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

[Freedom56]

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.”

It's not just financial advisors like Edward Jones, but the financial media in large part have convinced people that investing is difficult and they need so called professionally managed funds and advisors. Given that Vanguard, Fidelity, Schwab and other asset managers advertise on financial publications like Barron's, WSJ, MarketWatch, and others this messaging will continue.

 

[Montecfo]

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.

US Federal Income Tax brackets are indexed to inflation. They adjust every year.

 

[Mulligan]

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

It's not just financial advisors like Edward Jones, but the financial media in large part have convinced people that investing is difficult and they need so called professionally managed funds and advisors. Given that Vanguard, Fidelity, Schwab and other asset managers advertise on financial publications like Barron's, WSJ, MarketWatch, and others this messaging will continue.

Freedom, think of it this way.. They are viewed as financial “professionals”, yet studies have shown as Buffett alluded to, monkeys throwing darts can consistently beat them. Just think if you were about to go into open heart surgery, knowing a monkey could perform the surgery statistically as well as the professional doctor… I would likely eat more celery and broccoli and just takes my chances without having the surgery, ha.
Of course there are subsegments where financial professionals can be very helpful…estate planning, tax implications, long range goal setting, etc.

 

[GenXguy]

US Federal Income Tax brackets are indexed to inflation. They adjust every year.

They do, as do the poverty levels (not tax brackets) used to calculate ACA thresholds, but they adjust by only single percentage points in recent years, where as my interest income will be a few hundred percent higher! This gets my income much higher above the ACA threshold I originally expected to meet, despite an increase in incomes for poverty levels, while not actually having any additional purchasing power in the end, just higher health care costs. The increase in interest income also gets my income up high enough where more capital gains will be taxable as well. So, these reasons and more why I would prefer both inflation and interest rates were both about 1/2 what they are now (year over year).

 

[Montecfo]

Well can't disagree. I would like the value of all my assets to be higher, with inflation and taxes zero. But I do not see that happening.

I think there are inflation threads where these types of discussions fit better than here in the bond thread.

 

[GenXguy]

Well can't disagree. I would like the value of all my assets to be higher, with inflation and taxes zero. But I do not see that happening.

I think there are inflation threads where these types of discussions fit better than here in the bond thread.

Or rather a thread about higher interest income increasing taxable income and MAGI for ACA rather, regardless of what inflation is. Yes, 'zero' would not be my expectations.

 

[Freedom56]

From the Washington Post/Bloomberg

The Great US Treasury Bond Rout Is Far From Over.

"Since last fall, the 10-year Treasury yield has remained in a narrow range near its current level of 3.75%. There’s little reason for it to stay there, and many reasons to expect it to move considerably higher."

"How high, then, might Treasury yields go? Let’s put together the pieces. Suppose the Fed’s short-term interest-rate target, adjusted for inflation, averages about 1% over the next decade. Inflation averages 2.5%, and the bond risk premium is one percentage point. In sum, this suggests a 10-year Treasury note yield of 4.5%. And that’s a conservative estimate: Given historical neutral short-term rates, the recent persistence of inflation and the troubling US fiscal trajectory, all three elements could easily go higher."


https://www.washingtonpost.com/busi...e47a1a-1666-11ee-9de3-ba1fa29e9bec_story.html

 

[ERhoosier]

US Federal Income Tax brackets are indexed to inflation. They adjust every year.

Not always true, at least for some taxpayers. The Net Investment Income Tax (NIIT) and Additional Medicare Tax brackets (thresholds) are NOT indexed for inflation.


https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax


https://www.irs.gov/pub/irs-pdf/i8959.pdf

 

[Echard]

This article says quantitative easing is coming back 2x because governments have no other choice due to running huge deficits. Thoughts on the impact of bonds when this starts happening again?

https://markets.businessinsider.com...reserve-balance-sheet-global-liquidity-2023-7

 

[Freedom56]

This article says quantitative easing is coming back 2x because governments have no other choice due to running huge deficits. Thoughts on the impact of bonds when this starts happening again?

https://markets.businessinsider.com...reserve-balance-sheet-global-liquidity-2023-7

QE is not going to reduce deficits. It would lower rates and spike inflation higher.

 

[dobig]

^^^ 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.

What a great and selfless thing to do for an elderly couple! Love hearing how there are still good people out there willing to help those who need it.

 

[Freedom56]

What a great and selfless thing to do for an elderly couple! Love hearing how there are still good people out there willing to help those who need it.

We have been neighbors for over 26 years and helped each other out with home repairs and had many BBQs together over the years.

 

[MuirWannabe]

For brokered CD’s, if I needed to sell out before maturity, do I get any of the interest accrued? I can’t even tell exactly how much interest has accrued as it’s not shown in my brokerage account. I believe most of the CD’s I purchased back in March are pay at maturity or maybe pay at end of year.

I’m considering selling them to help raise cash for a vacation home purchase. But I’d sure hate to lose all my accrued interest to date. I understand the value of the CD is represented by the price value shown on my brokerage account. Most have gone up over face value but by just a $200 or less. A couple are down $50 or so.

Thanks for any help.

 

[COcheesehead]

For brokered CD’s, if I needed to sell out before maturity, do I get any of the interest accrued? I can’t even tell exactly how much interest has accrued as it’s not shown in my brokerage account. I believe most of the CD’s I purchased back in March are pay at maturity or maybe pay at end of year.

I’m considering selling them to help raise cash for a vacation home purchase. But I’d sure hate to lose all my accrued interest to date. I understand the value of the CD is represented by the price value shown on my brokerage account. Most have gone up over face value but by just a $200 or less. A couple are down $50 or so.

