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

[Mulligan]

My thinking is similar. If we get 5.5-6.0 risk free as some are predicting I will add. That's equity-like returns with no risk.

But also likely to tank stocks. But such rates I would not expect to last.

Probably another strike while iron is hot situation.

I am inclined to do more so too. Especially at the more longer 5 yearish duration noncallable if it would come. I can punt on 3rd down here in this scenario. But I dont want to be totally overexposed to reinvestment risk. Im already there a bit on the short end durations.
I have been riding love floaters too such as the plus 8% Allstate subordinate debt ALL-B and NSS at 12% in addition to some solid bonds bought at higher yields last fall. Short end still rising but credit spreads across IG down to CCC are narrowing which I dont like at all.

 

[PhotoAviation61]

Agency bonds surviving first call

There was a discussion awhile back on this thread regarding GSE bonds. I have quite a few, mostly the FFCB ones. I have been using them as short term places to keep my cash since the coupons are usually higher and the state tax free aspect of them gives me a nice return. I am in a state with a 5% income tax.

What is interesting is that I now have 3 of them that have survived the first call window. I have had talks with a Fidelity fixed income specialist in the past and he had said to treat the first call dates as absolutes. Not sure what to infer by this. I did notice that there was a 5.83% coupon FFCB bond that was called at the very end of May. That is why I am a bit puzzled why these are still running.

FFCB 1/25/38 6% first call 4/25/23 $150m offering
FFCB 3/1/33 6.15% first call 6/1/23 $50m offering
FFCB 4/3/36 6.32% first call 7/3/23 $75m offering

Here is a shot from the FFCB website showing recently called bonds.

 

[Montecfo]

Yes. [Responding to Mulligan above] And 30/1 and 10/2 inversions at highest levels since 1981.

PCE came in soft today but sure that won't matter. Higher short rates are coming to be followed by wider credit spreads and ultimately recession if this persists.

 

[Mulligan]

Yes. [Responding to Mulligan above] And 30/1 and 10/2 inversions at highest levels since 1981.

PCE came in soft today but sure that won't matter. Higher short rates are coming to be followed by wider credit spreads and ultimately recession if this persists.

Yes, nothing would be more exciting to me than a good old fashioned credit spread blowout.

 

[imbatman]

....That is why I am a bit puzzled why these are still running.

FFCB 1/25/38 6% first call 4/25/23 $150m offering
FFCB 3/1/33 6.15% first call 6/1/23 $50m offering
FFCB 4/3/36 6.32% first call 7/3/23 $75m offering

I have a lot of GSEs and had a 5.89% just survive a first call this month. Hard to guess (that is all it would be) but perhaps the confirmation of upcoming Fed rate hikes (requiring them to have higher rates on future issues) and other more expensive calls coming up they could redeem instead (ex. I hold some 6.33/6.375/6.44 all with calls this calendar year).

Seems like a win/win for us regardless.

 

[Freedom56]

There was a discussion awhile back on this thread regarding GSE bonds. I have quite a few, mostly the FFCB ones. I have been using them as short term places to keep my cash since the coupons are usually higher and the state tax free aspect of them gives me a nice return. I am in a state with a 5% income tax.

What is interesting is that I now have 3 of them that have survived the first call window. I have had talks with a Fidelity fixed income specialist in the past and he had said to treat the first call dates as absolutes. Not sure what to infer by this. I did notice that there was a 5.83% coupon FFCB bond that was called at the very end of May. That is why I am a bit puzzled why these are still running.

FFCB 1/25/38 6% first call 4/25/23 $150m offering
FFCB 3/1/33 6.15% first call 6/1/23 $50m offering
FFCB 4/3/36 6.32% first call 7/3/23 $75m offering

Here is a shot from the FFCB website showing recently called bonds.

The link below described the mechanics of the various types of asset backed securities available to investors including agency notes. I would add that since these are pooled loans that carry pre-payment risk. So if a significant portion of the securitized pool is paid off or re-financed by the borrowers, the security will be called. It may explain why a lower yielding note is called before a higher yielding note.

https://www.treasurer.ca.gov/cdiac/webinars/2015/portfolio/presentations/20150902.pdf

 

[GravitySucks]

Speaking of spreads:

What percentage bump do you expect to be paid to take a risk on corporates?

