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

[daylatedollarshort]

Over the last six months the Fed has been stating that rates will go much higher than prior rate hike cycles and stay there for longer. They are still saying that. Some Fed officials were talking about 5.5%-6%. Bond traders have been fighting the Fed and losing all of last year. What would make anyone believe that bond traders have any credibility?

The Fed has been pretty consistent for the last year or so now in what they are saying they are going to do and then actually doing it. From March, 2022 - "Policymakers projected six more similarly sized moves over the course of 2022 as inflation has reached a 40-year high, signaling that they are prepared to pull back support for the economy markedly...“The economy no longer needs — or wants — this very highly accommodative stance,” Jerome H. Powell, the Fed chair, said during his post-meeting news conference."
https://www.nytimes.com/live/2022/03/16/business/fed-meeting-interest-rates

Volcker let up on the rate increases in the 80s too soon and then inflation came roaring back. Powell is a fan of Volcker and unlikely to repeat the same mistake, especially with the labor market still tight.

The bond market as whole may have been late to the game / not taken The Fed seriously for 2022, but many of us here on the ER forum did and it has worked out well.

 

[Montecfo]

The Fed has been pretty consistent for the last year or so now in what they are saying they are going to do and then actually doing it. From March, 2022 - "Policymakers projected six more similarly sized moves over the course of 2022 as inflation has reached a 40-year high, signaling that they are prepared to pull back support for the economy markedly...“The economy no longer needs — or wants — this very highly accommodative stance,” Jerome H. Powell, the Fed chair, said during his post-meeting news conference."
https://www.nytimes.com/live/2022/03/16/business/fed-meeting-interest-rates

Volcker let up on the rate increases in the 80s too soon and then inflation came roaring back. Powell is a fan of Volcker and unlikely to repeat the same mistake, especially with the labor market still tight.

The bond market as whole may have been late to the game / not taken The Fed seriously for 2022, but many of us here on the ER forum did and it has worked out well.

Lol

 

[daylatedollarshort]

Lol

Bridgewater: Bonds are a terrible place to be thread, https://www.early-retirement.org/fo...onds-are-a-terrible-place-to-be-112820-2.html (from February, 2022).

and - https://www.early-retirement.org/fo...errible-place-to-be-112820-2.html#post2729007

These Are the Worst Income Investments for the New Year - Knowing what to avoid can be as important as what to buy for investing.....here’s my take on the worst income investments for 2022. Hint: They’re all longer-term bond funds.
https://www.barrons.com/articles/wor...ts-51641338869

 

[Freedom56]

You keep moving the goal posts. Now we are down to " the last 6 months."

Listen, I can't follow your logic, but I do find your comments on individual issues to be valuable.

Thank you for that.

At the beginning of 2022, everyone knew that the Fed was going to hike rates. I warned people of the dangers of owning bond funds bloated with low coupon debt that would not be able to increase distributions. We are entering the second year of rate hikes an yet those funds distributions barely budged. This rate hike cycle has been a moving target and Powell is attempting to restore some credibility after delaying the rate hikes to 2022. The Fed has to also deal with the wealth created out of thin air by highly speculative stocks and crypto currencies which are extremely inflationary. The Fed has never in it's history stopped hiking rates while real rates remain negative. This is a fact.

The problem that the markets are designed to operate on "the greater fool theory". This is how you end up in situation where 0.55% 5 year corporate bonds are purchased above par at near zero YTMs with the belief that someone else will buy it at negative yields. To assume that Wall Street bond traders are geniuses and experts would be a huge mistake. They don't risk their own capital. They risk and "lose other peoples money" and really don't care. This is why they continued to buy bonds in late 2020 through mid 2022 when high grade bonds and treasuries were not investable. I see that happening again as the market is bidding up longer durations treasuries.

We are at a point in time where bonds, CDs, treasuries are investable and can actually generate income. You don't even have to buy high yield bonds any longer to generate that income. People who are following this thread and others like it will realize they can earn a steady income stream without risking their capital. As people become more proficient at buying bonds, they will realize that bonds are not those complex esoteric financial instruments that they were led to believe, and they will once again become part of their portfolio. Most have learned by now that bonds funds are not bonds. We are in the golden period now. Money market funds are earning 4.27% and should cross 4.5% in a few weeks. Why on earth would someone lock 3.44% yield on a 10 year treasury with so much uncertainty? But then again people buy crypto currencies with next no use case hoping for that greater fool.

