Individual bonds

[aja8888]

I buy individual muni bonds through Schwab. Previously I had a personal account rep solely for my bond portfolio. Which meant that each time I wanted to buy a bond I could process it through him. I would offer a price below the ask and he would try and fill the order. Sometimes it went through and sometimes it didn't. Unfortunately, this gentleman retired and that ability has went away. I have also noticed that Schwab seems to be shifting its customer service away from individualized account reps even for larger accounts. It doesn't really bother me (except for loss of the above ability) because I never really need an account rep. If I have an issue I go to my local Schwab office and they resolve the issue personally.

Funny thing.....Schwab just assigned me a personal rep after 38 years of not having, or wanting, one. He is right out of college and has no real experience and wants to sell me all kinds of stuff. He also wants to set me up with a financial life plan. Once I told him I was going on 79 years old and I don't really need a 30 year plan, he got quiet. He's there if I need him. LOL

 

[DrRoy]

I have a bond ladder at FIDO but use their screening tools to pick my own. You can also talk to people at the bond desk to see what they think of a bond before you buy it.

 

[all4j]

I am currently only lookin at corporate notes with 2-3 year maturities at this time. ]

Freedom56, 1st of all I for one appreciate you taking the time to share your expertise & experience. 2ndly in full disclosure, I'm not interested in investing in bonds in the foreseeable future. However, I was somewhat curious about your methodology for possible future reference. Since I won't be using it anytime soon, I would certainly understand if you chose not to spend time in answering some questions. I'm not so much interested in specifics as to your approach.

I sampled one on your watchlist & I do understand that it hasn't triggered your criteria yet. In fact, to me it didn't seem close. I looked at its current yield & compared it to a treasury of approximately the same maturity. Also, to the current dividend yield of the common stock. I didn't expect the results. There was only 2 or 3 (I forget which) basis points difference with the treasury & about 30 with the dividend (I more clearly remember in my case it would have been about 20 bps after tax).

Raised questions: Is that something you even look at when the bond does fit your criteria? If so, what are your thresholds there?

I wasn't clear if you considered that you had a ladder. If you do, do you use maturity date to ensure rungs are spaced to your liking?

 

[beachfire]

Thanks for all the comments this has been enormously helpful to me. One other question, I get that the fed is on a March to drive up the fed fund rates in an attempt to deal with inflation. What are the one or 2 key drivers to rising the interest rates on the mid to long end of the curve? Is that related to expected Economic growth rates staying robust vs the possibility of recession? I may be way off, don’t really understand the drivers here.

Thanks

 

[Freedom56]

Watch for yield curve inversion as a signal of a possible economic slowdown. The yield on the 5 year note is already higher than the 10 year note as of this morning. When the 30 year bond yield drops below the 10 year, the bond market is discounting a potential economic slowdown. I believe the Fed start raising rates in 1/2 point increments. I am still going to buy the shorter end of the curve when yields become more attractive. If we start seeing the carnage that we had back in March 2020, I will buy more aggressively out to 10 year durations.

 

[ERhoosier]

I also inquired with Schwab regarding their website's lack of 'limit' bond bid functionality & was basically told it does not exist. No idea if they have any interest in adding it.
That said, I have recently bought multiple Treasuries via Schwab website at better yields (prices) than 'real time' quotes from other 3rd party sites.

FWIW- The 2/10 Treasury spread inverted today (at least for a time).

 

[mcbraemer]

What are thoughts on investing in a bond ladder made up of a mix of individual govt and investment grade bonds. Need to put about $1.5 million into fixed income at some point over the 12-18 months. I like the increased principal certainty that comes with owning individual bonds vs a fund (I understand the issuer risk, but feel comfortable working through that).

I have not bought individual bonds before. Has anyone used the bond ladder tool offered by fidelity (only available if you have a fidelity brokerage account). It looks kinda nice as it allows you to put in various criteria (govt, corp, muni, ratings, term, yield, how long of a ladder you want, maturity frequency, etc) and it brings forward specific bonds that meet your criteria to build out a ladder.

Any other thoughts or advice on how to best build out fixed income portfolio? How do I get visibility into how much brokers are marking up bonds that I may purchase?

Thanks for any thoughts.