Historically the 10 year BBB yields about 2.5% over a 10 year treasury. I couldn’t find a good chart on the 5 years. In the 2011 edition of The Bond Book the author advices to not buy corporates without at least a 2% premium.

 

[Freedom56]

Speaking of spreads:

What percentage bump do you expect to be paid to take a risk on corporates?

Historically the 10 year BBB yields about 2.5% over a 10 year treasury. I couldn’t find a good chart on the 5 years. In the 2011 edition of The Bond Book the author advices to not buy corporates without at least a 2% premium.

Here is a chart of historic spreads (you can also zoom in). Right now at the short end, there isn't that much of a spread but there is at the long end. An inverted yield curve does not make sense for corporates as the risk increases with duration.

https://www.longtermtrends.net/bond-yield-credit-spreads/

 

[Mulligan]

Speaking of spreads:

What percentage bump do you expect to be paid to take a risk on corporates?

Historically the 10 year BBB yields about 2.5% over a 10 year treasury. I couldn’t find a good chart on the 5 years. In the 2011 edition of The Bond Book the author advices to not buy corporates without at least a 2% premium.

Have you seen the Fed ICE BBB chart?

https://fred.stlouisfed.org/series/BAMLC0A4CBBB

 

[Freedom56]

Some great news from Powell today.

The US won't return to 2% inflation until at least 2025, Fed Chair Jay Powell has said.

That suggests the central bank's fight against inflation is far from over - underscoring the possibility of more interest-rate hikes.

https://markets.businessinsider.com...l-fed-2025-interest-rates-stock-market-2023-6

The two year note, which discounts the Fed funds rate 12-18 months from now, is currently at 4.9% and should breach 5% again.
Callable agency notes, CDs, and corporate notes may just be the best fixed income investments in this cycle.

 

[Montecfo]

Some great news from Powell today.

The US won't return to 2% inflation until at least 2025, Fed Chair Jay Powell has said.

That suggests the central bank's fight against inflation is far from over - underscoring the possibility of more interest-rate hikes.

https://markets.businessinsider.com...l-fed-2025-interest-rates-stock-market-2023-6

The two year note, which discounts the Fed funds rate 12-18 months from now, is currently at 4.9% and should breach 5% again.
Callable agency notes, CDs, and corporate notes may just be the best fixed income investments in this cycle.

Well, one thing I think is clear is Powell is not good at long-term forecasts and with good reason: he has no idea what the economy will do over the next 2 years.

Roughly 2 years ago he told us rates would stay near zero "through 2023".

This sounds similar to his recent statement.

To say that didn't age well is quite an understatement.

https://apnews.com/article/fed-expe...through-2023-9b9a335a1ce05d69fc97a1d6197371ab

 

[COcheesehead]

First of the month again. 90% of July's interest income was deposited into my account today and with that I have reached a new 1 year and YTD high. The other interesting thing is I am 10 days away from my 3 year anniversary of retiring and I have more money than the day I retired and that includes taking out expenses over that time frame with no pension or social security income.

 

[Freedom56]

First of the month again. 90% of July's interest income was deposited into my account today and with that I have reached a new 1 year and YTD high. The other interesting thing is I am 10 days away from my 3 year anniversary of retiring and I have more money than the day I retired and that includes taking out expenses over that time frame with no pension or social security income.

Today is the 8th anniversary of my early retirement and we have significantly more money today than the day I retired. However, I do have a nice level income pension that started at age 55 and I just started SS at 62 to compensate for the drop in my level income pension. With the long term capital gains from the sale of our condo in Florida, elevated levels of interest income from bonds and CDs, plus pension and SS, 2023 will be record high for income for us. We have already paid $112K in estimated taxes for 2023 to avoid penalties when we file next April. Thanks to Powell and the Fed, the future looks even brighter.

 

[COcheesehead]

Today is the 8th anniversary of my early retirement and we have significantly more money today than the day I retired. However, I do have a nice level income pension that started at age 55 and I just started SS at 62 to compensate for the drop in my level income pension. With the long term capital gains from the sale of our condo in Florida, elevated levels of interest income from bonds and CDs, plus pension and SS, 2023 will be record high for income for us. We have already paid $112K in estimated taxes for 2023 to avoid penalties when we file next April. Thanks to Powell and the Fed, the future looks even brighter.

