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

[COcheesehead]

Is anyone picking up Credit Suisse ? I cannot imagine that they wont be able to receive funding and restructure..

CS
22553QNP8
6.65%
Maturity 1/31/2024

I sold the only one I owned. The yield is where it is for a reason. Way too many other quality options.

 

[NW-Bound]

It's not necessariy the funds. Individual TIPS have lost big time too on a mark-to-market basis because ther fair value have declined as interest rates have risen...

I understand why bond values are marked down when interest rates rise way above their coupon rates. It's elementary.

TIPS are supposed to increase in value with inflation. And with inflation at 8.2%, way above the 6% coupon rate of even the new bonds, why do TIPS get marked down?

 

[Graybeard]

On CNBC I have been hearing talk about liquidity problems and treasuries but I don't understand what they are talking about. I did a search on that and randomly picked this. BTW, I had to use the Brave browser to be able to read this, in Chrome it's requiring you to sign up.

https://www.bloomberg.com/news/articles/2022-10-06/us-treasuries-liquidity-problem-exposes-fed-to-biggest-nightmare?leadSource=uverify%20wall

Here's the beginning of the article.

Treasuries Liquidity Problem Exposes Fed to ‘Biggest Nightmare’
JPMorgan measure of Treasury-market depth continue to plunge
Bloomberg’s gauge of how far yields are from fair value rising
ByLiz McCormick
October 6, 2022 at 6:00 AM EDTUpdated onOctober 6, 2022 at 11:42 AM EDT
The latest bout of global financial volatility has heightened concerns about regulators’ continuing failure to resolve liquidity problems with US Treasuries -- the debt that serves as a benchmark for the world.

It’s getting harder and harder to buy and sell Treasuries in large quantities without those trades moving the market. Market depth, as the measure is known, last Thursday hit the worst level since the throes of the Covid-19 crisis in the spring of 2020, when the Federal Reserve was forced into massive intervention.

With rising risks of a global recession, escalating geopolitical tensions and the potential for further defaults by developing nations -- not to mention ructions in a developed economy such as the UK -- investors may not be able to rely on Treasuries as the reliable haven they once were.

“We have seen an appreciable and troubling deterioration in Treasury market liquidity,” said Krishna Guha, head of central bank strategy at Evercore ISI. Regulators “really haven’t delivered yet any substantial reforms,” he said. “What we are seeing at the moment is a reminder that the work is really important.”

What does this mean for those of us buying T bills? Is this a problem we need to know about? Will there be less or more bills issued? Will yields be effected? I'm sure some of the bond gurus here understand this and can explain if this effects us and how.

 

[COcheesehead]

On CNBC I have been hearing talk about liquidity problems and treasuries but I don't understand what they are talking about. I did a search on that and randomly picked this. BTW, I had to use the Brave browser to be able to read this, in Chrome it's requiring you to sign up.

https://www.bloomberg.com/news/articles/2022-10-06/us-treasuries-liquidity-problem-exposes-fed-to-biggest-nightmare?leadSource=uverify%20wall

Here's the beginning of the article.



What does this mean for those of us buying T bills? Is this a problem we need to know about? Will there be less or more bills issued? Will yields be effected? I'm sure some of the bond gurus here understand this and can explain if this effects us and how.

If you hold to maturity, it’s not an issue. If you need to sell, you may have to accept a lower price.

 

[daylatedollarshort]

It's not necessariy the funds. Individual TIPS have lost big time too on a mark-to-market basis because ther fair value have declined as interest rates have risen.

The +10% return that dlds mentions exclude any mark-to-market adjustments since dlds intends to hold to maturity dlds ignores the,.

But if you ignore mark-to-market adjustments you could never lose money on individual government bonds bought at par either, or brokered CDs bought at par.

By that logic almost all bonds, not just TIPS, have lost value if you sell on the secondary market as interest rates have risen. Which has really been the point of this whole thread - how to buy individual bonds with maturity dates in this rising rate environment so we don't lose principal like the bond funds are losing NAV, because they have to sell on the secondary market due to redemptions and other reasons Freedom56 has pointed out.

I don't know why anyone would think individual TIPS, held to maturity, have lost principal but CDs and Treasuries have not this year. If anything TIPS are making more money because of high inflation and their CPI adjustments. They have similar CPI adjustments to I bonds.

 

[daylatedollarshort]

I understand why bond values are marked down when interest rates rise way above their coupon rates. It's elementary.

TIPS are supposed to increase in value with inflation. And with inflation at 8.2%, way above the 6% coupon rate of even the new bonds, why do TIPS get marked down?

Because the real yields on TIPS were negative for the last couple of years. TIPS yields went from -1% market rates to over 2% in 2022.

