Fixed Income Investing II

[Montecfo]

cfg cmnty bk lutherville md cd 3.75000% 12/11/2025

I bank there also. Hope you are in their HY MM account paying 5.20%.

But it does nothing to solve the puzzle.

 

[jazz4cash]

I was just reading that if you buy bonds above par you can deduct a portion of the premium each year. E.G. if I pay $110 for a 10 year bond, I can deduct $1 each year. I was not aware of that as I have avoided buying above par. I need to learn details on how to take the deduction. Investopedia says you can alternately wait till maturity and take a capital loss which is also news to me. I presume this means the stated yield to maturity ignores the effect of deducting the premium since it would vary based on marginal tax rate.

 

[Texas Proud]

I was just reading that if you buy bonds above par you can deduct a portion of the premium each year. E.G. if I pay $110 for a 10 year bond, I can deduct $1 each year. I was not aware of that as I have avoided buying above par. I need to learn details on how to take the deduction. Investopedia says you can alternately wait till maturity and take a capital loss which is also news to me. I presume this means the stated yield to maturity ignores the effect of deducting the premium since it would vary based on marginal tax rate.

Or you can be like me and only buy individual bonds in an IRA (well, except for one I accidently bought in a taxable account)...

 

[COcheesehead]

I was just reading that if you buy bonds above par you can deduct a portion of the premium each year. E.G. if I pay $110 for a 10 year bond, I can deduct $1 each year. I was not aware of that as I have avoided buying above par. I need to learn details on how to take the deduction. Investopedia says you can alternately wait till maturity and take a capital loss which is also news to me. I presume this means the stated yield to maturity ignores the effect of deducting the premium since it would vary based on marginal tax rate.

It’s called a reportable bond premium and Fidelity tracks it for you.

 

[jazz4cash]

Or you can be like me and only buy individual bonds in an IRA (well, except for one I accidently bought in a taxable account)...

Well, I have favored an IRA for individual bonds but now that I know about the deduction/capital loss it makes sense to also consider taxable accounts

 

[Montecfo]

Well, I have favored an IRA for individual bonds but now that I know about the deduction/capital loss it makes sense to also consider taxable accounts

I do both, though shorter term in my taxable. No recent purchases at premium (good point on deductibility) of course but that is coming at some point I suspect.

 

[Spock]

This was an interesting article that suggest that short duration bonds and even cash in a 60/40 portfolio got close-enough-for-handgrenades performance while avoiding bond volatility from rising interest rates.

I haven't backtested his numbers so YMMV.

https://awealthofcommonsense.com/2023/09/the-bond-bear-market-asset-allocation/

 

[Montecfo]

This was an interesting article that suggest that short duration bonds and even cash in a 60/40 portfolio got close-enough-for-handgrenades performance while avoiding bond volatility from rising interest rates.

I haven't backtested his numbers so YMMV.

https://awealthofcommonsense.com/2023/09/the-bond-bear-market-asset-allocation/

Possibly true any time except our zero rate environment we exited last year.

But I think if you ladder you can get the SWAN and get a meaningfully higher yield in most markets.

But you have to be ok with bonds paper gains or losses.

I think for the ultra squeemish CDs or agencies may be the ticket. More yield than cash in most markets and govt insurance or implied guaranteed.

 

[Montecfo]

Well, despite modest movement higher in the treasury market, I'm not seeing that translate into hire yields for CDs agencies incorporates of high quality in any meaningful way.

Other than the short end, two years and in, which has moved up nicely.

 

[pb4uski]

Schwab is currently offering some 6%-ish high quality 3 and 5 year callable corprorates. 6% is enought to get me interested.

Buy	BBB+	A2	The Goldman Sachs Gr 6.15% 09/19/2028 Callable
38150AUH6
Recently Issued
Callable	6.150	09/19/2028	25	100.00000	1	1000	6.150	6.148	Yes	$17.08	$25,017.08
Buy	BBB+	A2	The Goldman Sachs Gr 6% 09/18/2026 Callable
38150AUG8
Recently Issued
Callable	6.000	09/18/2026	25	100.00000	1	1000	6.000	6.000	Yes	$0.00	$25,000.00
Buy	A-	A1	Bank of America Corp 6% 09/25/2026 Callable
06055JCH0
Recently Issued
Callable	6.000	09/25/2026	25	100.00000	1	1000	6.000	6.000	Yes	$0.00	$25,000.00

 

[DuluthGA]

Schwab is currently offering some 6%-ish high quality 3 and 5 year callable corprorates. 6% is enought to get me interested.

BuyBBB+A2The Goldman Sachs Gr 6.15% 09/19/2028 Callable

38150AUH6

Recently Issued

Callable6.15009/19/202825100.00000110006.1506.148Yes$17.08$25,017.08

BuyBBB+A2The Goldman Sachs Gr 6% 09/18/2026 Callable

38150AUG8

Recently Issued

Callable6.00009/18/202625100.00000110006.0006.000Yes$0.00$25,000.00

BuyA-A1Bank of America Corp 6% 09/25/2026 Callable

06055JCH0

Recently Issued

Callable6.00009/25/202625100.00000110006.0006.000Yes$0.00$25,000.00

I understand the BBB+ is the lowest investment grade? Rating. Are you comfortable 3-5 years with that risk?

 

[Mulligan]

I understand the BBB+ is the lowest investment grade? Rating. Are you comfortable 3-5 years with that risk?

Ticks below BBB+ that are still lowest rung IG are BBB, then lastly BBB-.