 

[Car-Guy]

Like many here that are following this thread, I'm pretty happy with what's going on in the fixed income markets. Finally the war against savers has ended (or slowed a lot). However, from my POV, fixed income is just helping me keep up with inflation (or staying close anyway). What concerns me, at some point fixed income instruments will start falling. Likely tracking inflation's eventual fall. Unfortunately, "many things" (product and services) that have skyrocketed will never fall back to where they were before this inflationary cycle started. I think, whoever said whatever goes up must come down, wasn't talking about prices so much.

So am I really gaining ground, treading water or losing my buying power. (Rhetorical)

 

[COcheesehead]

Don’t buy bonds for inflation protection, though many now are yielding above yesterdays reported inflation of 4.6%. You buy bonds for current income and capital preservation.
As to the reliability of the income flow, that is important to me and I have locked in some longer call/no call assets knowing that I may be giving up some yield in exchange for more consistent cashflow.

 

[Freedom56]

^^^ Agree.


Income investing is a different mindset from the 4% rule. The idea is to create a growing income stream to cover expenses or save and grow your capital. With near zero interest rates since 2011, many savers have been shocked and given up on income investing. We have a neighbor in their 70's with $755K in a checking account and another $920K in a savings account literally earning next to nothing. They were just using the accounts to withdraw funds to cover expenses in excess of their SS and pension. They were freaking out after the SVB bank collapse as they exceeded FDIC limits on their accounts. They wanted the ultimate safety for their nest egg. They were not interested in brokerage accounts. I told them to move the money to a TreasuryDirect account and link it to their existing checking account and buy 1,3,6 month T-Bills with a "schedule reinvestment" option (auto roll). They set up their account and transferred $1.5M. After 2 months, they are astonished that they are earning over $6300 per month versus under $90 per month with their checking and savings accounts. I just wonder how many people people are waking up to this new reality.

 

[Chuckanut]

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

So am I really gaining ground, treading water or losing my buying power. (Rhetorical)

Here’s how I answer that question for me.

Overall when taking into account the lower buying power of the dollars I have saved and invested over 40 years, I am behind. The higher interest rates of today ease the pain and give me hope, but the reality is I fell behind over the past two to three years. And I continue to do so since my pension is COLA-lite, as in it makes up for some inflation but not all inflation. (Yes, it is better than no pension or a non COLA’d pension. For that I am thankful.)

I am hoping that my common stock mutual funds will bring me back to even at some point in time. I am not screaming poverty as I know a lot of people are worse off for me.

The people who really got smacked are the lower income folks who have fewer resources they can use to ease the pain.

 

[aja8888]

^^^ Agree.


Income investing is a different mindset from the 4% rule. The idea is to create a growing income stream to cover expenses or save and grow your capital. With near zero interest rates since 2011, many savers have been shocked and given up on income investing. We have a neighbor in their 70's with $755K in a checking account and another $920K in a savings account literally earning next to nothing. They were just using the accounts to withdraw funds to cover expenses in excess of their SS and pension. They were freaking out after the SVB bank collapse as they exceeded FDIC limits on their accounts. They wanted the ultimate safety for their nest egg. They were not interested in brokerage accounts. I told them to move the money to a TreasuryDirect account and link it to their existing checking account and buy 1,3,6 month T-Bills with a "schedule reinvestment" option (auto roll). They set up their account and transferred $1.5M. After 2 months, they are astonished that they are earning over $6300 per month versus under $90 per month with their checking and savings accounts. I just wonder how many people people are waking up to this new reality.

I just helped my widowed SIL do the same thing with he Edward Jones account. Her rep had $250K in about two dozen (yes, two dozen) small bond and stock mutual funds. Moved the account to Schwab and just put her in SWVXX for the time being.

She was down about 20% over the last year and EJ was milking her dry with fees that don't show up on the monthly statements! Those folks are outright crooks.

