Fixed Income Investing II

[erkevin]

But if you plan to hold the TIP until maturity in 2033 then the 10% loss do to changes in interest rates shouldn't matter... you are effectively a HTM investor and should ignore fair value. (Hard to do though).

Exactly! Same holds true for brokered CDs; they will also show a fluctuation in their value, but it is meaningless if you hold until maturity.

 

[Car-Guy]

Exactly! Same holds true for brokered CDs; they will also show a fluctuation in their value, but it is meaningless if you hold until maturity.

Yep, but I hate that. Messes up my spreadsheets. So I add a line item to account for the "fluctuations" each month.

 

[COcheesehead]

If you have any below market coupon agency bonds, I am seeing bids starting to appear. I sold two this morning at a profit when factoring in the coupons already paid and will reinvest at a higher yield.

 

[imbatman]

Yeah I have thought about "upgrading" some 5.4-6.0% callable Agencies to some of these newer 6.8-7.0% with 3-12 months before call..........but the soft unknown becomes when they will do calls. They will probably be calling 7% real quick and may not get to those 5.4% for some time...............anyhow only so much one can overanalyze here (but I will do my best ha ha)

 

[COcheesehead]

Yeah I have thought about "upgrading" some 5.4-6.0% callable Agencies to some of these newer 6.8-7.0% with 3-12 months before call..........but the soft unknown becomes when they will do calls. They will probably be calling 7% real quick and may not get to those 5.4% for some time...............anyhow only so much one can overanalyze here (but I will do my best ha ha)

I bought some high grade corporates 6.375% - 7.5% coupons yielding mid 6% ish, but non callable out past 10 years. Better coupon, more reliable.

 

[Retire2023]

I have some questions that I hope the more experienced Agency Bond investors can answer.
Vanguard charges $1 per $1000 for agency bonds on the secondary market, but none for original issue.
Most agency bonds have short call periods so if I want to buy say $50K, that would be a $50 commission.
Not that bad if it is spread over the life of the bond, but to me it seems pretty steep for one to be called in 3 months.
So, my questions are:
When are new issue agency bonds listed? Is there a schedule like with Treasuries?
My search in Vanguard never seems to return any new issues.
Or, am I making too much of this? I like the higher yields (even if only a few months), but don't like commissions,
but then who does except the broker! Any other tips/thoughts from the wise ones?

 

[imbatman]

I don't know that I am particularly more experienced than you, but sounds like we have a similar philosophy. I don't know about Vanguard, but in Fidelity there is a specific "New Issues" section for all bonds, as well as a specific "New Issues" area under each bond type....such that if you go into the default bond search (which is secondary), you wouldn't see them.

I definitely find value in saving on the secondary commissions by buying new issues. Annoying fees aside, often many of the new issues never even end up available in secondary.

If you are limited to one broker, there isn't much use (IMO) of trying to look up all the new issues because different brokers get different offerings. But you can look up on each GSE webpage (ex. https://www.fhlb-of.com/ofweb_userWeb/pageBuilder/new-bond-issues-48)

 

[Retire2023]

I don't know that I am particularly more experienced than you, but sounds like we have a similar philosophy. I don't know about Vanguard, but in Fidelity there is a specific "New Issues" section for all bonds, as well as a specific "New Issues" area under each bond type....such that if you go into the default bond search (which is secondary), you wouldn't see them.

I definitely find value in saving on the secondary commissions by buying new issues. Annoying fees aside, often many of the new issues never even end up available in secondary.

If you are limited to one broker, there isn't much use (IMO) of trying to look up all the new issues because different brokers get different offerings. But you can look up on each GSE webpage (ex. https://www.fhlb-of.com/ofweb_userWeb/pageBuilder/new-bond-issues-48)

Thanks for that! I am currently only at Vanguard for brokerage, but that may change going forward. This is really the only beef I have with them at this point. We do have a 401K at Fidelity, so would not be a stretch to move some funds to a brokerage over there.

 

[Koolau]

Medical inflation is a whole different animal in the concocted CPI numbers used to adjust TIPS. The healthcare component of CPI could go through the roof but if synthetic numbers like Owners Equivalent Rent of Residences, seasonal adjustments, and whatever else is that goes into calculating todays CPI (which is very different than the CPI used to track inflation in the 70's) is down you could end up with 0 overall inflation with an exploding health care budget.

