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

[COcheesehead]

Ladder your holdings and you won’t have to guess.

 

[Free bird]

I'm having trouble finding those. Where are they?

I’m pretty sure I saw some longer term CDs on vanguard in the 3-4 year range in the mid 4s. I’ll check again

 

[Free bird]

What does the rest of your allocation look like?

I’ve only gone out 12- 24 months. Everything else is money market or cash deposits at Vanguard

 

[youbet]

you dont see them on the CD ladders at schwab and fidelity?

example:

CIBC Bank USA IL 4.5% CD 05/25/2028
12547CBN7

I didn't see that one on a CD "ladder," but I did find similar on Schwab's CD listings. Thanks.

 

[Free bird]

Ladder your holdings and you won’t have to guess.

There’s a 36 month paying 4.85% in Vanguards inventory. Probably should just buy it. 12 month 18 month & 24 month is in the books. Just was wanted to know if Freedom or Monte would pound the table to buy or wait. Seems like one camp makes a good case that inflation is on the run & should be back in its hole in the coming months while the other camp say inflation is far from target & wages are going to continue to push prices up to unacceptable levels. Is building a ladder in an inverted yield environment a great idea? Will long rates push up once the fed is done & the bond market will do the heavy lifting in the future? I need another opinion.

 

[COcheesehead]

There’s a 36 month paying 4.85% in Vanguards inventory. Probably should just buy it. 12 month 18 month & 24 month is in the books. Just was wanted to know if Freedom or Monte would pound the table to buy or wait. Seems like one camp makes a good case that inflation is on the run & should be back in its hole in the coming months while the other camp say inflation is far from target & wages are going to continue to push prices up to unacceptable levels. Is building a ladder in an inverted yield environment a great idea? Will long rates push up once the fed is done & the bond market will do the heavy lifting in the future? I need another opinion.

Nobody knows. Hedge your bets.

 

[copyright1997reloaded]

There’s a 36 month paying 4.85% in Vanguards inventory. Probably should just buy it. 12 month 18 month & 24 month is in the books. Just was wanted to know if Freedom or Monte would pound the table to buy or wait. Seems like one camp makes a good case that inflation is on the run & should be back in its hole in the coming months while the other camp say inflation is far from target & wages are going to continue to push prices up to unacceptable levels. Is building a ladder in an inverted yield environment a great idea? Will long rates push up once the fed is done & the bond market will do the heavy lifting in the future? I need another opinion.

You know, you can buy half of your desired position...

I am always amazed at the binary discussions here on ER.org. Not picking on you, just an observation that many think they need to make some magical decision and then put it all on red. We don't. Of course, if we inch in, hedge our thinking, etc., then we can't claim (to ourselves or others) about getting it perfectly correct.

Having said that, I've been staying pretty short....but have also nibbled at 2/3/4/5 year CD's when a more attractive deal came along. Did I go all in? Nope. If I don't see those again, oh well, at least I bought something. If I see even better deals, great as I still have capital OR CAN SELL SOME OF THE SHORT TERM HOLDING to jump on the longer dated issue.

 

[youbet]

Is building a ladder in an inverted yield environment a great idea?

And there lies the crux of the situation.

 

[pb4uski]

...Is building a ladder in an inverted yield environment a great idea?...

Compared to what?

How long will the inverted yield curve last? When and how quickly will it revert to "normal" and how steep will it be? What else will happen along the way?

The only way to know is with a crystal ball and mine broke a long time ago. Or with 20/20 hindsight.

I'm struggling with this right now... will probably split the different and extend the ladder a little slower than I planned to and cross my fingers.

 

[Free bird]

Compared to what?

How long will the inverted yield curve last? When and how quickly will it revert to "normal" and how steep will it be? What else will happen along the way?

The only way to know is with a crystal ball and mine broke a long time ago. Or with 20/20 hindsight.

I'm struggling with this right now... will probably split the different and extend the ladder a little slower than I planned to and cross my fingers.

Good idea. Split the difference & quit trying to thread the needle. Roger that

 

[Montecfo]

I’ve only gone out 12- 24 months. Everything else is money market or cash deposits at Vanguard

You could probably use some longer term securities.

If you ladder (as I have) then each tranche is less important and approach is systematic. That is what I have done. My ladder extends about 8 years and is done for now.

I doubt that the 10 year is going to drop much more, but it could. The CPI reading has been down 10 months in a row, so the inflation trend is well established, at least for now.

When the yield curve is inverted it usually reverts by a drop in ST rates, not an increase in LT rates. So in my opinion waiting for LT rates to rise is a nonstarter. They could rise, but I doubt by much.

But the path to the new normal will probably take a while.

So maybe start fishing for some longer dated securities to fill your ladder. That takes time under the best conditions. But I would not wait to begin.

 

[Free bird]

You could probably use some longer term securities.

If you ladder (as I have) then each tranche is less important and approach is systematic. That is what I have done. My ladder extends about 8 years and is done for now.

I doubt that the 10 year is going to drop much more, but it could. The CPI reading has been down 10 months in a row, so the inflation trend is well established, at least for now.

