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

[Sunset]

I have two large C.D.'s I bought through Schwab. (CUSIP 46593LBV4). They pay 3% and mature 8/15/23. Since it is a brokerage C.D. I assume I have to sell it to get rid of it as opposed to paying a penalty if it were a bank C.D. Is that correct? I don't know how to sell it and I don't know if I should. I see how to click on the sell tab but I don't know what happens next or if I would benefit from doing so. Nine month C.D's and treasuries are over 4% now.. Should I sell or not?

This link has a great calculator that is easy to use to figure out about selling a CD.

Are you sure about the non-penalty aspect ? , and one has to think there is a cost to selling, even if no penalty.
I would think the cost is the difference between current CD's and your CD, plus a little spread (for the brokerage to make money).

So my total guess compared to a 4.5% CD is the cost is 1.5% + 0.2%.
Using my estimated cost to sell, and consider it as a penalty instead of a cost, its slightly more than a 6 month penalty to sell.
The calculator says any penalty more than 4 months is not worth selling.

I'll be interested to learn from others if there is a better way to calculate the numbers.

 

[Fotodog]

What you are seeing is buyers with low ball limit orders with minimum quantities as low one bond getting a small number of bonds from sellers who need to raise cash. Bonds are normally very illiquid so you pick up small lots of notes at discounts to market. It doesn't mean that your order will ever be filled. I have many open low ball limit orders and in a given day and I may get one or two filled over a two week period if I'm lucky and at very low quantities. A lot of bond traders fix on one and two year durations since they know funds sell bonds with less than one or two year durations and buy longer durations to maintain an average duration. Ironically those are the lowest risk bonds. If you look at the trade history, you will see the low volumes. Tax loss selling season in a down year is the best time to buy stocks or bonds with low ball limit orders.

Got it, thanks!

 

[Freedom56]

That's what I thought but it's reassuring to get your response. Thanks

Fixed income is all about generating income and preserving capital. Stay disciplined. If yields are too low for you, stay in cash. Timing the market is not a sin, it's normal behavior in fixed income investing. Cash today in a money market is yielding more than most bond funds. Stick to short durations with 5 years at the long end. Bonds, corporate notes, treasuries, and agency notes all pay a fixed coupon and mature or are called at par. You are locking in a rate when you buy them. Some corporate bonds will give you a premium above par for an early call. But the idea is to ladder. Buy some 1,2,3,4,5 year CDs, corporate notes or treasuries. Which every is giving you the better yield balanced with risk. There is no incentive at this point in the cycle to go beyond 5 years. Most of the rate hikes are behind us and bond market is attempting to price the terminal Fed funds rate either between 4.8-5% right now and the probability of a recession as the yield curve is still inverted. The best case scenario for fixed income is if they hold at their terminal rates at least through 2024. This means that all those callable CDs, notes, issued since June have a low risk of being called and as they mature their principal and their coupon payments, can be invested at current yields.

 

[Letj]

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

Freedom. How did you create your preferred stock watch list? I tried doing it on FINRA but the symbols in your spreadsheet didn’t work.

 

[BlazerJeremiah]

Looking for advice on Petroleos Mexicanos bonds

What do you guys think about Petroleos Mexicanos (PEMEX) bonds? They are offering a great premium on the Secondary market and I have read that there is a implied backing by the Mexican government but not an in writing guarantee. Just that they are kind of too large to fail in Mexico kind of thing.

 

[Freedom56]

Freedom. How did you create your preferred stock watch list? I tried doing it on FINRA but the symbols in York so redshirt didn’t work.

Preferred stocks and CEFs trade on the stock exchange. So it's the same as creating a stock watch list. I just did it on Fidelity.

This sheet tracks the universe of preferred stocks and REITs.

https://docs.google.com/spreadsheets/d/1M18jyMWV54AAcrks45VgISIgzbxu_7uy23gSJG1Ed80/edit#gid=0

 

[Letj]

Preferred stocks and CEFs trade on the stock exchange. So it's the same as creating a stock watch list. I just did it on Fidelity.

This sheet tracks the universe of preferred stocks and REITs.

https://docs.google.com/spreadsheets/d/1M18jyMWV54AAcrks45VgISIgzbxu_7uy23gSJG1Ed80/edit#gid=0

Thank you.

 

[MercyMe]

Schwab article yesterday paints a different picture that what many of us believe. I don't know what to think of all of this.

