Why are Short Term Corporates Yielding Less Than Treasuries

[Golden sunsets]

I don't get it. Example: I can buy a Treasury at slightly less than par, (so no premium), that is due 7/31/19, that yields 2.44%. The highest rate I see in corporates for investment grade with a similar maturity is 1.795%. Why would anyone buy corporates of short maturity these days, when treasuries are blowing the rates away?

[Freedom56]

Quote:

Originally Posted by Golden sunsets I don't get it. Example: I can buy a Treasury at slightly less than par, (so no premium), that is due 7/31/19, that yields 2.44%. The highest rate I see in corporates for investment grade with a similar maturity is 1.795%. Why would anyone buy corporates of short maturity these days, when treasuries are blowing the rates away?

I have mentioned that several times before. High investment grade corporates are overpriced. No sane retail investor would buy them. Only a passive bond fund driven by fun flows would. The bond funds holding these notes will continue to under-perform as their prices drop to compensate for yield.

[jebmke]

The US treasury is funding a huge deficit mainly on the short end. That is driving up yields on the short end. Corporations have plenty of cash and have probably borrowed up already where they need to.


Two years seems to be the sweet spot right now. I am buying treasuries and CDs right around the 2-year range. Treasuries ~2.65% and CDs ~2.8%.

[COcheesehead]

"due 7/31/19, that yields 2.44%. The highest rate I see in corporates for investment grade with a similar maturity is 1.795%."

Were are you getting these quotes? I just went on Fido and I see Aaa corporates at 2.56% and Aa at 2.87% for 1 year durations.

[brewer12345]

It is probably because you are getting ripped off as a retail investor on the corporates.

[Texas Proud]

Quote:

Originally Posted by jebmke The US treasury is funding a huge deficit mainly on the short end. That is driving up yields on the short end. Corporations have plenty of cash and have probably borrowed up already where they need to. Two years seems to be the sweet spot right now. I am buying treasuries and CDs right around the 2-year range. Treasuries ~2.65% and CDs ~2.8%.

That has nothing to do with current yields on these investments...



I think Brewer is probably right...




Just checked Vanguard and I can purchase with YTM between 2.2 and 2.5%... That includes Apple... AAA rated..


If you go into the investment grade Bs then it is up to 3.3%

[Golden sunsets]

I just checked again to make sure that I was looking at the right column, "Yield to Worst" and I am seeing no 1 year corporates yielding in excess of 2%. I am a Merrill Edge Customer. But I can buy a 1 year Treasury for 2.44%

[COcheesehead]

Quote:

Originally Posted by Golden sunsets I just checked again to make sue that I was looking at the right column, "Yield to Worst" and I am seeing no 1 year corporates yielding in excess of 2%. I am a Merrill Edge Customer. But I can buy a 1 year Treasury for 2.44%

Fidelity charges $1 per bond and has some great bond research and management tools. If you are serious about buying individual bonds, you might want to check them out.

[Texas Proud]

Quote:

Originally Posted by Golden sunsets I just checked again to make sure that I was looking at the right column, "Yield to Worst" and I am seeing no 1 year corporates yielding in excess of 2%. I am a Merrill Edge Customer. But I can buy a 1 year Treasury for 2.44%

What bonds showed up


As I said, Apple had bonds that were over 2%... I put in dates from 7/1 to 9/30 IIRC...

[audreyh1]

Looks like 1 year Microsoft bonds recently traded around 2.3%.

Here is today's Fixed Income offerings yield table from Fidelity

https://fixedincome.fidelity.com/ftg...|highest-yield

[brewer12345]

Quote:

Originally Posted by Golden sunsets I just checked again to make sure that I was looking at the right column, "Yield to Worst" and I am seeing no 1 year corporates yielding in excess of 2%. I am a Merrill Edge Customer. But I can buy a 1 year Treasury for 2.44%

That is because the cornhole aspect of what you are being offered in the corporate space is being baked into the price of the bonds as a markup.

[Golden sunsets]

Quote:

Originally Posted by audreyh1 Looks like 1 year Microsoft bonds recently traded around 2.3%. Here is today's Fixed Income offerings yield table from Fidelity https://fixedincome.fidelity.com/ftg...|highest-yield

Thanks; I'll check into Fidelity and see what gives. I'm not sure what a cornhole is but I assume Brewer is implying that I am being soaked by ML on the spread between bid and ask. It doesn't surprise me that there is more cost for a bond with ML than another discount broker, but the difference between a treasury yielding 2.44 and a corporate of similar maturity yielding 1.7 is mind boggling to me. A .74 point difference without even adding a factor for the higher risk of corporates vs treasuries makes no sense to me. I'm going to dig into this further to see if I can figure out what is going on. I regularly check what treasuries are yielding compared to corporates on the same fixed income screener and have always seen the predictable slightly higher yield for corporates, so something is up and it appears to be with ML as opposed to the markets as my OP implied.


