Corporate and Agency GSE Bond DEALS and NEW ISSUES

[pb4uski]

If a new issue bond is immediately callable, that is a non-starter for me. And in that case the rate can't be high enough to compensate you, in my view, because you could get the money back in a month compared to 5 years for example.

Now, in the secondary market you may find callable bonds trading at a discount. In such cases the call feature is not an issue since it is unlikely to be called and you have a "cushion" between par and the purchase price. They have to pay you in order to call it or rates have to fall a lot (which also pays you in realizing the value more quickly).

Call them "cushion callables". They can make a lot of sense.

Now, some folks are trying to live off of their interest. These might not work as well there since coupons are much lower.

I sometimes look for these "cushion callables" and occasionally find one. I did a search for agency issues maturing in 2030 on Schwab. Best non-callable yield is 4.382%

FFCB 4.25% 09/30/2030
3133ENQ45	4.250	09/30/2030	--	Ask	25	99.18248	25	357	4.382	--	303.990	25,099.610	View

Change the search to callables maturing in 2030 and scan the list for a low coupon issue. There is a callable issue with a 1.28% coupon that is yielding 4.848%

FEDERAL HOME LN MTG 1.28% 04/30/2030 Callable
3134GW3L8
07/30/2023 @ 100.00000	1.280	04/30/2030	Yes	Ask	2	79.54600	2	2	4.848	4.848	5.190	1,596.110	View

I'll take the extra 47 bps given the negligible call risk. Easy money.

I don't need the cash flow so yield is more important to me than coupons.

 

[imbatman]

3130AWN22 FHLB (AA+) 20-YR 2043 (6-month call Jan 2024) 6.27% at Fido

 

[digger1959]

What does Ask Yield to Worst mean?

See attached for CUSIP 3130AWN22...

 

[aja8888]

See attached for CUSIP 3130AWN22...

That's the worst yield you can get holding this security, no matter what happens.

 

[PhotoAviation61]

3130AWN22 FHLB (AA+) 20-YR 2043 (6-month call Jan 2024) 6.27% at Fido

I went to purchase this bond early this morning but got the error message below. I tried multiple times during the day but always got the error message.

I see as of early evening the bond is still listed on the FIDO new issues page. Wish they would take it down if no more available. It was a small offering of only $2m so probably went very fast.

 

[COcheesehead]

I went to purchase this bond early this morning but got the error message below. I tried multiple times during the day but always got the error message.

I see as of early evening the bond is still listed on the FIDO new issues page. Wish they would take it down if no more available. It was a small offering of only $2m so probably went very fast.

I just keep lowering the quantity. Sometimes they only have a handful left.

 

[PhotoAviation61]

I just keep lowering the quantity. Sometimes they only have a handful left.

I went down to 10 which is the minimum listed and still no joy. Next time I talk to fido fixed income rep I will mention this to them.

 

[jgman]

I actually successfully purchased (100K) this morning via Schwab shortly after it was posted above. Thanks to imbatman for posting.

 

[COcheesehead]

I went down to 10 which is the minimum listed and still no joy. Next time I talk to fido fixed income rep I will mention this to them.

They probably had an odd lot of less than 10 left. It’s happened to me too. Once they only had 2. I just cancelled the order.

 

[Montecfo]

3130AWN22 FHLB (AA+) 20-YR 2043 (6-month call Jan 2024) 6.27% at Fido

Hi imbatman,

What do you see as the value proposition on that one?

I see high quality, great initial yield. But it looks like you are likely to get it back in a worse market.

Do you ladder? If so where do you put it?

Serious question, not trying to be a wiseacre.

Thanks in advance.

 

[imbatman]

Hey @Montecfo, I actually didn't end up pulling the trigger on that one. It is still a nice security, and I wouldn't feel bad if I had put some funds in it (6.27% is a heck of a return right now), but the inflation news gave me pause. Instead, I actually ended up taking a small position in the RBC 5-year 5.7% (78014RPB0) that I posted yesterday instead. I am now thinking my 5-year fixed income net return may be better there than doing 6.27% for 6-months plus whatever I can get in January. Just got to roll with the news and keep trying to balance achieving a "good enough" yield while also not spending all my free time searching for new bonds.

TBH I am still building my ladder and focus on agencies with a mix of munis in my taxable accounts and mainly corporates with a few CDs in my IRA accounts. Mainly high quality but might dip into Baa3/bbb- if a good opportunity.

Much less than in the past (yup felt some burn in the last 18-months), but I do still have a little in a few bond funds. Anyhow, far from an expert and learning a little from everyone every day.

