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

[lordjust]

The worst that can happen is you earn, 5% for the next three years with that investment.

i guess i shouldnt grumble about my 5.3% GS 2028 that I paid for...

 

[jazz4cash]

^^^^^
I just looked at it and it says you can add non-Fidelity holdings in an Excel format.

Here's their info.

Hey that's a great tip....Thanks

I am stuck. It seems to require a valid CUSIP. I have treasuries, credit union CDs and MYGAs that I would like to add. I guess it's no big deal since I have everything on an excel sheet anyway.

 

[lordjust]

freedom .. you stay away from energy companies?

694308KJ5

 

[pb4uski]

Hey that's a great tip....Thanks



I am stuck. It seems to require a valid CUSIP. I have treasuries, credit union CDs and MYGAs that I would like to add. I guess it's no big deal since I have everything on an excel sheet anyway.

Since the upload is only CUSIPs and quantity it only works with securities that have a CUSIP, so for us it will exclude i-bonds and DWs NFCU Roth CD. It will also exclude our dry powder MMF holdings.

Neat tool though.

 

[11522914]

How many other financial institutions did this?

I don't know Freedom, I was hoping you'd be able to tell me.

 

[Freedom56]

freedom .. you stay away from energy companies?

694308KJ5

PG&E is too risky for me. It came out of bankruptcy in 2020.

 

[Montecfo]

From 2008 to 2021 I owned bonds from GE, Citigroup, Bank of America, JP Morgan, Capital One Financial, Johnson & Johnson, AMD, Seagate, eBay and many others. I also bought CDs. I also bought investment grade preferred stocks from JP Morgan, Capital One, Bank of America, and others.

So you owned the same low coupon securities purchased by fund managers that you deride. I figured that must be the case.

I also bought CEFs like PDT, FPF, and FFC in 2013 and later sold out in 2016.

I have owned these also at certain points in the cycle.

Why don't you go back are review the preferred stock thread dating back over the last 10 years.

Topic is bonds, not equities.

In early 2022, I warned investors to get out of their passive bond funds as they were and still are bloated with too much low coupon debt and they would be unable to increase distributions to keep up with rate hikes and they had nowhere to go but down.

All bondholders held low coupon debt. That was the market then. The real enemy was duration. And I can say that without deriding anyone. Most bond funds are actively managed. Indexes are passive.

And yes avoiding duration was the right call. Bonds and funds lost massive value proportional to their duration.

 

[DawgMan]

Curious to strategy perspective here. I'm assuming there are 2 primary camps that hang out here. Income investors who are running their portfolio to create create a certain amount of income annually and then bucket/predictability folks. I fall in the second camp where I have circled 10 years worth of planned spend to pull from when stocks are not performing. In my case, ensuring this planned spend is is available year after year for up to 10 years (assuming stocks are down for an extended period) is my primary goal followed my some reasonable yield. Hence, how should one define "reasonable yield"? Treasuries only? A Rated Corporates? This is my pickle. When to buy longer term?

Interesting. I COULD sell me stocks today and buy 100% bonds and generate more spend $$ than I need/plan for today, however, I have chosen to "play the game" for legacy/charity reasons. None the less, I want to be a prudent steward of my strategy, yet I find the "game" of choosing bonds challenging... and interesting. I really appreciate the insights of you "bond experts"... on the internet!

 

[COcheesehead]

Curious to strategy perspective here. I'm assuming there are 2 primary camps that hang out here. Income investors who are running their portfolio to create create a certain amount of income annually and then bucket/predictability folks. I fall in the second camp where I have circled 10 years worth of planned spend to pull from when stocks are not performing. In my case, ensuring this planned spend is is available year after year for up to 10 years (assuming stocks are down for an extended period) is my primary goal followed my some reasonable yield. Hence, how should one define "reasonable yield"? Treasuries only? A Rated Corporates? This is my pickle. When to buy longer term?