Individual investors can choose to just sit out from buying TIPS with negative real yields as that kind of defeats the purpose. This is comparative to Freedom56 pointing out bond funds buying long term bonds at .65%, something most rational individual investors would simply pass on.

 

[Graybeard]

If you hold to maturity, it’s not an issue. If you need to sell, you may have to accept a lower price.

I see. I don't see any reason to sell before maturity so this wouldn't effect me. I bought what looked like a good 26 week T bill in May, it matures in about 2 weeks. IIRC the yield is 1.67%, if I didn't dump that weeks ago (and I haven't) then I guess I won't sell any T bill before maturity! Thanks for the reply.

 

[Freedom56]

On CNBC I have been hearing talk about liquidity problems and treasuries but I don't understand what they are talking about. I did a search on that and randomly picked this. BTW, I had to use the Brave browser to be able to read this, in Chrome it's requiring you to sign up.

https://www.bloomberg.com/news/articles/2022-10-06/us-treasuries-liquidity-problem-exposes-fed-to-biggest-nightmare?leadSource=uverify%20wall

Here's the beginning of the article.



What does this mean for those of us buying T bills? Is this a problem we need to know about? Will there be less or more bills issued? Will yields be effected? I'm sure some of the bond gurus here understand this and can explain if this effects us and how.

I wouldn't lose sleep over buying treasuries. There are so many clowns appearing on CNBC bashing treasuries as investors exit bond and equity funds and lock in higher treasury yields and seek capital protection. The USG treasury market is deep. As the dollar rises many foreign holders of treasuries are selling their holdings and taking gains relative to their currencies. A large block sale in any security can cause an an order imbalance. This is nothin new. The Fed is always going to be the buyer of last resort. That is the job of the central bank.

If you see a sudden spike in treasury yields to 6-8%, then buy it like it was toilet paper during a pandemic.

 

[NW-Bound]

Because the real yields on TIPS were negative for the last couple of years. TIPS yields went from -1% market rates to over 2% in 2022.

Individual investors can choose to just sit out from buying TIPS with negative real yields as that kind of defeats the purpose. This is comparative to Freedom56 pointing out bond funds buying long term bonds at .65%, something most rational individual investors would simply pass on.

This means these secondary buyers of TIPS were overpaying for them. And now the price comes down to the real value. If you buy these TIPS at issue, it looks like you are doing OK, although you would make out like bandit selling them on the secondary market when people were clamoring for them.

In this way, it's no different than people who bid up stocks with high P/E. The price is now coming back down to earth.

 

[lordjust]

I wouldn't lose sleep over buying treasuries. There are so many clowns appearing on CNBC bashing treasuries as investors exit bond and equity funds and lock in higher treasury yields and seek capital protection. The USG treasury market is deep. As the dollar rises many foreign holders of treasuries are selling their holdings and taking gains relative to their currencies. A large block sale in any security can cause an an order imbalance. This is nothin new. The Fed is always going to be the buyer of last resort. That is the job of the central bank.

If you see a sudden spike in treasury yields to 6-8%, then buy it like it was toilet paper during a pandemic.

HA! .. at least now i will remember to buy it when its 6-8% due to the joke

 

[Montecfo]

You know in another thread I went over a random TIPS bond I picked from my portfolio that has returned over 10% this year by looking up the CUSIP at Treasury Direct. Asking again in a different thread isn't going to change those numbers significantly a few days later.

TIPS return CPI inflation plus their real yield. Your total return depends on the real yield of the TIPS you hold and bought over the years, which is why I said "around", since most of us have ladders. Current TIPS yields are 1.61% to 2.01%, plus CPI inflation which has been over 8%. If you have a blended real yield of 2% on your ladders, you may be earning 2% plus over 8% inflation this past year.

TIPS, if held to maturity, and bought at par are guaranteed to return par or par plus accumulated inflation. The returns of funds and individual TIPS aren't a matter of my personal opinion, those stats are simply a matter of record. TIPS current yields are on the Bloomberg site and the performance stats for the funds are on every site that has mutual fund stats. You can look up the current, inflation adjusted value of older TIPS bonds at Treasury Direct to see how they performed for the past year.

TIPS held to maturity, just like nominal bonds, have not lost principal this past year and, because of the inflation protection, have increased by CPI inflation. That is just how they work. They have inflation adjustments similar to I bonds, except I bonds currently only have 0% real yields, while TIPS are up to 2%.

Do you think all nominal Treasury bonds with maturity dates have lost money this year, too, the same as treasury bond funds? Because that would be using the same logic.

Long way of saying there is no TIPS bond bought this year with a 10 percent total return. You are just flat out wrong about that.

You really should stop comparing actual total returns of bond funds to your made up "returns" that do not reflect the market price of the securities.

You are just misleading people.

 

[Montecfo]

I understand why bond values are marked down when interest rates rise way above their coupon rates. It's elementary.