"...This year has been an anomaly and is unlikely to repeat, in our view. Going forward, returns should be better because starting yields are higher and it's unlikely that rates will continue to rise like they have. We suggest investors consider extending duration to take advantage of the move up in yields and stay up in credit quality by focusing mostly on higher-rated bonds."

 

[Spock]

What do you guys think about Petroleos Mexicanos (PEMEX) bonds? They are offering a great premium on the Secondary market and I have read that there is a implied backing by the Mexican government but not an in writing guarantee. Just that they are kind of too large to fail in Mexico kind of thing.

Personally I wouldn't touch Pemex with a 10 foot pole.
Mexico is always 1 election away from re-nationalizing everything.
Lately Pemex pipelines are being tapped by cartels/et. al. and the product bootlegged.
But that's just me.

 

[COcheesehead]

Schwab article yesterday paints a different picture that what many of us believe. I don't know what to think of all of this.

"...This year has been an anomaly and is unlikely to repeat, in our view. Going forward, returns should be better because starting yields are higher and it's unlikely that rates will continue to rise like they have. We suggest investors consider extending duration to take advantage of the move up in yields and stay up in credit quality by focusing mostly on higher-rated bonds."

I have a ten year ladder in place. Longer durations may not have been optimal in the past, but they soon will be.

 

[Chuckanut]

I find the new 0.4% fixed rate for I-bonds interesting. Why now? It's not like they have stacks of the things rotting in some warehouse because nobody is buying them.

 

[Mulligan]

I have a ten year ladder in place. Longer durations may not have been optimal in the past, but they soon will be.

Personally I agree. I have toed in on both ends. A lot of times the long end doesnt give you a warning bell its about to drop. And then its quite possible one could be back in the same problem they were 2 years ago. No yield anywhere. Heck it happened now. I bought some A2, 17 year duration debt at 6.7% just a week or two ago and its trading back in the 6.2%s already.

 

[COcheesehead]

Personally I agree. I have toed in on both ends. A lot of times the long end doesnt give you a warning bell its about to drop. And then its quite possible one could be back in the same problem they were 2 years ago. No yield anywhere. Heck it happened now. I bought some A2, 17 year duration debt at 6.7% just a week or two ago and its trading back in the 6.2%s already.

The long end of the curve has not been as volatile as the short end, hence the inverted curve we now have. I have enjoyed the increased cashflow from the long end when yields on the short end were nothing. We now have an opportunity to add to that yield and I have been taking advantage of it with 5 and 10 year bonds. My ladder went from throwing off $100k a year to now paying $160k.

 

[Freedom56]

Schwab article yesterday paints a different picture that what many of us believe. I don't know what to think of all of this.

"...This year has been an anomaly and is unlikely to repeat, in our view. Going forward, returns should be better because starting yields are higher and it's unlikely that rates will continue to rise like they have. We suggest investors consider extending duration to take advantage of the move up in yields and stay up in credit quality by focusing mostly on higher-rated bonds."

I don't know if Schwab is referring to individual bonds or their bond funds. Bond funds are going to be financial sink holes. They hold far too much low coupon debt. Extending durations on a bond fund will only make the situation worse.

I still would stay within 5 years with individual bonds unless you receive a premium yield for extending out to 7-10 years. Right now with high grade bonds, there is very little incentive to go beyond 5 years. I would buy 1-2 year treasuries before going near a 10 year treasury.

 

[jldavid47]

I don't know if Schwab is referring to individual bonds or their bond funds. Bond funds are going to be financial sink holes. They hold far too much low coupon debt. Extending durations on a bond fund will only make the situation worse.

I still would stay within 5 years with individual bonds unless you receive a premium yield for extending out to 7-10 years. Right now with high grade bonds, there is very little incentive to go beyond 5 years. I would buy 1-2 year treasuries before going near a 10 year treasury.

I'm sure they are talking about individual bonds. I pretty much agree with the rest of what you wrote although I'm not going over 5 years and the only note I have that long is a FHLB callable note paying a 6% coupon. I don't touch corporates (and if I did it would be AA or higher). Our average duration is about 6.5 months in our taxable account and 10 months in our IRAs.

 

[COcheesehead]

I'm sure they are talking about individual bonds. I pretty much agree with the rest of what you wrote although I'm not going over 5 years and the only note I have that long is a FHLB callable note paying a 6% coupon. I don't touch corporates (and if I did it would be AA or higher). Our average duration is about 6.5 months in our taxable account and 10 months in our IRAs.