Interesting. I COULD sell me stocks today and buy 100% bonds and generate more spend $$ than I need/plan for today, however, I have chosen to "play the game" for legacy/charity reasons. None the less, I want to be a prudent steward of my strategy, yet I find the "game" of choosing bonds challenging... and interesting. I really appreciate the insights of you "bond experts"... on the internet!

I am an income investor, but my ladders throw off more than I need with using only a part of my assets. So the leftovers go into equities that I may never really need to touch.
I have been buying bonds since 2008, but only in mass quantities since 2017. It gets easier. Especially if you know what you need to make your plan work. It’s an easy guidepost to decide whether or not something fits rather that trying for perfection.

 

[Montecfo]

I am probably in a 3rd category: total return investor managing debt portion of AA for reasonable risk adjusted return, as a counterbalance to larger equity allocation.

I think you want to begin extending maturities if you have not already done so. We have a reasonable view that the shortest rates are heading somewhat higher, longer rates have been stuck where they are below the highs from last fall.

Given we do not know the exact timing of rate cuts (Fed says 2024) or recession (either of which will reduce rates) I think now is a good time to extend maturities.

For my debt portfolio, I keep quality high. I take risk with equities, not so much here.

Good Investing!

 

[jazz4cash]

I keep seeing folks happy with two or three year call protection on 8-10 year bonds. For me, that's a non-starter. Maybe because I remember the 1970's, but there is still a risk of higher rates and getting stuck with a bond for 10 years at a market price way below par isn't very appealing to me, when the interest rate premium above no call bonds is minimal.

I've been searching for a way to quantitatively evaluate these call protection provisions, rather than just eyeball it and either like it or not like it.

Yeah, it's gut feel for me, but I am not inclined to feel cheated if I don't get the absolute best deal everytime. Curiously 2-5 year CDs are all at 5.4% (callable) at Fido right now. The reduced rate for a non-callable CD is a good deal right now IMO, esp the 1 yr LOL.

Maturity Callable Non Callable
1 yr 5.4 5.4
2 yr 5.4 5.25
3 yr 5.4 4.95
4 yr 5.4 4.95
5 yr 5.4 4.85

 

[dmpi]

I have a 65/35 asset allocation. The 65% is still in S&P index funds but unfortunately for me the 35% was all in a bond fund. Subsequently 95% of it has been sold off and now is in a high-yield money market account. I have bought a few tiny broker CDs just to test the water and to practice using schwab. This whole bond market thing is brand new to me and there's a whole lot to learn. However with rates are still going up & the MM paying good I feel I don't have to rush.

 

[Mulligan]

The worst that can happen is you earn, 5% for the next three years with that investment.

I can definitely live with that for this purchase. Presently its 53 bps higher than the 3 year Treasury. Personally I got the Guy Adami view. Fed is in the 7th or 8th inning of rate hikes while the market and economy is only in the 2nd or 3rd inning from the impact of them. Its possible to get higher long end bond yields not from higher yields but from widening credit spreads.

 

[Freedom56]

So you owned the same low coupon securities purchased by fund managers that you deride. I figured that must be the case.



I have owned these also at certain points in the cycle.



Topic is bonds, not equities.



All bondholders held low coupon debt. That was the market then. The real enemy was duration. And I can say that without deriding anyone. Most bond funds are actively managed. Indexes are passive.

And yes avoiding duration was the right call. Bonds and funds lost massive value proportional to their duration.