Sent from my iPad using Early Retirement Forum

[Golden sunsets]

Well I've discovered a couple of things. Fido is cheaper as has been pointed out. Thanks Audrey for the link. I had set up a guest account there years ago and it still works. The cheaper Fido price is much more magnified at the short end where coupon rates are generally low. For example the Microsoft issue mentioned above is at ask of 98.750 at Fido and Ask 99.750 at ML, Because the coupon is minimal the math works out to a significant difference in Yield of roughly 1%. But when I compare an issue that is maturing on 10/15/27 - GE 4% coupon. The ask at ML is 98.27 and at Fido it is 97.284 for a Yield of 4.229 at ML and 4.361 at Fido. Still a difference but not nearly as significant. Both bonds have an approximate 1000 point difference in ask price, but the low coupon magnifies the difference in Yield. Conclusion - in a low coupon environment, the ML bonds are a hosing, or as Brewer indicates - a cornhole (looked it up)

I own a lot of bonds in our IRA's. I've set up a bond ladder to mirror our RMD's which started last year. I don't think I've bought any short term bonds. I'm always working out at the longer end of the ladder, where the difference between Fido and ML is much less and of course we hold to maturity. I'll have to determine whether it is worth it to us to change everything over from BOA/ML to Fido.

[audreyh1]

Quote:

Originally Posted by Golden sunsets Thanks; I'll check into Fidelity and see what gives. I'm not sure what a cornhole is but I assume Brewer is implying that I am being soaked by ML on the spread between bid and ask. It doesn't surprise me that there is more cost for a bond with ML than another discount broker, but the difference between a treasury yielding 2.44 and a corporate of similar maturity yielding 1.7 is mind boggling to me. A .74 point difference without even adding a factor for the higher risk of corporates vs treasuries makes no sense to me. I'm going to dig into this further to see if I can figure out what is going on. I regularly check what treasuries are yielding compared to corporates on the same fixed income screener and have always seen the predictable slightly higher yield for corporates, so something is up and it appears to be with ML as opposed to the markets as my OP implied. Sent from my iPad using Early Retirement Forum

Fidelity recently had a presentation that mentioned how much higher the markups were on their competitors bonds. So yes this is what you are running into.
https://www.fidelity.com/fixed-incom...s/bond-pricing

[Texas Proud]

Quote:

Originally Posted by Golden sunsets Well I've discovered a couple of things. Fido is cheaper as has been pointed out. Thanks Audrey for the link. I had set up a guest account there years ago and it still works. The cheaper Fido price is much more magnified at the short end where coupon rates are generally low. For example the Microsoft issue mentioned above is at ask of 98.750 at Fido and Ask 99.750 at ML, Because the coupon is minimal the math works out to a significant difference in Yield of roughly 1%. But when I compare an issue that is maturing on 10/15/27 - GE 4% coupon. The ask at ML is 98.27 and at Fido it is 97.284 for a Yield of 4.229 at ML and 4.361 at Fido. Still a difference but not nearly as significant. Both bonds have an approximate 1000 point difference in ask price, but the low coupon magnifies the difference in Yield. Conclusion - in a low coupon environment, the ML bonds are a hosing, or as Brewer indicates - a cornhole (looked it up) I own a lot of bonds in our IRA's. I've set up a bond ladder to mirror our RMD's which started last year. I don't think I've bought any short term bonds. I'm always working out at the longer end of the ladder and we hold, where the difference between Fido and ML is much less and of course we hold to maturity. I'll have to determine whether it is worth it to us to change everything over from BOA/ML to Fido.

Just a thought... find out what kind of fee they charge and is that part of the 1000 pt spread?


Also, you can put in a bid from what I understand... I could be wrong in this as I have never traded real bonds... only trade exchange traded bonds...

[COcheesehead]

Quote:

Originally Posted by Texas Proud Just a thought... find out what kind of fee they charge and is that part of the 1000 pt spread? Also, you can put in a bid from what I understand... I could be wrong in this as I have never traded real bonds... only trade exchange traded bonds...

Fido charges $1 per bond and you can put in a bid price, but I see lots of bonds sitting there with bids below ask. For the small cost difference I just buy at the ask. In the end its a few dollars difference and I know I will get what I want.

[stepford]

I've tried putting in bids slightly below the asking price on Fido bonds several times and never gotten a nibble.

[audreyh1]

Quote:

Originally Posted by COcheesehead Fido charges $1 per bond and you can put in a bid price, but I see lots of bonds sitting there with bids below ask. For the small cost difference I just buy at the ask. In the end its a few dollars difference and I know I will get what I want.

$1 per $1000 unit of bonds. Just to be precise.

[breswick]

i also have a Merrill Edge Account. I use Merrill Edge for stocks and ETFs because with their rewards program I get 100 free trades per month. For bonds, I use Fidelity. The markup at Fidelity is $1 per corporate bond. At Merrill Edge the markup appears to be about $11 per corporate bond and this makes a big difference on shorter term yields.