TIPS are supposed to increase in value with inflation. And with inflation at 8.2%, way above the 6% coupon rate of even the new bonds, why do TIPS get marked down?

Because of duration and low coupon. Same as other bonds.

 

[NW-Bound]

Because of duration and low coupon. Same as other bonds.

But the coupon of TIPS, as low as it is, is on top of inflation, which is 8.2% now.

This makes the total rate a heck of a lot higher than the ordinary bonds. Even higher than the current YTM of them bonds.

There's still something missing that I have not seen explained well.

 

[Montecfo]

But the coupon of TIPS, as low as it is, is on top of inflation, which is 8.2% now.

This makes the total rate a heck of a lot higher than the ordinary bonds. Even higher than the current YTM of them bonds.

There's still something missing that I have not seen explained well.

It is duration and the low coupon. The return from TIPS is heavily back-end loaded. It mostly comes from principal adjustments which would not be received until up to 30 years into the future.

TIPS still carry interest rate risk.

 

[NW-Bound]

It is duration and the low coupon. The return from TIPS is heavily back-end loaded. It mostly comes from principal adjustments which would not be received until up to 30 years into the future.

TIPS still carry interest rate risk.

OK. It's tough to wait for as long as 30 years to get that principal adjustment for inflation, even though it will make you whole. Meanwhile, you have to live with the low income generated by the coupon. I can understand that.

With that being the case, then I would expect older TIPS to be priced better, because holders will get their inflation-adjusted principal back sooner.

PS. Getting a big principal adjustment after 30 years of inflation means a big tax bill at maturity. Yes?

 

[NW-Bound]

Heck, I am just reminded that when the I bonds I bought in the early 2000s reached maturity, I will get hit with a big tax bill with all the deferred interest payments.

This coupled with RMD on the IRA/401k will make for exciting tax times. Aye, aye, aye...

 

[daylatedollarshort]

Long way of saying there is no TIPS bond bought this year with a 10 percent total return. You are just flat out wrong about that.

You really should stop comparing actual total returns of bond funds to your made up "returns" that do not reflect the market price of the securities.

You are just misleading people.

You added the bought last year part. You said previously no TIPS have returned 10% this past year. I gave you the specific CUSIP of one of mine that has that return - https://www.early-retirement.org/fo...and-john-lim-on-bonds-115578.html#post2840242.

Investors with TIPS ladders with a blended rate of ~2% yield earn the 2% yield + ~8% inflation for a return of around 10% this past year. If you have a 0% yield TIPS portfolio or ladder your return will be less, CPI inflation only, but still 8.2% CPI adjustment for the past year, similar to current I bond returns.

Current TIPS yields for recently bought bonds are 1.63% to 2.01% plus CPI inflation of around 8% currently. Google finance shows VIPSX as having a 1 year return of -18.76%, five year return of -8.88%.

Excerpt from The Bond Book by Annette Thau online at the AAII site: An Investor's Guide to Inflation Protected Securities: "Is there any advantage to buying TIPS through funds rather than by buying the individual bonds? For reasons that escape me, individual bonds and bond funds are treated in the financial press as interchangeable instruments. But they are not. For starters, if you hold individual TIPS and redeem them when they mature, you will receive, at minimum, no less than the initial face value of the bond; or more likely, the adjusted value of principal. On the other hand, a TIPS fund, like any other bond fund, has no “maturity” date. That is to say there is no date at which the entire portfolio matures. Given the volatility of the underlying bonds in the portfolio, there is no way to know what its price will be when you want to sell." https://www.aaii.com/journal/article...ignup-readmore

This maturity issue is not different for TIPS vs. TIPS fund than it is for any bond vs. bond fund in a rising rate environment. Which is why many posters here have sold their bond funds and are buying individual Treasuries, corporates and TIPS instead.

 

[daylatedollarshort]

It is literally on the Fidelity web site explaining the difference between bonds and bond funds that individual bonds "If bought and held to maturity investor is not affected by market risk." - https://www.fidelity.com/learning-center/investment-products/mutual-funds/bond-vs-bond-funds

 

[daylatedollarshort]

OK. It's tough to wait for as long as 30 years to get that principal adjustment for inflation, even though it will make you whole. Meanwhile, you have to live with the low income generated by the coupon. I can understand that.

With that being the case, then I would expect older TIPS to be priced better, because holders will get their inflation-adjusted principal back sooner.

PS. Getting a big principal adjustment after 30 years of inflation means a big tax bill at maturity. Yes?

TIPS principal gets adjusted regularly according to CPI changes, with the interest payments twice a year applied to the adjusted principal. You have to pay taxes if held in a taxable account on the inflation adjustments so they are better held in retirement accounts.

TIPS with a 0% real yield provide a 3.33% safe withdrawal rate over 30 years. At 1.33% real returns, the safe withdrawal rate is 4%.