No I did not own the same low coupon garbage that those dumb fund managers bought. If you actually invested in individual bonds/CDs you would understand that in 2009 high grade bonds were being issued at coupons from 6.25-7% for 10 year duration (non-callable). In 2010 the yields dropped to about 5.6%-6% for 7-10 year durations. In 2013 yields spiked up to 6-7%. CEFs were selling at 15-20% discount to NAV and had distribution yields of 10-11%. Yields pulled back again and then spiked once again in 2015 and 2016. In 2016 your could buy eBay 6% notes below par or JP Morgan or Capital One preferred shares with coupons of 6.5% below par. Allied Capital had 6.75% notes that you could buy below par. Then yields pulled back again and spiked again in 2018. Once again we had another buying opportunity. In all cases, bond funds bought high and sold low. This is what bond funds are designed to do. Barron's even wrote an article about the vulnerability of passive funds when rates rise causing redemptions and selling and creating opportunities for active bond and preferred stock investors. During March 2020, it was perhaps the buying opportunity of the century. Funds were busy liquidating high grade bonds at yield of 7-9% and high yield bonds up to 18% yields. Investment grade preferred stocks dropped to 50-60% below par in a matter of days. In all cases it was fund driven selling at huge losses and those same funds bought back the same bonds and preferred stocks that they liquidated at much higher prices and even well above par. Go review what was going on at the time. Many people were loading up the truck with fixed income assets during March 2020. After the Fed dropped rates to zero, all those bonds and preferred stocks recovered. But later in 2020 and through 2021 banks started calling their preferred stocks and the higher coupon fixed income assets matured and were refinanced at much lower coupons. Corporations then started to issue bonds and preferred stocks and historically low yields. I chose to hold cash earning very little for all redemptions and called securities and coupon payments throughout 2021 rather than play the stupid game of buying the lowest yielding security with the longest duration that all those dumb bond fund mangers played. Just because bond funds have historically paid very little distributions over the past 15 years, don't assume coupons were low throughout that period. Bond funds suffered serious losses during all the spikes in interest rates and market corrections over the past decade. Most of these fund managers don't know how to deal with an extended period of rising rates and higher for longer rates. Passive funds are not even programmed to deal with this scenario. This is a fact of life. It was pretty clear to many of us, that 2022 was going to be another buying opportunity. Yields have nearly reset back to levels prior to the financial crisis of 2008/2009.

 

[Freedom56]

I can definitely live with that for this purchase. Presently its 53 bps higher than the 3 year Treasury. Personally I got the Guy Adami view. Fed is in the 7th or 8th inning of rate hikes while the market and economy is only in the 2nd or 3rd inning from the impact of them. Its possible to get higher long end bond yields not from higher yields but from widening credit spreads.

The spreads on high grade corporates and treasuries are ridiculous. JP Morgan 1 year notes were yielding less that one year treasuries. We have seen this movie before in early 2018 when corporate notes yielded about the same or less that treasuries and then came a market correction and massive redemption of bond funds that widened the spreads. It's a matter of time before spreads normalize. The heavy lifting of rates are done. The Fed can't keep raising rates like the early 80's with the current level of national debt. The level of national debt will also put a floor on rates. It's highly unlikely that we are moving back to zero rates any time soon. A more plausible scenario is the Fed just pauses like the Bank of Canada is doing and holding rates steady until inflation drops which could hold rates up at these levels though mid 2025.

The 10 and 30 year treasury yields are still too low. The equity markets are still in bubble territory and it seems that may people have forgotten that the dotcom bubble took three years to bottom. Those meme stock traders are sending strong signals to the Fed that the stock market casino is alive and well funded. There is a flight to safety trade that is keeping yields at the long end artificially low. Equity investors would rather earn 5% versus -20%. Many investors are also ditching bond funds that yield next to nothing and are buying individual bonds and treasuries. I would rather keep dry powder in a MM fund than accept these low spreads. When 5 and 7 year treasuries cross 5%, I'll load up. When 5 and 7 year high grade non-callable bonds yield cross 6% I'll also load up.

 

[Freedom56]

A perspective on SVB Financial from CNBC and is it a canary in a coal mine?

The other notable bank in the news was Silvergate. The demise of this bank should not be a shocker as it was operating an exchange for modern day pet rocks. What could go wrong?

 

[jldavid47]

Schwab has an Investment Income report that shows estimated investment income from your current holdings by month in a bar graph or a table by holding with totals... Income for 2022 or 2023 or next 12 months.

Just found this yesterday. I wish they had a similar table for maturities.