I'm guessing if you factor in the improvements in drugs and medical procedure "outcomes" medical inflation is probably actually negative. Classic example: no one has surgery for ulcers any more. 40 years ago, very expensive drugs came out that controlled acid. Those drugs got vastly improved over time and got even more expensive - and even more effective. NOW, those improved drugs (that obviate the need for ulcer surgery) are OTC.

Other "improvements:" Stents vs open heart surgery. SSRI's vs Psych visits. I'm sure we could come up with a dozen more, given time to think about it.

It's true that what we call medical "inflation" has gone up faster than regular inflation. But when considering the improved "outcomes" (the equivalent of giving you a gallon of ice cream for the slightly increased price over the half gallon) I submit that medical inflation is mostly due to new and improved drug/treatments.

Even when the "evil" drug companies started raising prices on their older branded drugs (and even the older generics) that was (ultimately) to get money to develop even better drugs - with better profit potential, of course, but also better efficacy.

Like most things, it's complicated.


Heh, heh, returning you now...

 

[Montecfo]

Yeah I have thought about "upgrading" some 5.4-6.0% callable Agencies to some of these newer 6.8-7.0% with 3-12 months before call..........but the soft unknown becomes when they will do calls. They will probably be calling 7% real quick and may not get to those 5.4% for some time...............anyhow only so much one can overanalyze here (but I will do my best ha ha)

Yes. Those juicy rates are above the noncancellable market. They could be called as soon as the protection expires.

 

[COcheesehead]

There are some great non callable bonds out there. 6%++. I have been slowly adding more to my ladders. I have 6 figures of bonds maturing between now and the end of year. I will likely only reinvest in non call or longer call bonds.
My goals for fixed income are high current income, reliable income, capital preservation.

 

[Spock]

I'm guessing if you factor in the improvements in drugs and medical procedure "outcomes" medical inflation is probably actually negative. Classic example: no one has surgery for ulcers any more. 40 years ago, very expensive drugs came out that controlled acid. Those drugs got vastly improved over time and got even more expensive - and even more effective. NOW, those improved drugs (that obviate the need for ulcer surgery) are OTC.

Other "improvements:" Stents vs open heart surgery. SSRI's vs Psych visits. I'm sure we could come up with a dozen more, given time to think about it.

It's true that what we call medical "inflation" has gone up faster than regular inflation. But when considering the improved "outcomes" (the equivalent of giving you a gallon of ice cream for the slightly increased price over the half gallon) I submit that medical inflation is mostly due to new and improved drug/treatments.

Even when the "evil" drug companies started raising prices on their older branded drugs (and even the older generics) that was (ultimately) to get money to develop even better drugs - with better profit potential, of course, but also better efficacy.

Like most things, it's complicated.


Heh, heh, returning you now...

meh. there aren't any miracle cures for stitches on a cut but the costs have zoomed. Can't even take that to ER now you got find an urgent care that is in your insurance plan.
I've started just using super glue with an alcohol based pain killer.

 

[imbatman]

yup, sorry not drinking the "we reinvest all those profits to give you miracle cures" Kool-Aid, IMO (not worth anything) the only people benefitting from the US health care system are pharma companies and for-profit hospitals and care centers

Anyhow, back to actual investing..........yeah, I have definitely backed off GSEs due to the call dates and moved more to straight munis recently.....corporate call dates may go a little longer but the after-tax rates haven't moved much in the last few months and rates (after accounting for taxes) are still significantly higher in munis/ GSEs so kind of stuck in that pool unfortunately

 

[COcheesehead]

yup, sorry not drinking the "we reinvest all those profits to give you miracle cures" Kool-Aid, IMO (not worth anything) the only people benefitting from the US health care system are pharma companies and for-profit hospitals and care centers

Anyhow, back to actual investing..........yeah, I have definitely backed off GSEs due to the call dates and moved more to straight munis recently.....corporate call dates may go a little longer but the after-tax rates haven't moved much in the last few months and rates (after accounting for taxes) are still significantly higher in munis/ GSEs so kind of stuck in that pool unfortunately

Anything taxable over 6% works for me vs the munis paying high 4’s with 5% coupons. I was lucky enough last year to snag some 6% and 6%+ coupon munis, but those are no longer available.