When the yield curve is inverted it usually reverts by a drop in ST rates, not an increase in LT rates. So in my opinion waiting for LT rates to rise is a nonstarter. They could rise, but I doubt by much.

But the path to the new normal will probably take a while.

So maybe start fishing for some longer dated securities to fill your ladder. That takes time under the best conditions. But I would not wait to begin.

This group has been a big help. I think paid professionals struggle mightily with this stuff. You’ve stayed consistent with your views. I’m trying to put a positive spin on having to manage money. I really don’t like it but I’m not great at handing the wheel to someone else. It’s such a hot mess right now with politics & debt ceilings. But you know we’ve been here before. We’ve seen worse. I think it’s the TV & the internet that makes it seem worse than it is. Anyway thanks for your constructive input. It’s helpful

 

[COcheesehead]

If you have a ladder, you have a ladder. The curve doesn’t matter. Hey that rhymes. Your longer duration bonds eventually become shorter duration, short duration matures, gets reinvested long. You collect the interest, you get your principal back at maturity.
The total cashflow is what I focus on and the reliability of that cashflow. I am an income investor first.

 

[JoeWras]

+1 to what Cheese just said.

 

[Chuckanut]

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

Nobody knows. Hedge your bets.

My ladder only goes out to 5 years. And some of those 5 year steps are made of TIPS in the event of high inflation.

The above is not quite 100% true if we can count Ibonds. Ibond steps have a variable length, a small advantage. Now that the fixed rate is almost 1% I may add to those steps when an old 3%+ CD comes due.

I’m a big fan of diversification.

 

[Free bird]

You know, you can buy half of your desired position...

I am always amazed at the binary discussions here on ER.org. Not picking on you, just an observation that many think they need to make some magical decision and then put it all on red. We don't. Of course, if we inch in, hedge our thinking, etc., then we can't claim (to ourselves or others) about getting it perfectly correct.

Having said that, I've been staying pretty short....but have also nibbled at 2/3/4/5 year CD's when a more attractive deal came along. Did I go all in? Nope. If I don't see those again, oh well, at least I bought something. If I see even better deals, great as I still have capital OR CAN SELL SOME OF THE SHORT TERM HOLDING to jump on the longer dated issue.

Your observation is spot on. I think I’m effected by people talking about how they nailed this great rate or that great deal. Then I think all my deals need to be perfect. I did notice folks on the other thread posting their average yield across their holdings. So maybe that will help me keeps a bigger picture perspective.

 

[Mulligan]

Your observation is spot on. I think I’m effected by people talking about how they nailed this great rate or that great deal. Then I think all my deals need to be perfect. I did notice folks on the other thread posting their average yield across their holdings. So maybe that will help me keeps a bigger picture perspective.

I suspect this just comes a lot from people answering or replying to specific questions and thus not mentioning other parts of their income spectrum. For example I have mentioned I got in nicely on over 5% five year noncallable CDs. But I also have lower 4.5% or so one yr CDs bought on the way up which are lower yielding than todays present 1 year CDs.
But income wise I cover the spectrum too. Also have IBonds, plus 6% ute debt of 8-12 years, 7%-8% floating rate AllState debt and 12% NuStar adjustable subordinate debt. So I try to diversify across credit quality, cap stack, duration, fixed and float.

 

[jldavid47]

If you have a ladder, you have a ladder. The curve doesn’t matter. Hey that rhymes. Your longer duration bonds eventually become shorter duration, short duration matures, gets reinvested long. You collect the interest, you get your principal back at maturity.

Yes, but...

The original idea behind a ladder was that you kept rolling out to longer durations to take advantage of higher rates in those durations which you would enjoy until maturity. Lather, rinse, repeat. When the yield curve is inverted you are locking in lower interest rates (relative to the short end) to your disadvantage. The only reason to extend maturities in this environment is if you believe the far end of the curve will not go up. I don't share that belief.

IMO, any ladder should be kept in short durations if the yield curve is inverted. I practice that. My average duration right now is 248 days and only 8% of the total is invested in durations longer than 2 years, only 1% is over 3 years. The time to extend maturities is when the yield curve is flat to normal. That's my belief. YMMV.

The total cashflow is what I focus on and the reliability of that cashflow. I am an income investor first.

I agree.

 

[Chuckanut]

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

I suspect this just comes a lot from people answering or replying to specific questions and thus not mentioning other parts of their income spectrum. For example I have mentioned I got in nicely on over 5% five year noncallable CDs. But I also have lower 4.5% or so one yr CDs bought on the way up which are lower yielding than todays present 1 year CDs.
But income wise I cover the spectrum too. Also have IBonds, plus 6% ute debt of 8-12 years, 7%-8% floating rate AllState debt and 12% NuStar adjustable subordinate debt. So I try to diversify across credit quality, cap stack, duration, fixed and float.

Well said, Mulligan.

We see the same thing when discussing when to take SS, 62 or 70. Yet, there are 95 places in between those ages when a person can turn on the SS spigot.