Careful. That report does not include interest from T-bills. I got suckered by that last year and kept wondering why the number seemed so low before I ran the numbers myself. Now I simply keep a tab in my fixed income spreadsheet to give me a more accurate estimate.

 

[pb4uski]

Careful. That report does not include interest from T-bills. I got suckered by that last year and kept wondering why the number seemed so low before I ran the numbers myself. Now I simply keep a tab in my fixed income spreadsheet to give me a more accurate estimate.

Good to know. Isn't that strange. As it turns out I have mostly brokered CDs and very few Tbills so it would not impact me much.

ETA: I went back and looked that that report in detail. It excludes tbill interest is because tbills are zero coupon bonds. It only includes coupon payments and does not include amortization of discount for any bonds, zeros or otherwise. Luckily, I don't have a lot of high discount bonds and premiums are negligible, but it is something to keep in mind when reviewing the report. My spreadsheet calculation of interest income includes amortiation of discount and accrual of premium so I'll rely on that.

 

[DawgMan]

Careful. That report does not include interest from T-bills. I got suckered by that last year and kept wondering why the number seemed so low before I ran the numbers myself. Now I simply keep a tab in my fixed income spreadsheet to give me a more accurate estimate.

Made me look. Surprised that T-bills are not included? Projected MM yields and CD interest is included.

One other Schwab report FYI... if you are trying to track CGs the CGs report only includes trades you make. If you own a fund that does some internal trading that spits out a CG, you have to manually pull it out of the Transaction ledger and add it to your total.

I have mentioned this to my Schwab guy, but not sure there are fixes in the near term coming here. As I told him, retired folks like us like to do some tax planning and projecting taxable income (i.e. dividends, interest, CGs) in a simple report should be at the top of their list.

 

[pb4uski]

A perspective on SVB Financial from CNBC and is it a canary in a coal mine?...

The other notable bank in the news was Silvergate. The demise of this bank should not be a shocker as it was operating an exchange for modern day pet rocks. What could go wrong?

From the video it sounds like the problem is that the demand deposits in these specific banks was not as dead money as many banks have... dead money being like my neanderthal friend who keeps a lot of money in a bank at negligible interest or my DM who carries a significant checking account balance at negligible interest. The banks count on this dead money and that it will stay dead to make loans and invest and make a spread. But the investments are not so liquid as the demand deposits so if demand depositors wake up from the dead and want their deposits to reinvest in something that pays a better yield then the bank's liquidity gets squeezed.

It would be interesting to know what those banks were invested in and why their duration matching was so poorly designed.

ETA: This reminded to move some dead money from DM's checking account to her Schwab account. YTD interest was 36c on a low 5-figure balance... I think we can do better in SWVXX.

 

[Retired2021]

The spreads on high grade corporates and treasuries are ridiculous. JP Morgan 1 year notes were yielding less that one year treasuries. We have seen this movie before in early 2018 when corporate notes yielded about the same or less that treasuries and then came a market correction and massive redemption of bond funds that widened the spreads. It's a matter of time before spreads normalize. The heavy lifting of rates are done. The Fed can't keep raising rates like the early 80's with the current level of national debt. The level of national debt will also put a floor on rates. It's highly unlikely that we are moving back to zero rates any time soon. A more plausible scenario is the Fed just pauses like the Bank of Canada is doing and holding rates steady until inflation drops which could hold rates up at these levels though mid 2025.

The 10 and 30 year treasury yields are still too low. The equity markets are still in bubble territory and it seems that may people have forgotten that the dotcom bubble took three years to bottom. Those meme stock traders are sending strong signals to the Fed that the stock market casino is alive and well funded. There is a flight to safety trade that is keeping yields at the long end artificially low. Equity investors would rather earn 5% versus -20%. Many investors are also ditching bond funds that yield next to nothing and are buying individual bonds and treasuries. I would rather keep dry powder in a MM fund than accept these low spreads. When 5 and 7 year treasuries cross 5%, I'll load up. When 5 and 7 year high grade non-callable bonds yield cross 6% I'll also load up.