Yes... we have used individual corporate bond investing ( through Vanguard but that is not important). Have successfully constructed our own two IRA bond ladders simply by diversifying the purchase of many groups of bonds, typically in $5k-20k bunches) across the next 10 years as far as maturity dates go. All on one big spreadsheet, this results in predictable monthly income without decrease in principal. I know the drawbacks of this strategy, insofar as missing large market equity gains, low but rising interest rates today, etc etc. However it makes a very nice income stream. We simply reinvest in another group of bonds at todays rates, improving, as groups come due every few mos. One more good thing is having spendable chunks of cash in an emergency when a group comes due. Never had to spend these fortunately, and have been jusy reinvesting the money by adding to the ladder back end. If you haven't yet done so, research bond ladders on investment oriented websites for a deeper dive.
To date, after 6 years doing this, we have had 0 bond defaults and 0 misses of dividend payments. We move divis to our cash account and only spend these, no the principal.
Good luck! You will not be on an investment rollercoaster ride, rather just sitting happily on the merry go round bench

 

[mcbraemer]

I personally would not use any ladder tools offered by Fidelity or have Fidelity choose bonds for you. The bid and ask yield ranges are generally too high. You will most likely end up overpaying for bonds that Fidelity wants to dump. I have been investing in fixed income for over 30 years (individual corporate bonds, CDs, treasuries, municipal bonds, and preferred stock). My primary objectives are preservation and growth of capital with a regular income though coupon payments. The coupon payments are my income stream along with my private pension. Whatever remains after covering taxes and expenses is reinvested. I also trade CEFs when the opportunity arises. I never buy passive bond or preferred stock funds. They are just a bad idea. Buying individual bonds are no different from buying individual stocks except you want stable profitable companies with good cash flow and interest rate coverage. Remember a bond is a contractual obligation the issuer has to the holder to pay fixed coupon payments. Don't be fooled by bond ratings. I own many BB and BB+ rated corporate bonds from profitable companies like Seagate Technology, Western Digital, Level 3, that are far safer than many investment grade rated issues from companies that barely earn income. Credit default swaps (the cost of insuring the debt) from default is a better indication of safety than bond ratings. The best approach is to time your purchases such that you are buying when everyone is selling. Use limit orders only. During times of panic selling, I have seen bid and ask spreads as high as 15-18%. Pick companies you know and that are profitable. In a rising rate environment, buy short duration fixed income (2-3 years). You can buy longer duration fixed income issues about 3 months before the last interest rate hike. With at least 6 more rate hikes on the way, many low coupon investment grade issues from banks are going to get crushed. You can use that opportunity to pick up issues from companies like JP Morgan, Bank of America, Capitol One Financial, and others at yields far better than what funds were paying 6 months ago. 2022 will be a great year to build up an individual bond ladder. Start by looking for issues of companies you know with maturities in 2023, 2024, all the way up to 2026. Later in the year, buy longer duration bonds out to 2032.

+1
Very thorough overview above! Great advise.

 

[DawgMan]

It appears the individual bond experts are here!

I made a strategic decision as I start withdrawals this year to move from a pure 60/40 AA Total Return approach to a quasi-bucket approach, but keeping a min 60/40 AA in the process. I have recently moved 5-ish years of planned spend into 3 individual bonds which currently come due between 7/22 - 1/23 with plans to redeploy them more strategically when they hit maturity (perhaps lengthen the duration based on yield). The remaining 5+ years of spend still sit primarily in a short term bond ETF with plans to possibly move those $$ into individual bonds structuring a 10 year ladder, but I have not quite made that decision yet. Having moved into the withdrawal phase now, I have determined I like the predictability of individual bonds, at least for some period (say 5 years for now) relative to my planned spend, with the intent of drawing from my laddered bonds in the event the stock market does not put out favorable gains in any given year. The net effect of this currently with the market being down has my AA around 70/30.

A few questions for you experts based on my strategy noted above...

- Is there a good argument to be made to bond ladder beyond 5 years as opposed to holding my 5+ years fixed allocation in bond ETFs?

- In terms of individual bond diversification, how many different bonds should I attempt to hold?

- For the purposes of reasonable predictability, what threshold of bond ratings do you use (i.e. BBB) relative to your bond purchases? (I am trying to better understand reasonable bond potential defaults relative to yield)

I appreciate all the good bond insight here on this thread.

 

[COcheesehead]

It appears the individual bond experts are here!

I made a strategic decision as I start withdrawals this year to move from a pure 60/40 AA Total Return approach to a quasi-bucket approach, but keeping a min 60/40 AA in the process. I have recently moved 5-ish years of planned spend into 3 individual bonds which currently come due between 7/22 - 1/23 with plans to redeploy them more strategically when they hit maturity (perhaps lengthen the duration based on yield). The remaining 5+ years of spend still sit primarily in a short term bond ETF with plans to possibly move those $$ into individual bonds structuring a 10 year ladder, but I have not quite made that decision yet. Having moved into the withdrawal phase now, I have determined I like the predictability of individual bonds, at least for some period (say 5 years for now) relative to my planned spend, with the intent of drawing from my laddered bonds in the event the stock market does not put out favorable gains in any given year. The net effect of this currently with the market being down has my AA around 70/30.

A few questions for you experts based on my strategy noted above...

- Is there a good argument to be made to bond ladder beyond 5 years as opposed to holding my 5+ years fixed allocation in bond ETFs?