 

[COcheesehead]

I understand the BBB+ is the lowest investment grade? Rating. Are you comfortable 3-5 years with that risk?

There are a lot of household name companies with BBB+ ratings.

 

[COcheesehead]

For the high risk end of my bond portfolio I have been buying bits and pieces of WDI, a closed end, leveraged, bond fund. It holds some of everything, but a good portion of floaters. So it yields about 12% which looks sustainable because it’s earning 106% of its distribution and earnings are increasing. It is also selling at a discount to its NAV. It’s up 8%+ in the last year. I have about 4% of my bond allocation in it.
I also have been buying LONZ, 8% yield, short duration junk, up 9% plus, no leverage.

Those two are balanced off with the other 95% of my bonds in high quality, mostly non callable, laddered individual bonds.

 

[pb4uski]

I understand the BBB+ is the lowest investment grade? Rating. Are you comfortable 3-5 years with that risk?

Your understanding is incorrect. BBB- is the lowest investment grade rating from S&P. BBB+ is only one notch below Bank of America's A- S&P rating.

I have little doubt that Goldman Sachs will still be around in 3-5 years to pay off these bonds.

 

[Montecfo]

Well I certainly don't want to stretch for yield by going lower quality or callable. I understand folks who are mostly or all debt may find that attractive for a sliver, but my equity portfolio is where I am taking risk.

 

[Montecfo]

For the high risk end of my bond portfolio I have been buying bits and pieces of WDI, a closed end, leveraged, bond fund. It holds some of everything, but a good portion of floaters. So it yields about 12% which looks sustainable because it’s earning 106% of its distribution and earnings are increasing. It is also selling at a discount to its NAV. It’s up 8%+ in the last year. I have about 4% of my bond allocation in it.
I also have been buying LONZ, 8% yield, short duration junk, up 9% plus, no leverage.

Those two are balanced off with the other 95% of my bonds in high quality, mostly non callable, laddered individual bonds.

I do think closed end bond funds are attractive here. With rates near their highs and trading at a discount, what is not to like?

 

[pb4uski]

Well I certainly don't want to stretch for yield by going lower quality or callable. I understand folks who are mostly or all debt may find that attractive for a sliver, but my equity portfolio is where I am taking risk.

WADR, I don't view buying BBB+ corporates as being much of a stretch.

The historical rate of default of BBB+ corporate bonds is 1% and the recovery rate on default is about 80%, so the loss is 0.2%.

If you think 0.2% is a stretch, then let's agree to disagree.

Besides, I don't think that Goldman will be the 1 of 1,000 BBB+ bonds that end up defaulting.

 

[Gumby]

I think when it comes down to the last dollar to be made, Goldman will be the one making it.

 

[Montecfo]

WADR, I don't view buying BBB+ corporates as being much of a stretch.

The historical rate of default of BBB+ corporate bonds is 1% and the recovery rate on default is about 80%, so the loss is 0.2%.

If you think 0.2% is a stretch, then let's agree to disagree.

Besides, I don't think that Goldman will be the 1 of 1,000 BBB+ bonds that end up defaulting.

I'm not looking to debate that. You have a greater risk tolerance for all or a portion of your bond portfolio.

I stated my philosophy previously, and sticking to it.

But I'm not a verse to credit risk. I in the past have held junk bonds, for example, just not as part of my bond allocation. Because they act like equities.

Not saying low investment grade is equivalent to junk, just discussing my philosophy.

ETA: also, any individual bond carries too much weight in my portfolio for me to be willing to assume much risk. If I want to look at higher risk categories, I would generally look for those in a fund that will hold hundreds or thousands of bonds.

And I do.

 

[COcheesehead]

I do think closed end bond funds are attractive here. With rates near their highs and trading at a discount, what is not to like?

A timely article in Seeking Alpha about the attractiveness of the bond CEF WDI which I posted about up thread.

https://seekingalpha.com/article/46...percent-distribution-yield-and-solid-coverage

 

[Texas Proud]

A timely article in Seeking Alpha about the attractiveness of the bond CEF WDI which I posted about up thread.

https://seekingalpha.com/article/46...percent-distribution-yield-and-solid-coverage

Might have to look at this... My SPLP-A has a huge gain so the current yield is not that attractive and I have been looking for something to move it too... it also matures in a few years so going out a bit looks promising...

 

[COcheesehead]

Updated through today, my fixed income generates more per month right now than I earned for an entire year at my first real job out of college, the cost of my first three new cars combined or about 25% of the cost of my first house. I don’t know whether to cry or be happy. It shows what inflation will do over almost 38 years and just how high yields are right now.

 

[Affinity4Investing]

Updated through today, my fixed income generates more per month right now than I earned for an entire year at my first real job out of college, the cost of my first three new cars combined or about 25% of the cost of my first house. I don’t know whether to cry or be happy. It shows what inflation will do over almost 38 years and just how high yields are right now.

I think you should reach around and give yourself a pat on the back. You deserve it.

 

[Car-Guy]

Updated through today, my fixed income generates more per month right now than I earned for an entire year at my first real job out of college, the cost of my first three new cars combined or about 25% of the cost of my first house. I don’t know whether to cry or be happy. It shows what inflation will do over almost 38 years and just how high yields are right now.

So true, my first full time job after school in the early 70's yielded me about 12k yr (gross). (IIRC). Easily make that much per month these days just in fixed income returns.

And my first used car cost me $600. Nice car too. My second used car was $200. Heck, that's the cost of about 2 or 3 tanks of gas now "around this part of the country".