 

[Montecfo]

You added the bought last year part. You said previously no TIPS have returned 10% this past year. I gave you the specific CUSIP of one of mine that has that return - https://www.early-retirement.org/fo...and-john-lim-on-bonds-115578.html#post2840242.

Investors with TIPS ladders with a blended rate of ~2% yield earn the 2% yield + ~8% inflation for a return of around 10% this past year. If you have a 0% yield TIPS portfolio or ladder your return will be less, CPI inflation only, but still 8.2% CPI adjustment for the past year, similar to current I bond returns.

Current TIPS yields for recently bought bonds are 1.63% to 2.01% plus CPI inflation of around 8% currently. Google finance shows VIPSX as having a 1 year return of -18.76%, five year return of -8.88%.

Except from The Bond Book by Annette Thau online at the AAII site: An Investor's Guide to Inflation Protected Securities: "Is there any advantage to buying TIPS through funds rather than by buying the individual bonds? For reasons that escape me, individual bonds and bond funds are treated in the financial press as interchangeable instruments. But they are not. For starters, if you hold individual TIPS and redeem them when they mature, you will receive, at minimum, no less than the initial face value of the bond; or more likely, the adjusted value of principal. On the other hand, a TIPS fund, like any other bond fund, has no “maturity” date. That is to say there is no date at which the entire portfolio matures. Given the volatility of the underlying bonds in the portfolio, there is no way to know what its price will be when you want to sell." https://www.aaii.com/journal/article...ignup-readmore

This maturity issue is not different for TIPS vs. TIPS fund than it is for any bond vs. bond fund in a rising rate environment. Which is why many posters here have sold their bond funds and are buying individual Treasuries, corporates and TIPS instead.

Again, lots of words, but what you did is a calculation that reflects value in your mind only and compared that favorably to actual published total returns of bond funds.

That is not correct and you really should stop it.

 

[Spock]

Is anyone picking up Credit Suisse ? I cannot imagine that they wont be able to receive funding and restructure..

CS
22553QNP8
6.65%
Maturity 1/31/2024

"Picking up pennies in front of a steam roller".
Debt Restructure:

• The debt restructuring process can reduce the interest rates on loans or extend the due dates for paying them back.
• A debt restructuring might include a debt-for-equity swap, in which creditors agree to cancel a portion or all of the outstanding debt in exchange for equity in the business.

 

[daylatedollarshort]

Again, lots of words, but what you did is a calculation that reflects value in your mind only and compared that favorably to actual published total returns of bond funds.

That is not correct and you really should stop it.

A five year TIPS bond purchased at par 5 years ago would have been redeemed five years later for around $1,202, as the principal would have been adjusted with the CPI to account for inflation.

The NAV of $1K of VIPSX would have gone down -8.88% five years later for a value of $888.

The TIPS bond principal would have gone up with inflation and the NAV of VIPSX would have lost money. $1,202 TIPS bond vs. $888 TIPS fund.

 

[NW-Bound]

Being an ignoramus in TIPS (never bought one, and only get interested now), I just learned this:

Interest received on U.S. Treasury Inflation Protected securities is taxable. The increase in the principal balance due to inflation adjustments is also taxable in the year the principal adjustment takes place even if the TIPS hasn’t matured.

It hurts to pay taxes on the 8.2% inflation adjustment, but not actually receiving that adjustment for many years. I can see that TIPS should only be held in an IRA. You still pay taxes when you withdraw from the IRA, but this is somewhat under your control.

On the other hand, the accrued I bond interest is deferred until I cash out, or at the end of 30 years. This will create a tax bomb, in 10 years for me, when it is added on top of RMD.

I had forgotten about it. Aye, aye, aye...

As I said, high inflation will get you one way or the other. The false gain that just gets you even with inflation is taxed. You still lose (but not as much as when you don't even catch up with inflation).

 

[aja8888]

Being an ignoramus in TIPS (never bought one, and only get interested now), I just learned this:




It hurts to pay taxes on the 8.2% inflation adjustment, but not actually receiving that adjustment for many years. I can see that TIPS should only be held in an IRA. You still pay taxes when you withdraw from the IRA, but this is somewhat under your control.

On the other hand, the accrued I bond interest is deferred until I cash out, or at the end of 30 years. This will create a tax bomb, in 10 years for me, when it is added on top of RMD.

I had forgotten about it. Aye, aye, aye...

As I said, high inflation will get you one way or the other. The false gain that just gets you even with inflation is taxed. You still lose.

In the end, the Gov gets their tax payments! Yes, holding TIPS in a taxable account is not smart.

 

[Quattro73]

If you buy a TIP on the secondary market, it will already have inflation adjustments correct? What happens if inflation goes down or we have some form of deflation? Will the value of the TIP go down? Meaning can I “lose” money?