 

[Echard]

Thoughts on specific maturity bond funds? Yes there are expenses, but theoretically shouldn’t these provide a decent alternative to building your own bond ladder that addresses some of the interest rates risks as long as you hold to maturity?

https://www.ishares.com/us/strategies/bond-etfs/build-better-bond-ladders

 

[pb4uski]

Thoughts on specific maturity bond funds? Yes there are expenses, but theoretically shouldn’t these provide a decent alternative to building your own bond ladder that addresses some of the interest rates risks as long as you hold to maturity?

https://www.ishares.com/us/strategies/bond-etfs/build-better-bond-ladders

I've owned them in the past. They're OK. Better than bond funds. The fatal flaw with them used to be that the yields were pathetic in the terminal year as high coupon bonds matured from January through December and the proceeds from maturity were invested short term since the money would be needed in December to pay the terminal distribution. But that problem could be easily avoided by simply selling a year or so before the terminal distribution. Also, given how flat the yield curve is it's probably not so much of an issue today.

I prefer a rolling bond ladder using individual bonds but a rolling bond ladder using target maturity bond ETFs isn't a bad idea for corporate bonds to conveniently mitigate credit risk, but IMO is totally unnecessary for government bonds since there is no need to mitigate credit risk.

 

[Freedom56]

The big U.S. banks have been reporting earnings this morning. All you need to care about is did they make money and set aside money for future loan losses in the event of a recession. Year of year growth doesn't matter to short/medium duration bond holders.

Citigroup earned $2.5 billion net income in the forth quarter after setting aside $640 million more for load losses.

Bank of America earned $7.1 Billion net income dollars and set aside $1.1 for credit losses.

JP Morgan earned $11.01 Billion net income and set aside $2.3 billion for credit losses

Well's Fargo Earned $2.86 billion depressed by settlement costs from ripping off customers and set aside $957 for credit losses.

Goldman Sachs reports next week.

 

[Montecfo]

Would you mind posting the CUSIP on this?

857477BP7

State Street Bank. Yield has come down a bit but still offered.

 

[swk7907]

Some TD Bank Make whole call notes are trading now. These were large institutional issues.

TORONTO DOMINION BANK SER C MTN 5.15600% 01/10/2028 CALL MAKE WHOLE
89115A2M3

TORONTO DOMINION BANK SER C MTN 5.10300% 01/09/2026 CALL MAKE WHOLE
89115A2K7

The coupons are okay but they are trading above par and will likely fall below par as we move forward in 2023. Also the make whole premium will not get you that much premium over par if called given where treasury rates are today. There is no compelling reason to buy them now but could be in the future if prices drop.

I've done a bunch of reading but still am struggling getting my head around the make whole concept.

I found this online sheet/calculator that when I have time I hope to play around with to modify and make it more useable (enter in the details and see the difference between make whole vs. par callable).

Does anybody have a spreadsheet they use already? Thanks.

 

[MercyMe]

857477BP7

State Street Bank. Yield has come down a bit but still offered.

Thanks. Having dug a bit deeper into their financials, I'm not certain what to do. Their Moody's report isn't exactly glowing. I like the longer duration though. Freedom, any thoughts on SS Bank?

 

[Freedom56]

Thanks. Having dug a bit deeper into their financials, I'm not certain what to do. Their Moody's report isn't exactly glowing. I like the longer duration though. Freedom, any thoughts on SS Bank?

I personally would not buy a 10 year note with a 2.2% coupon. State Street is a safe bank. It has had its share of malfeasance like other banks.

https://www.justice.gov/usao-ma/pr/...iminal-penalty-and-enter-deferred-prosecution

The safest banks in the U.S. today are:

JPMorgan Chase
U.S. Bank
PNC Bank
Citibank
Wells Fargo
TD Bank
M&T Bank Corporation
AgriBank
CoBank
AgFirst
Farm Credit Bank of Texas

Bank of America is okay also.

 

[HF63]

Is time to start a dipping our toes into some high yield products like,
VWEHX/ High Yield Corporate or VWOB/ Emerging Markets Government Bond Index


I know we been mainly focusing on CD's but the 5 years or longer seem low.

 

[Montecfo]

The State Street Bank bond referenced is an 8 year credit. It is an A rated bond which Moody's designates as low risk.

