot of excess cash with nowhere to go. Just buy a 1 year 5.2% non-callable CD.

 

[dobig]

Couldn't help myself and bought another chunk of JPM non callable 2043 bonds (46625HJM3) with 5.62% coupon at an average price of 99.278 in 3 different purchases. These bonds now make up 8% of my portfolio which I understand is high but wanted to lock in some retirement income.

 

[Rianne]

Couldn't help myself and bought another chunk of JPM non callable 2043 bonds (46625HJM3) with 5.62% coupon at an average price of 99.278 in 3 different purchases. These bonds now make up 8% of my portfolio which I understand is high but wanted to lock in some retirement income.

Wow! I hope those available through 2023.

Edit: Can anyone explain what this means?
Schwab Charles Corp Callable 02/27@ Greater Of 100 OR Make Whole - Make Whole Call Exp 02/2027

 

[imbatman]

Having not spent any time looking at individual corporate bonds, I was surprised to see JPM (in my mind a monster of stability) at a BBB+ rating. Anyhow, shows the power of a brand over reality and the vast rating differences outside treasuries/ agencies...

I would think you would have to look in the bond terms to see the provisions of that make whole call (basically they can call early at face or perhaps greater with some other calculation within the bond terms).

 

[Sunset]

My 6 month JPMorgan 4.75% CD will be called 5/30/23, 3 months early.

Lucky you !!

My G.S. bond paying 7% recently paid me the interest, and so far no call

 

[Phroig]

My 6 month JPMorgan 4.75% CD will be called 5/30/23, 3 months early.

That’s nice of JPM.

 

[Echard]

Has anyone filled their bond portfolio/ladder with some TIPS or iBonds? I have a small amount of iBonds and have been looking at whether or not to carve out a piece of the bond ladder for TIPS. I don't love the yields on Treasuries in general and am thinking my stock holdings will probably do a better job of inflation fighting than TIPS, even though the current real yields for 10 year TIPS are about 1.46%, which isn't too bad.

 

[Chuckanut]

Has anyone filled their bond portfolio/ladder with some TIPS or iBonds? I have a small amount of iBonds and have been looking at whether or not to carve out a piece of the bond ladder for TIPS. I don't love the yields on Treasuries in general and am thinking my stock holdings will probably do a better job of inflation fighting than TIPS, even though the current real yields for 10 year TIPS are about 1.46%, which isn't too bad.

I have some Ibonds that go out well past 5 years. For practical purposes I consider them to have a variable maturity date from the start of year 2 to the 30th year. I consider them a good place for an emergency fund since they will more or less keep up with inflation

 

[Free bird]

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.

Right now on Vanguard 5% CDs are common but anything beyond 18 months is callable with in 6-12 months from what I can tell.

 

[Montecfo]

Has anyone filled their bond portfolio/ladder with some TIPS or iBonds? I have a small amount of iBonds and have been looking at whether or not to carve out a piece of the bond ladder for TIPS. I don't love the yields on Treasuries in general and am thinking my stock holdings will probably do a better job of inflation fighting than TIPS, even though the current real yields for 10 year TIPS are about 1.46%, which isn't too bad.

I think i-bonds are great. Excellent part of your short term bond/cash portfolio. Accessible and inflation protected, no market risk.

TIPS I think have their place. They are very volatile during times of interest rate changes, ironically. I like to do the 5 year TIPS. Hold to maturity.

Most of my ladder is CDs and bonds. The "step-ladder" is 3 years of treasuries.

 

[Montecfo]

Fitch puts US on credit watch with negative implications.

But they also admit the AAA credit rating will not be affected even if the US does default.

That will be a blow to folks who speculate that the credit ceiling tug-o-war will lead to a credit downgrade and higher rates.

Fitch Puts U.S. Debt on ‘Credit Watch Negative.’ The Debt Ceiling Debate Turns Real.: https://www.barrons.com/articles/fitch-us-debt-credit-watch-5e1800bb

 

[Winemaker]

Just took a real gut punch this morning; my TANNZ 8% 10/15/30 Senior Notes called 6/15/23. TravelCenter of America notes that I purchased back in 2017, under par, a nice steady payer, acquired by BP plc.