That’s a short ladder!

 

[jldavid47]

That’s a short ladder!

For now, yes. The durations are actually longer than two months ago. I’m going to gradually increase the average duration over the next 6 months.

 

[lordjust]

The long end of the curve has not been as volatile as the short end, hence the inverted curve we now have. I have enjoyed the increased cashflow from the long end when yields on the short end were nothing. We now have an opportunity to add to that yield and I have been taking advantage of it with 5 and 10 year bonds. My ladder went from throwing off $100k a year to now paying $160k.

$160k..? Well now i know i am doing something wrong

 

[COcheesehead]

$160k..? Well now i know i am doing something wrong

Trust me, it’s been a process.

 

[Freedom56]

I'm sure they are talking about individual bonds. I pretty much agree with the rest of what you wrote although I'm not going over 5 years and the only note I have that long is a FHLB callable note paying a 6% coupon. I don't touch corporates (and if I did it would be AA or higher). Our average duration is about 6.5 months in our taxable account and 10 months in our IRAs.

I don't think I could deal with a 6.5 month duration portfolio. I buy bonds for income and capital preservation and my longest duration now is 8.2 years and the shortest is 15 months and I'm holding a lot of cash for the fire sale this and next month. The longer duration notes carry a high coupon and kept a reasonable level of cash flow from investments coming in through the zero interest days of 2021 and early 2022. I had maturities and coupon payments in 2021 and 2022 and absolutely nothing worth buying due to the extremely low rates. All the preferred stocks that I bought in March 2020 were called and replaced with much lower coupon preferred stocks that I didn't want to own. My money market funds were paying .01% yield and If I didn't have any notes maturing in 2024, 2025, 2028, and 2031, my portfolio would have been earning .01% for all of 2021 into 2022. I even transferred money to my AMEX and Capital One savings accounts above FDIC limits as they were paying 0.4% on cash balances. That all started to change by June of this year and the start of this thread. One thing I have learned is that when rates top out, the transition happens pretty quickly and yields drop off. So I have been buying incrementally as rates rise. I'm saving the majority of the buying to this years tax loss selling season.

 

[NomDeER]

Buy some 1,2,3,4,5 year CDs, corporate notes or treasuries. Which every is giving you the better yield balanced with risk. There is no incentive at this point in the cycle to go beyond 5 years.

What is the reason for not going beyond 5 years? The interest rates aren't good enough and you expect the interest rates to improve soon?

 

[lordjust]

Trust me, it’s been a process.

... i would call it a success (well earned i am sure). hope to do as well as you in my future

 

[lordjust]

What is the reason for not going beyond 5 years? The interest rates aren't good enough and you expect the interest rates to improve soon?

I was going to ask something similar. Powell did say he expected to keep the rates up into the future. I read that as "for at least a year or two" before even looking at lowering. I am assuming we hit 10% mortgage rates and 5.5% fed rate. My numbers are wild a$$ guesses so nobody should listen to me, ever. Just my opinion which based on my stock portfolio return is meaningless.

I think we should see A rated+ corporate bond rates 7-8% january/february. Feel free to correct my assumptions.

 

[COcheesehead]

I was going to ask something similar. Powell did say he expected to keep the rates up into the future. I read that as "for at least a year or two" before even looking at lowering. I am assuming we hit 10% mortgage rates and 5.5% fed rate. My numbers are wild a$$ guesses so nobody should listen to me, ever. Just my opinion which based on my stock portfolio return is meaningless.

I think based on my numbers that we should see higher corporate bond rates 7-8% january/february. Feel free to correct my assumptions.

I agree, but here’s the deal, they may not go up.
If they go up, collect some coupons, trade out and buy the higher yield when you are in the black overall.
If they do not go up, you are locked in at least until the bond is called - which may or may not happen.
I gave up guessing long ago. I buy what is, deal with what is and make the best of it. All of which has only increased our income.

 

[pb4uski]

I find the new 0.4% fixed rate for I-bonds interesting. Why now? It's not like they have stacks of the things rotting in some warehouse because nobody is buying them.

Yes, that was perplexing... it isn't like demand was slack. But at the same time I don't get why the USG didn't issue much more long debt when interest rates were low for so long... stupid.