Coupon does not matter to me since I am a total return investor invested primarily in equities.

I do not try to live off my coupons.

 

[Mulligan]

I personally would not buy a 10 year note with a 2.2% coupon. State Street is a safe bank. It has had its share of malfeasance like other banks.



https://www.justice.gov/usao-ma/pr/...iminal-penalty-and-enter-deferred-prosecution



The safest banks in the U.S. today are:



JPMorgan Chase

U.S. Bank

PNC Bank

Citibank

Wells Fargo

TD Bank

M&T Bank Corporation

AgriBank

CoBank

AgFirst

Farm Credit Bank of Texas



Bank of America is okay also.

Sisters AgriBank, CoBank, AgFirst, and Farm Credit are the only US Banks that are ever in the 50 safest banks in the world rankings. Unfortunately I believe all their debt is only issued via 144a so not really publicly available.

 

[Freedom56]

Sisters AgriBank, CoBank, AgFirst, and Farm Credit are the only US Banks that are ever in the 50 safest banks in the world rankings. Unfortunately I believe all their debt is only issued via 144a so not really publicly available.

You are correct. The safest banks in North America (all among the top 50 in the world) are those you mentioned plus the major Canadian Banks. To me buying a bond from TD Bank or Royal Bank of Canada is like buying a CD.

https://d2tyltutevw8th.cloudfront.n...rlds-safest-bank-awards-2022-s-1663604820.pdf

 

[finnski1]

You are correct. The safest banks in North America (all among the top 50 in the world) are those you mentioned plus the major Canadian Banks. To me buying a bond from TD Bank or Royal Bank of Canada is like buying a CD.

https://d2tyltutevw8th.cloudfront.n...rlds-safest-bank-awards-2022-s-1663604820.pdf

Yep. That's why I went with the 10 yr Royal Bank of Canada 6.00% coupon yesterday even though I really wasn't keen on going out 10 years. Like to stick with 3-5 years if possible.
It will probably get called at the 2 year date anyway.

 

[bmcgonig]

Interesting cross currents out there. Larry Summers is walking back his stance now saying that the fed is much closer to finishing that he previously thought. Lots of people saying that 3% is the new 2%. That trying for 2% will put us into a severe recession. Druckenmiller says that in his 40 yr experience when the bond market and the Fed are at odds, the bond market wins.

Kashkari says “Feel lucky punk? Have I shot 5 rounds or have I shot 6?”

Famous, although retired, technician Walter Deemer declared a new bull market in stocks yesterday. (He’s living in a CCRC in Florida now!)

 

[Montecfo]

Interesting cross currents out there. Larry Summers is walking back his stance now saying that the fed is much closer to finishing that he previously thought. Lots of people saying that 3% is the new 2%. That trying for 2% will put us into a severe recession. Druckenmiller says that in his 40 yr experience when the bond market and the Fed are at odds, the bond market wins.

Kashkari says “Feel lucky punk? Have I shot 5 rounds or have I shot 6?”

Famous, although retired, technician Walter Deemer declared a new bull market in stocks yesterday. (He’s living in a CCRC in Florida now!)

Not a huge Summers fan but he may be right here. And yes, reshoring and other factors may make 2% hard to achieve.

Fed pivot is good for stocks but more bloodletting en route I fear.

 

[Mulligan]

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

Is time to start a dipping our toes into some high yield products like,
VWEHX/ High Yield Corporate or VWOB/ Emerging Markets Government Bond Index


I know we been mainly focusing on CD's but the 5 years or longer seem low.

I do HY also, but I do it on the exchange. Issues like chronic junk NSS that trade very solid and are heading for 11% next cycle. But I mix and match dabbling in 30 day CDs on up to perpetuals. Raised some cash on some quick bouncers and buried some of it into a 5.3% YTM 2025 subsidiary ute Public Service New Mexico today. Glad I got my longer dated bond issues back in Oct as yields pretty much suck again.

 

[Freedom56]

Interesting cross currents out there. Larry Summers is walking back his stance now saying that the fed is much closer to finishing that he previously thought. Lots of people saying that 3% is the new 2%. That trying for 2% will put us into a severe recession. Druckenmiller says that in his 40 yr experience when the bond market and the Fed are at odds, the bond market wins.

Kashkari says “Feel lucky punk? Have I shot 5 rounds or have I shot 6?”