Anyhow back to Corporates / Agencies, things have really dried up in the last week and not sure today's news are going to help much on that. We shall see.

 

[COcheesehead]

Hey @Montecfo, I actually didn't end up pulling the trigger on that one. It is still a nice security, and I wouldn't feel bad if I had put some funds in it (6.27% is a heck of a return right now), but the inflation news gave me pause. Instead, I actually ended up taking a small position in the RBC 5-year 5.7% (78014RPB0) that I posted yesterday instead. I am now thinking my 5-year fixed income net return may be better there than doing 6.27% for 6-months plus whatever I can get in January. Just got to roll with the news and keep trying to balance achieving a "good enough" yield while also not spending all my free time searching for new bonds.

TBH I am still building my ladder and focus on agencies with a mix of munis in my taxable accounts and mainly corporates with a few CDs in my IRA accounts. Mainly high quality but might dip into Baa3/bbb- if a good opportunity.

Much less than in the past (yup felt some burn in the last 18-months), but I do still have a little in a few bond funds. Anyhow, far from an expert and learning a little from everyone every day.

Anyhow back to Corporates / Agencies, things have really dried up in the last week and not sure today's news are going to help much on that. We shall see.

Yep, the music is stopping and not everyone will have a chair.

 

[Montecfo]

Imbatman I do feel that we just had the 3rd best time this cycle to extend maturities. I agree 6+ is fabulous, especially if the money will be spent at maturity (no reinvestment risk).

But feasting on ST rates with LT money right now feels like something that I would regret.

And the Producer Price Index came in at 1.1% today. Not a typo.

That was well below expectations.

Not sure if that was reported in this thread yet.

So to CoCheesehead's point, the opera is not over but I noticed what appears a corpulent woman who appears to be looking around for her mic.

So it seems at this point.

 

[dobig]

Imbatman I do feel that we just had the 3rd best time this cycle to extend maturities. I agree 6+ is fabulous, especially if the money will be spent at maturity (no reinvestment risk).

But feasting on ST rates with LT money right now feels like something that I would regret.

And the Producer Price Index came in at 1.1% today. Not a typo.

That was well below expectations.

Not sure if that was reported in this thread yet.

So to CoCheesehead's point, the opera is not over but I noticed what appears a corpulent woman who appears to be looking around for her mic.

So it seems at this point.

Yes I've started to learn that lesson these past few months. Sold a large holding of FMLB 6.22% coupons this morning ($275k) looking for some liquidity. Want to lock in some 3-5 year non callables if anything comes up in the 5.25% - 5.5% range. I'd rather give up a little on the short end to get locked in on the longer end with the way the trend is looking. If nothing comes up, I'll just plow more into Vangaurd Wellesley which is looking better and better to me at the moment and gives me some equity exposure I'm lacking.

 

[imbatman]

Want to lock in some 3-5 year non callables if anything comes up in the 5.25% - 5.5% range.

I've been watching for similar (to a little higher) and haven't seen much.

Only thing I see out there (Fido) near that today (assume you need agencies for credit quality and/or tax reasons) is 3133EPNL5 5.18% FFCB (AAA/AA+) 10-Yr (first call 3 year in June 2026) selling at a discount ($99.8) to yield about 5.2%.

 

[dobig]

I've been watching for similar (to a little higher) and haven't seen much.

Only thing I see out there (Fido) near that today (assume you need agencies for credit quality and/or tax reasons) is 3133EPNL5 5.18% FFCB (AAA/AA+) 10-Yr (first call 3 year in June 2026) selling at a discount ($99.8) to yield about 5.2%.

Yeah, slim pickings right now. Just have to sit tight and bide our time.

Might pick up some more of those Wells Fargo perpetual preferreds in the mean time (WFCPRL).

 

[imbatman]

3133EPQK4 FFCB (AAA/A+) 6.05% 20-Year (2043) but callable 1-Year (July 2024) at Fido

Not too bad for a short term investment if you aren't going to sweat a few points one way or the other. Personally, I am still holding for now.

 

[Montecfo]

Yeah, slim pickings right now. Just have to sit tight and bide our time.



Might pick up some more of those Wells Fargo perpetual preferreds in the mean time (WFCPRL).

Those may be somewhat interesting if you think as I do that longterm rates are at least stable.

But I personally would not hold these as bond proxies but as equity. Duration is infinity meaning these are highly rate sensitive.

 

[PhotoAviation61]

I live in a state that has a state income tax. This year for the first time I have purchased quite a few FHLB and FFCB GSE bonds through my Fidelity account and I just want to confirm that Fidelity will not break out the state tax free interest earned on these bonds on their Tax Document mailing. I am assuming I will need to figure out that number by myself and provide to my tax accountant.