 

[Car-Guy]

The people who really got smacked are the lower income folks who have fewer resources they can use to ease the pain.

Absolutely agree... And for the millions of middle income and/or NW individuals that aren't invested just to keep up...It's sad.

 

[Mulligan]

I just helped my widowed SIL do the same thing with he Edward Jones account. Her rep had $250K in about two dozen (yes, two dozen) small bond and stock mutual funds. Moved the account to Schwab and just put her in SWVXX for the time being.

She was down about 20% over the last year and EJ was milking her dry with fees that don't show up on the monthly statements! Those folks are outright crooks.

Aja, I bet the “Ed Jones Boys” dont have these Warren Buffett quotes hanging on their office walls, lol….

Legendary investor Warren Buffett calls investing a “simple game” that financial advisors have convinced the public is harder than it really is.

You can have monkeys throwing darts at the page, and, you know, take away the management fees and everything, I’ll bet on the monkeys [over the advisors],” he said.

“It’s amazing how hard people make what is a simple game,” Buffett said of advisors. “But of course, if they told everybody what a simple game it was, 90% of the income of the people that were speaking would disappear.”

 

[madatrub]

I see a lot of talk on this thread at how bad bond funds are.... If they are so bad now, then they have to be "not so bad" later, right? If so, what are some of the triggers to look for when/if that happens?

Im not retired yet, but my 401k options in the bond space are severely limited. Bond funds only... Just looking at queues at when/if I can ever trust money allocated in there again?

 

[aja8888]

I see a lot of talk on this thread at how bad bond funds are.... If they are so bad now, then they have to be "not so bad" later, right? If so, what are some of the triggers to look for when/if that happens?

Im not retired yet, but my 401k options in the bond space are severely limited. Bond funds only... Just looking at queues at when/if I can ever trust money allocated in there again?

Bond funds do well in an environment when interest rates are dropping. When that happens, the NAV increases giving you a capital gain if you bought when interest rates were higher. Other than that, they just pay a distribution type yield.

 

[Montecfo]

Bond funds do well in an environment when interest rates are dropping. When that happens, the NAV increases giving you a capital gain if you bought when interest rates were higher. Other than that, they just pay a distribution type yield.

I agree. There is a tendency to misunderstand what happened in the past 18 months. Interest rates rose at unprecedented speed-fastest rate ever. That damaged both bonds and bond funds IF your holdings reflected any "duration". People that reduced duration sharply on the front end did fine. Others did not.

Bond funds are a tool. No tool is right for all jobs at all times. Now appears to be a pretty good time for well managed low cost bond funds as most of the hiking cycle is over and longer term rates have been on a downward trajectory for some time.

But in a cycle of rapidly rising rates only something like MM accounts, i-Bonds, or floating rate bonds really work.

Very few investments if any are right for all seasons.

 

[GenXguy]

Like many here that are following this thread, I'm pretty happy with what's going on in the fixed income markets. Finally the war against savers has ended (or slowed a lot). However, from my POV, fixed income is just helping me keep up with inflation (or staying close anyway). What concerns me, at some point fixed income instruments will start falling. Likely tracking inflation's eventual fall. Unfortunately, "many things" (product and services) that have skyrocketed will never fall back to where they were before this inflationary cycle started. I think, whoever said whatever goes up must come down, wasn't talking about prices so much.

So am I really gaining ground, treading water or losing my buying power. (Rhetorical)

I would actually much prefer lower inflation like 2% and interest lower, like 3%, as well. With inflation high, and rates high, it causes a lot more interest income tax. This also causes MAGI income to be higher, which isn't good if you're trying to keep your income lower for ACA subsidies, which is pretty common for people under 65.

As far as those "many" products and services that skyrocketed not falling back in price to where they were back in 2020, that's actually not going to happen with almost anything. In fact, just the opposite, prices are going to continue to increase as long as inflation is above zero (look at year over year trend).

Sadly, 5% interest gets me closer to 3.6% net interest after taxes, and since that's well less than year over year core inflation of about 5%, I'm actually losing money (purchasing power), on top of all the purchasing power I had already lost when inflation was 9% while CDs were paying less than 1%. So, no, these have not been good times and still aren't. We will not recover from what we lost in purchasing power.