- In terms of individual bond diversification, how many different bonds should I attempt to hold?

- For the purposes of reasonable predictability, what threshold of bond ratings do you use (i.e. BBB) relative to your bond purchases? (I am trying to better understand reasonable bond potential defaults relative to yield)

I appreciate all the good bond insight here on this thread.

Are you talking corporate, treasuries or muni’s?

 

[COcheesehead]

Here’s a helpful chart on default rates.

 

[DawgMan]

Are you talking corporate, treasuries or muni’s?

Plans are to you use all of the above, but my current bonds are in treasuries. Will be using corporate as well but not real clear on what is a reasonable level of risk to take based on potential yield relative to default risk

 

[COcheesehead]

Plans are to you use all of the above, but my current bonds are in treasuries. Will be using corporate as well but not real clear on what is a reasonable level of risk to take based on potential yield relative to default risk

Treasuries are the most secure, then muni’s, then corporate.

I am a big advocate of expense matching. So I bought muni’s to match (actually now exceed) my retirement budget each year until social security kicks in. I own about 150 individual issues with bonds maturing about every 2 months or so. June and December are big income months for me.

That’s my plan. I figure the short term bonds are bucket 1. Mid term are a part of bucket 2.

 

[DawgMan]

Here’s a helpful chart on default rates.

For clarification, is a default defined as the bond issuer not fulfilling 100% of the bond obligation (or say only partial fulfillment) or only complete loss of bond value? In other words, if you paid $50K for a 1% yielding bond that matured in 1 year, is it ever typical for a default defined as say repayment of your principle, but something less than 1% interest? Or, are these bond default rates in the chart representative of 100% loss of your bond investment? Just trying to fully access the real risk/reward as you move down the food chain.

 

[COcheesehead]

For clarification, is a default defined as the bond issuer not fulfilling 100% of the bond obligation (or say only partial fulfillment) or only complete loss of bond value? In other words, if you paid $50K for a 1% yielding bond that matured in 1 year, is it ever typical for a default defined as say repayment of your principle, but something less than 1% interest? Or, are these bond default rates in the chart representative of 100% loss of your bond investment? Just trying to fully access the real risk/reward as you move down the food chain.

I have never had a bond default. That’s a good thing. So I can’t speak from experience, but from what I have read, a default means the borrower can no longer meet their obligation. From that point it could mean a partial return of your money or it could mean you lose it all. It just depends. Assume a lengthy process with a default as well. I have read about bond holder lawsuits.
I have been a believer in taking your risks with equities, not bonds.

 

[DawgMan]

I have been a believer in taking your risks with equities, not bonds.

Agree. I suppose I am trying to determine what should be defined as "risk" relative to bonds? Is AAA bond risky? Well, technically, there is a risk of default (.37%). Is it worth looking at Bbb bonds for the additional yield or are they truly that much more risky (3.7%)? Having not owned individual bonds before, more curious as to where one might draw the line on bond ratings if your goal is to primarily protect your planned spend in years of poor stock performance. I'm with you on equities being where most of my risks are taken, but I would also rather get 2% on my bond vs. 1% if in reality I am not taking on that much risk. Understand we all have our own level of risk, just trying to understand how real it is.

Bond default experience relative to ratings for any of you long term individual bond holders out there?

 

[COcheesehead]

Agree. I suppose I am trying to determine what should be defined as "risk" relative to bonds? Is AAA bond risky? Well, technically, there is a risk of default (.37%). Is it worth looking at Bbb bonds for the additional yield or are they truly that much more risky (3.7%)? Having not owned individual bonds before, more curious as to where one might draw the line on bond ratings if your goal is to primarily protect your planned spend in years of poor stock performance. I'm with you on equities being where most of my risks are taken, but I would also rather get 2% on my bond vs. 1% if in reality I am not taking on that much risk. Understand we all have our own level of risk, just trying to understand how real it is.

Bond default experience relative to ratings for any of you long term individual bond holders out there?

I buy muni’s because they are safer than corporates and there are a lot of advantages to having loads of tax free income - we are in the zero tax bracket for instance though I draw six figures of income a year.

I have most in the A range, some in the high B range and a handful in the BBB category which is still investment grade.

With muni’s if they are a general obligation bond they are backed by the taxes you and I pay. In March of 2020 funds liquidated muni’s like they were going out of style. People thought municipalities would go bankrupt, but we all know the two things in life we can’t avoid, taxation being one of them. So I bought as many as I could at nice yields. The “sale” ended as quickly as it arose. There may be another sale coming as folks liquidate their bonds funds.

So I work backwards, how much money do I want/need, then buy bonds that will give me the cashflow I want at reasonable risk.

I don’t think I reach for yield, maybe I do, but as I said, fingers crossed - never had a default.