Famous, although retired, technician Walter Deemer declared a new bull market in stocks yesterday. (He’s living in a CCRC in Florida now!)

Summers is stating the obvious. We have gone from 0 to 4.5% so the jump from 4.5% to 5.25% can be done with three 0.25% rate hikes. So we are much closer to finishing with the rate hikes.

 

[Sunset]

Thoughts on specific maturity bond funds? Yes there are expenses, but theoretically shouldn’t these provide a decent alternative to building your own bond ladder that addresses some of the interest rates risks as long as you hold to maturity?

https://www.ishares.com/us/strategies/bond-etfs/build-better-bond-ladders

Nope, I had one, that matured at the end of 2022. It lost $2 per share in the end, didn't get back the $25 par value at all.

From now on I'll hold bonds only and to maturity, no more thinking I can just sell my bond fund if needed to raise money. Better to have some kind of a ladder so I'm never too far off from something cashing out.

 

[Graybeard]

Volcker let up on the rate increases in the 80s too soon and then inflation came roaring back.

Wasn't it Arthur Burns during the 70's that loosen rates and saw inflation come roaring back? Volker was the chair that kept raising rates and finally broke the back of inflation in the 80's.

 

[Montecfo]

Wasn't it Arthur Burns during the 70's that loosen rates and saw inflation come roaring back? Volker was the chair that kept raising rates and finally broke the back of inflation in the 80's.

You are correct.

 

[bmcgonig]

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

Summers is stating the obvious. We have gone from 0 to 4.5% so the jump from 4.5% to 5.25% can be done with three 0.25% rate hikes. So we are much closer to finishing with the rate hikes.

Like I wrote, closer than he thought originally. He forecast 6% Fed rate. It’s a significant reversal for him.

 

[daylatedollarshort]

Wasn't it Arthur Burns during the 70's that loosen rates and saw inflation come roaring back? Volker was the chair that kept raising rates and finally broke the back of inflation in the 80's.

The Fed must avoid Volcker’s mistake on inflation - Initial reversal of policy to tackle rising prices led to higher unemployment and lost economic output: "With the unemployment rate rising by more than a percentage point to more than 7 per cent in May after a recession began, the Fed decided to reverse course and sharply lower the federal funds rate by more than 7 percentage points. This action was taken despite the fact that inflation reached a peak of 14.7 per cent in April. The Fed had blinked and Volcker’s credibility as an inflation fighter took a hit. Inflation expectations stayed stubbornly high and actual inflation remained above 12 per cent through to the end of 1980. With the recession ending in July 1980, the Fed got back into the inflation fighting business and started to raise the federal funds rate again. But this time, to re-establish its credibility, the Fed had to raise the federal funds rate to a crushing level of nearly 20 per cent by the middle of 1981. Volcker finally had the courage to take out the baseball bat to slam the economy and slay inflation." - https://www.ft.com/content/45ab5a45-6f32-49b3-be5d-9193071de970

How the Fed ended the last great American inflation — and how much it hurt: "The approach took two tries to get its intended effect. Volcker’s tightening slowed economic activity enough that by January 1980, the US was in recession. But Fed interest rates actually began falling sharply after April, which limited the effectiveness of the Fed’s anti-inflation efforts. The Fed tightened again after that and sparked another recession in July 1981. This one was far worse than the first; while unemployment peaked at 7.8 percent during the 1980 recession, it would peak at 10.8 percent in December 1982 in the middle of the 16-month second Volcker recession. That’s a higher level than at the peak of the Great Recession in 2009. Over the course of the 1980s, this policy regime would become known as the “Volcker shock.” - https://www.vox.com/future-perfect/2022/7/13/23188455/inflation-paul-volcker-shock-recession-1970s

Raising interest rates is a lesson Powell learned from former Fed chair Paul Volcker - "Who isn't an admirer of Paul Volcker? I knew him just a little bit and have tremendous admiration for him. He had the courage to do what he thought was the right thing."

Most still expect prices to settle down in the coming years. Ending the pandemic and the war in Ukraine could also take some of the upward pressure off prices. But Powell and his colleagues are no longer banking on that. Instead, they're taking a page from Volcker's playbook, and they're ready to play bad cop with interest rates for as long as it takes to get prices under control. - https://www.npr.org/2022/09/22/1124...powell-learned-from-former-fed-chair-paul-vol