 

[Mulligan]

Anything taxable over 6% works for me vs the munis paying high 4’s with 5% coupons. I was lucky enough last year to snag some 6% and 6%+ coupon munis, but those are no longer available.

Interestingly even though the long end has broached 15 plus year highs in yields recently, the bond market yields havent even hit last Octobers highs in yields yet.

 

[COcheesehead]

Interestingly even though the long end has broached 15 plus year highs in yields recently, the bond market yields havent even hit last Octobers highs in yields yet.

I got some beauties last Fall.

 

[Montecfo]

I got some beauties last Fall.

Me too.

 

[COcheesehead]

Me too.

 

[pb4uski]

Yes. Those juicy rates are above the noncancellable market. They could be called as soon as the protection expires.

But for many of them they are currently callable but haven't been called so that shoots that theory to smithereens.

 

[COcheesehead]

But for many of them they are currently callable but haven't been called so that shoots that theory to smithereens.

I just had some 5% coupon munis called. First call in a long time. Didn’t expect that, but great timing to replace them.

 

[Montecfo]

But for many of them they are currently callable but haven't been called so that shoots that theory to smithereens.

No. It remains completely correct. They could be called at any time.

Surely we invest for financial return and not hoped-for debtor largesse.

 

[pb4uski]

No. It remains completely correct. They could be called at any time.

Surely we invest for financial return and not hoped-for debtor largesse.

Sure, they could be called, but they haven't been. I haven't had a call for a long time and have many callables that "could" have been called so I keep collecting that extra call premium.

I'm not expecting debtor largesse at all, but in order to call it they likely have to do another issue to raise the proceeds for the call so the interest rate has to be enough lower to make it worth the effort. In other instances the debt proceeds were used for asset backed loans and the call feature just gives the issuer the flexibility to call if the underlying loans pay off early.

 

[Montecfo]

Sure, they could be called, but they haven't been. I haven't had a call for a long time and have many callables that "could" have been called so I keep collecting that extra call premium.

I'm not expecting debtor largesse at all, but in order to call it they likely have to do another issue to raise the proceeds for the call so the interest rate has to be enough lower to make it worth the effort. In other instances the debt proceeds were used for asset backed loans and the call feature just gives the issuer the flexibility to call if the underlying loans pay off early.

It is all possible of course. But in normal times far fewer issues seem to have been callable. So issuers felt they needed such flexibility less often or did not see the risk of meaningfully lower future rates as an issue.

I expect the issuer understands the risks and opportunities to call the issue much more thoroughly than you or I do (since we are reduced to speculating). So I tend to doubt we as retail investors are in a very good position to profit on the other side of their market knowledge. I do know that the very premium that makes the issue attactive to you makes its call more likely.

Callables exist because issuers wish to offload rate risk onto retail investors and those investors are willing to take on that risk.

But this is the opposite of why I invest in bonds. I wish for the issuer to keep that risk. If I was in a position to quantify the risk I might be more likely to take it. But risk is for my equity portfolio. My bond portfolio is about certainty.

Those such as yourself having no equity portfolio may welcome more risk in bonds than more typical bond investors do.

 

[Texas Proud]

Sure, they could be called, but they haven't been. I haven't had a call for a long time and have many callables that "could" have been called so I keep collecting that extra call premium.

I'm not expecting debtor largesse at all, but in order to call it they likely have to do another issue to raise the proceeds for the call so the interest rate has to be enough lower to make it worth the effort. In other instances the debt proceeds were used for asset backed loans and the call feature just gives the issuer the flexibility to call if the underlying loans pay off early.

Yea, they have to get the money from somewhere in order to call a bond... and issuing a new bond today is not going to get your cheaper funds...


Also, issuing a bond costs money... if the bond being called is large then the percent of expenses goes down, but a small issue it can be a 10% or more overhead... so even lower rates does not mean they can get cheaper funds...

 

[COcheesehead]

TSLY. Not really fixed income, more of an options play. I brought up in another thread and got push back because it did not really apply to the OP regarding safe income, but anyone interested in rocket fuel dividends may want to check it out.
For every 1000 shares you own, roughly a $13,500 position, you’ll get paid $7900+annually.