I also have some equities. The equities fill my risk bucket to the top. No need to add more to the risk bucked using bonds of somewhat lesser safety. So I will stick with Treasuries and FDIC CDs.

 

[Echard]

Everyone should have a ladder, or at least a mix of a ladder with some bond funds of various maturities/duration. The characteristic of that ladder and mix will be different for each person, depending upon their income needs.

For me, I benefit greatly from 5% interest rates, because it covers a lot of living expenses and I don't have a pension. So, I went ahead and built a ladder that goes out 5-6 years, with also some intermediate term bond funds with about 7 year ave maturity, and a few 9-10 year bonds on the ladder, to lock in 4-5% income for the next several years.

However, my ladder looks more like a slide, with more funds in the near term maturities, and less as it goes out in time. So it covers all of my spending needs in the near-term (next few years) but not the longer term. I did this because I don't like the current uncertainty of intermediate and long-term rates, which could go up, down or stay the same. And I don't like the current yields on TIPS. Over the next few months, I'll probably fill-in the back end of the ladder if there are no signs of re-igniting inflation or rising intermediate term rates.

 

[Free bird]

I suspect this just comes a lot from people answering or replying to specific questions and thus not mentioning other parts of their income spectrum. For example I have mentioned I got in nicely on over 5% five year noncallable CDs. But I also have lower 4.5% or so one yr CDs bought on the way up which are lower yielding than todays present 1 year CDs.
But income wise I cover the spectrum too. Also have IBonds, plus 6% ute debt of 8-12 years, 7%-8% floating rate AllState debt and 12% NuStar adjustable subordinate debt. So I try to diversify across credit quality, cap stack, duration, fixed and float.

I forgot I bought ibonds in 2001 & 2002. I bought $30k both years. I bought some others after that but sold some during the 08/09 mortgage banking shenanigans. I bought some 4 year CDs with the money because the ibond returns zeroed out & the CDs paid 4+%. Then came QE TARP & zero rates. Some ibonds I kept have tripled some have languished. I’ve some 0 rate paper ibonds from 2011 & some electronic from the modern era. I should have kept them all but like now I barely know what I’m doing. I’m going to buy more CDs in the 36-48 month vicinity in the coming weeks. I’m monitoring the debt ceiling situation in case things get squirrelly. I hope the country figure out a path forward that makes sense.

 

[JoeWras]

At home I have 5 ladders. 2 ft step. 4 ft. step. 6 ft. step. 12 ft. convertible. 28ft extension.

In the fixed income discussion, not all ladders are equal. Upstream there was talk about ladders failing to capture rates if inverted. I say it depends on what kind of ladder.

One could go mad trying to keep their ladder short or long. I go for the low middle. I'm not going for the extension ladder. Maybe an 8 ft. step is good right now. Maybe not. I don't know.

Just like there are short, intermediate and long term bond funds, we can build different kinds of ladders.

 

[jazz4cash]

. When the yield curve is inverted you are locking in lower interest rates (relative to the short end) to your disadvantage. The only reason to extend maturities in this environment is if you believe the far end of the curve will not go up. I don't share that belief.

I don’t know if it is to my disadvantage. I would need a crystal ball to know what rates will do in the future. I hold my nose sometimes and keep laddering out 8-10 yrs, actually further using munis. I might only have the minimum to fund my essential expenses. When larger chunks mature I’ll go long and short wherever I perceive value. Not hard to do these days. These rates are very good relative to the prior 10 yrs even with the inversion.

 

[COcheesehead]

Yes, but...

The original idea behind a ladder was that you kept rolling out to longer durations to take advantage of higher rates in those durations which you would enjoy until maturity. Lather, rinse, repeat. When the yield curve is inverted you are locking in lower interest rates (relative to the short end) to your disadvantage. The only reason to extend maturities in this environment is if you believe the far end of the curve will not go up. I don't share that belief.

IMO, any ladder should be kept in short durations if the yield curve is inverted. I practice that. My average duration right now is 248 days and only 8% of the total is invested in durations longer than 2 years, only 1% is over 3 years. The time to extend maturities is when the yield curve is flat to normal. That's my belief. YMMV.
I agree.

Yes, but…
There are pockets of 5-10 year yields that match or are higher than short term rates. Taxable munis and A - BBB+ corporates being recent examples. Sometimes these were much higher like last Fall and I grabbed a bunch. Last June had a nice spike in munis. Grabbed some of those. So I am not giving up anything, possibly gaining, over short term yields. The dead spot based on what I look at is in the over 1 - 5 year yields.

 

[jazz4cash]

The impact of the yield curve inversion seems very limited. I’ve been traveling and not paying attention to rates. While the treasury yield curve shows significant inversion, CDs are very flat. You’re not getting the typical bonus for longer maturities but you are not giving up yield either. The issue with these is call protection which is not unreasonable to me at 55 bps for 5 yrs vs. 1 yr. I think many of us have shifted away from treasuries for terms > 1-2 yrs already and are finding attractive rates with CDs and corporates