Do you see any risk of these high yielding MMs taking a hair cut? They are not FDIC insured, just SIPC insured.

 

[simple girl]

I have a 65/35 asset allocation. The 65% is still in S&P index funds but unfortunately for me the 35% was all in a bond fund. Subsequently 95% of it has been sold off and now is in a high-yield money market account. I have bought a few tiny broker CDs just to test the water and to practice using schwab. This whole bond market thing is brand new to me and there's a whole lot to learn. However with rates are still going up & the MM paying good I feel I don't have to rush.

Pretty much in the same position. I did not close out quite as much of our bond fund allocation but about half of it (had to do a rollover anyways, so it worked well with that timing). Right now I'm trying to re-analyze our asset allocation within our bond portion and develop a plan while holding the dry powder we have available in a MMF at Fidelity.

 

[pb4uski]

Do you see any risk of these high yielding MMs taking a hair cut? They are not FDIC insured, just SIPC insured.

No IMO. MMFs invest in very short securities, mostly overnight and the high yields are a function of the Fed's actions to raise the federal funds rate that banks lend to each other overnight and the impact of that on very short duration securities.

 

[pb4uski]

Curious to strategy perspective here. I'm assuming there are 2 primary camps that hang out here. Income investors who are running their portfolio to create create a certain amount of income annually and then bucket/predictability folks. I fall in the second camp where I have circled 10 years worth of planned spend to pull from when stocks are not performing. In my case, ensuring this planned spend is is available year after year for up to 10 years (assuming stocks are down for an extended period) is my primary goal followed my some reasonable yield. Hence, how should one define "reasonable yield"? Treasuries only? A Rated Corporates? This is my pickle. When to buy longer term?

Interesting. I COULD sell me stocks today and buy 100% bonds and generate more spend $$ than I need/plan for today, however, I have chosen to "play the game" for legacy/charity reasons. None the less, I want to be a prudent steward of my strategy, yet I find the "game" of choosing bonds challenging... and interesting. I really appreciate the insights of you "bond experts"... on the internet!

I was previously a 60/40 AA in the total return camp but am now more like 100/0 AA in the capital preservation camp. When covid his and my investment balance approached what I had when I retired 8 years earlier and seemed to be dropping lke a rock and the future was so uncertain it spooked me away from stocks. The principal reason that I am not playing the game anymore is that I have totally lost faith in the stock market to value stocks based on fundamentals, projected cash flow, etc and valuations that are more like a casino... still based on supply and demand but demand is clueless. Think GameStop and some of the other meme stocks as the most extreme example. I had been considering reducing my stock allocation signficantly and covid was the straw that broke the camel's back. Also, the current market P/E is so much higher than the historical average P/E that I just don't see a good future for stocks, so for now I am out.

Luckily, our retirement is well funded, arguably overfunded, so I don't really need stocks. If the stock market ever comes to its senses then I'll reconsider investment in stocks.

My fixed income are mostly brokered CDs and agency issues with a some corporates A-rated or better and right now with a very short weighted average maturity of about 2.4 years and a weighted average yield of just under 5%. Our WR is about 3% and once I start SS it will be even lower.

 

[sengsational]

Important tax question as a follow-on from an earlier tax question about tax on interest in an after-tax/taxable investment account:

1. Zero coupon bonds have imputed interest that you have to pay every year on your taxes, even though you didn't receive the interest yet.

2. It is also my understanding that debt/bonds with coupons below the IRS minimum interest rate also creates an imputed interest tax liability. This minium interest rate is published monthly by the IRS and usually is around treasury rates.

So, if you buy low coupon bonds is the brokerage calculating imputed interest for your 1099-INT every year? Or, do you have to do it manually? Or, are people ignoring this?

I never hear anyone talk about this. Clearly, the IRS isn't going to provide a "free tax lunch" to investors by allowing all of the gains of a bond bought below par to be taxed at capital gains rates just because the coupon rates were low.

Your broker will send you a 1099-OID (original issue discount). The IRS isn't going to let you ignore it