In looking at my past Fidelity tax documents there are no lines stating interest earned on agency bonds. I realize not all agency bonds are state tax free so probably why can't be broken out on their tax document.

 

[gauss]

I live in a state that has a state income tax. This year for the first time I have purchased quite a few FHLB and FFCB GSE bonds through my Fidelity account and I just want to confirm that Fidelity will not break out the state tax free interest earned on these bonds on their Tax Document mailing. I am assuming I will need to figure out that number by myself and provide to my tax accountant.

In looking at my past Fidelity tax documents there are no lines stating interest earned on agency bonds. I realize not all agency bonds are state tax free so probably why can't be broken out on their tax document.

In general, I believe, that this is handled differently depending on if your interest is reported on 1099-DIV vs 1099-INT. 1099-INT has a line item that addresses State tax exempt interest (line 3 "Interest on US Savings bonds and Treasury Obligations" which is not present on 1099-DIV.

If your state tax-exempt interest is indeed reported on 1099-DIV you will typically need to break it out yourself on your state return.

The instructions for your state income tax return should spell this out in some detail (ie GSE interest is included etc.)

update:
Below is an excerpt on the 1099-INT instructions and it appears that GSE interest would NOT be reported on 1099-INT box 3 -- As such I would be prepared to breakout your GSE interest manually on your State return.


Box 3. Interest on U.S. Savings Bonds and
Treasury Obligations
Enter interest on U.S. Savings Bonds, Treasury bills, Treasury
notes, and Treasury bonds. Do not include in box 1. For a
taxable covered security acquired at a premium, see Box 12.
Bond Premium on U.S. Treasury Obligations, later


-gauss

 

[PhotoAviation61]

In general, I believe, that this is handled differently depending on if your interest is reported on 1099-DIV vs 1099-INT. 1099-INT has a line item that addresses State tax exempt interest (line 3 "Interest on US Savings bonds and Treasury Obligations" which is not present on 1099-DIV.

If your state tax-exempt interest is indeed reported on 1099-DIV you will typically need to break it out yourself on your state return.

The instructions for your state income tax return should spell this out in some detail (ie GSE interest is included etc.)

update:
Below is an excerpt on the 1099-INT instructions and it appears that GSE interest would NOT be reported on 1099-INT box 3 -- As such I would be prepared to breakout your GSE interest manually on your State return.


Box 3. Interest on U.S. Savings Bonds and
Treasury Obligations
Enter interest on U.S. Savings Bonds, Treasury bills, Treasury
notes, and Treasury bonds. Do not include in box 1. For a
taxable covered security acquired at a premium, see Box 12.
Bond Premium on U.S. Treasury Obligations, later


-gauss

Thank you for the detailed response. This is exactly the info I was looking for.

 

[Healthy Lifestyle]

As I am trying to learn and have confidence in understanding agency bonds.
Can you explain to a beginner how to evaluate this agency bond that I presently see on Vanguard? Are there positives and negatives for this bond?

CUSIP 3133EPQJ7:
Federal Farm Cr Bks Cons Bd 5.82%38 5.82% due 7/21/2038 Callable 07/25@100

 

[imbatman]

Hi @Healthy Lifestyle - that is a perfectly fine bond depending on your use case. Certainly high credit quality and potentially useful for avoiding state/ local taxes. Basically depends on how you feel about 5.82% and it being callable in 2-years (the 15-year part isn't super significant IMO).

It is good but not really motivating me to buy, so I am keeping my powder dry for rates to go up or some more new issues (right now, Fido literally has 2 new issue agencies and 1 new issue corporate available - not sure where all the new issues went??).

Alternatively, if you want to buy now, you could consider 3133EPQK4 (same FFCB but 6.05% callable in 1-year). All about how long you want at what rate.

 

[COcheesehead]

As I am trying to learn and have confidence in understanding agency bonds.
Can you explain to a beginner how to evaluate this agency bond that I presently see on Vanguard? Are there positives and negatives for this bond?

CUSIP 3133EPQJ7:
Federal Farm Cr Bks Cons Bd 5.82%38 5.82% due 7/21/2038 Callable 07/25@100

Here’s the way I look at these. Are you OK if it gets called? Are you OK if it goes to maturity? If the answer is yes to both, buy it.

There are agency bonds paying 6% maturing in 2033 as well.

 

[imbatman]

There are agency bonds paying 6% maturing in 2033 as well.

Where at? Definitely not on Fido or ML in new issue or secondary..........