Thanks for any help.

You’ll get accrued interest and the market price less any commission. If you want to see exactly what you’ll get - if there is a bid - create a sell ticket and hit preview. It will show accrued interest and the total you’ll be paid.
Bids are not a sure thing, FYI.

 

[Montecfo]

Huge 60 bp gap between the 1 year Treasury and the 2 year. Will be interesting to see how that behaves.

Market expecting cuts next summer.

 

[MuirWannabe]

You’ll get accrued interest and the market price less any commission. If you want to see exactly what you’ll get - if there is a bid - create a sell ticket and hit preview. It will show accrued interest and the total you’ll be paid.
Bids are not a sure thing, FYI.

Thank you. That’s good news.

 

[Freedom56]

We are about to take out previous highs for short term treasury's, CDs, and high grade corporate notes. The 2 year treasury is about to breach 5% again. This is where it was before the SVB and Signature Bank collapse. CDs will soon breach 6% and 6% corporate and agency notes are becoming common once again. Hedge funds have been shorting the equity markets and buying the 10 year treasury note and 30 year treasury bond. With a large supply of treasury bonds coming to the market, that trade has the potential to unwind and whipsaw long rates up. With so much money sitting in MM funds now earning 5%, the increase in interest income will add more stimulus to the economy.

 

[GenXguy]

With so much money sitting in MM funds now earning 5%, the increase in interest income will add more stimulus to the economy.

After taxes and inflation, there's not going to be any additional buying power for stimulus on a 1 year CD. And most people are getting rates lower than people here, many well under 5%.

 

[Freedom56]

Retail note offerings at Schwab.

14 month 5.8% note from TD Bank rated AA2

2 year 6% note from Bank of Montreal rate A2

5 year 6% note from TD Bank rate A1

You are likely to pick up these on the secondary markets at higher yields.

 

[imbatman]

not bad but callable just FYI

89114XAQ6 TD 5-year 6% note is callable 1 year
06374VKX3 Montreal 2-year 6% note is callable 6 months

 

[Freedom56]

After taxes and inflation, there's not going to be any additional buying power for stimulus on a 1 year CD. And most people are getting rates lower than people here, many well under 5%.

Right now there is $7T sitting in MM funds. Many people are cash sorting and boosting their income. Banks are not going to knock on peoples doors and tell them that they could earn 5% on their balances versus .001%. Banks still want free money when they can get it. It's up to people to become better informed and make their own financial decisions. I can assure you that for someone parking $2M in short term T-Bills earning over $100K per year versus next to nothing in early 2022, taxes and inflation are the last thing on their minds. They are more concerned about lobster tails and USDA prime steaks for a big BBQ tomorrow.

 

[Healthy Lifestyle]

Right now there is $7T sitting in MM funds. Many people are cash sorting and boosting their income. Banks are not going to knock on peoples doors and tell them that they could earn 5% on their balances versus .001%. Banks still want free money when they can get it. It's up to people to become better informed and make their own financial decisions. I can assure you that for someone parking $2M in short term T-Bills earning over $100K per year versus next to nothing in early 2022, taxes and inflation are the last thing on their minds. The are more concerned about lobster tails and USDA prime steaks for a big BBQ tomorrow.

+100

This is my go to thread and one of my favorites that I look forward to reading.

Thank you Freedom!!!

 

[Freedom56]

not bad but callable just FYI

89114XAQ6 TD 5-year 6% note is callable 1 year
06374VKX3 Montreal 2-year 6% note is callable 6 months

Non-callable notes from these banks are trading on the secondary markets below CD yields which really does not make sense. Even worse, many non-callable corporate bonds, including those from large banks, are trading below treasury yields at the short end which makes even less sense.

 

[Freedom56]

+100

This is my go to thread and one of my favorites that I look forward to reading.

Thank you Freedom!!!

Even the brokerage firms make it difficult, intentionally or unintentionally, for self directed investors who buy retail notes, CDs, treasury's. Their 3rd party price make it more difficult to track performance. Here is an example of a non-callable 5 year 5% CD many of you own (including myself). Look at the bid and ask price (both over par) but the third party price is evaluating a price below par at a yield that does not exist. It's even worse with retail corporate notes. Fidelity will tell you that you should ignore the third party price if you intend to hold a security to maturity and that you should always ask for bids rather than rely on third party price. However, they use that third party price to track performance. Over time it becomes a wash as all of these mature or are called at par.

 

[GenXguy]

Banks are not going to knock on peoples doors and tell them that they could earn 5% on their balances versus .001%. Banks still want free money when they can get it. It's up to people to become better informed and make their own financial decisions

I agree with you on that, but of course, so many of these people are going to keep getting lower rates. Probably not .001% that you stated, but something well below 5%, as many banks currently offer, with their interest eaten away by taxes and inflation, along with some of their principal.

I can assure you that for someone parking $2M in short term T-Bills earning over $100K per year versus next to nothing in early 2022, taxes and inflation are the last thing on their minds. They are more concerned about lobster tails and USDA prime steaks for a big BBQ tomorrow.

I disagree with that. If inflation and taxes are eating up all their gains, so that they didn't really increase their purchasing power, I do not believe it will be the last thing on their minds.

However, I'm sure people will be celebrating the holiday if they have that kind of dough - $2M stashed in short term T-bills alone. I think there are far many more of those people mentioned above with CDs earning low interest rates, actually losing purchasing power after taxes and inflation, than those with $2M in T-bills.