Teach me Bonds

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Slim11

Recycles dryer sheets
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Ok people, I am Dumb. Mostly in that I have no clue how bonds and such work. I was going to set up some CD ladders, but the person at Fidelity asked me to wait untill they could meet with me about fixed investing. I am not payong them for this, I just brought over a bunch of money and they offered. I am sure it will come with an pitch. But anyway, I want fixed investments that are safe ( I know nothing is garuanteed) and that I dont need to pay taxes on. Municipal Bonds? What are rough rates of return and are they mostly fixed equities or variable? I kinda want to stay on the safer fixed side with this money. I have other assets, and dont really need this money for the near future. Amount to invest is about 500k. I figure, I saved all my life, and have a good pension and retired, I dont need to loose the future on speclation. Fixed, mostly safe. Please and TY.
 
A bond is an obligation from a municipality or the government or a corporation or a government sponsored entity where you lend them money and they agree pay a stated amount of interest periodically, typically semi-annually, and then at maturity return your money to you.

The safest are US government securities and brokered CDs which are FDIC insured as long as you stay within the FDIC limit for any single bank. The next safest are US government sponsored entities like the Federal Home Loan Bank, Federal Farm Credit Union, etc. While there are not "full faith and credit of the United States government, there is implicit U.S. Government backing. Municipal bonds and corporate bonds are riskier depending on the financial strength and credit worthiness of the issuer. Some municipal bonds are insured against credit losses.

I limit myself to $x per issuer for corporates, only investment grade issuers (BBB- or better from S&P) and generally A or better.

That's the 50,000 foot view.
 
Fidelity has really excellent resources in their Learning Center. There are articles and and videos depending on how you absorb information. It’s one thing to ask a question here but trying to acquire a meaningful grasp on a very broad subject is difficult. Youtube is another excellent option if you are good at filtering out the noise. WADR. Once you have a basic grasp (beyond Pb4’s primer you could come back to ask specific. questions. Good luck….it’s a pretty cool topic.
 
Lots to learn and grasp.
The basics:
1. you buy a bond, or buy shares in a bond fund. You're lending money to the gummint or corporation X or a gov't-sponsored outfit, or maybe a foreign gov't. (These days, I'd stay domestic.)

2. In the case of a bond fund, you're buying pieces of hundreds of bonds, and the yield (interest payments) will vary a bit from month to month or from quarter to quarter. Why? Because individual bonds mature, and there is some turnover in the fund.

3. You will receive a pre-offered, fixed amount of interest, on individual bonds. Some bonds are called "zero coupon" bonds. A "zero" pays you nothing along the way to maturity, but your profit compounds, and you get paid at the maturity of the bond.

4. Investment Grade bonds carry less risk than "junk" bonds. The easiest way to own 'junk' is through a fund. My bond portion of the portfolio is one-third of my total, and most of that is "junk." But "junk' is less junkier than in days gone by. The euphemism for 'junk' is 'high yield.'

5. Established, industrialized countries are the safest bets. USA, for one. Currently, the USA gov't, through Treasury bonds, has the highest rates available you can get in the safest, Investment-Grade universe: a bit less than 5%. ('Junk' is offering 8-9% lately.) You can buy Treasuries through "TreasuryDirect." I never do. The website is clunky and user-unfriendly.

6. Traditionally, bonds were the safe portion of your portfolio and provided ballast during rocky times. These days, the profit from bonds can rival what you can get out of stocks. Be prudent. I would not even go near Emerging Market bonds now. And my 'junk' is all domestic.

"Break a leg!"
*EDIT:
you said: "I want fixed investments that are safe ( I know nothing is garuanteed) and that I dont need to pay taxes on. Municipal Bonds? What are rough rates of return and are they mostly fixed equities or variable? I kinda want to stay on the safer fixed side with this money."
****************
Yes, Munis are federally tax free. If the Munis are from the State where you live, you won't pay State tax on the interest, either. But because of that very thing, the interest rate you can get on Munis is very much lower than on a taxable bond. Munis make sense if you are in a medium-to-high tax bracket. Not for me. :)
 
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Municipal bonds would be federal income tax free, and if the issuer is from your state, then state tax free also. Study up a bit about bond ratings to determine your risk tolerance.
 
Slim11 said:
Ok people, I am Dumb. Mostly in that I have no clue how bonds and such work. I was going to set up some CD ladders, but the person at Fidelity asked me to wait untill they could meet with me about fixed investing. I am not payong them for this, I just brought over a bunch of money and they offered. I am sure it will come with an pitch. But anyway, I want fixed investments that are safe ( I know nothing is garuanteed) and that I dont need to pay taxes on. Municipal Bonds? What are rough rates of return and are they mostly fixed equities or variable? I kinda want to stay on the safer fixed side with this money. I have other assets, and dont really need this money for the near future. Amount to invest is about 500k. I figure, I saved all my life, and have a good pension and retired, I dont need to loose the future on speclation. Fixed, mostly safe. Please and TY.
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If my prediction is correct, you'll get a lot of explanations in this thread. The same will happen if you read a book. But the principles are not so complex.

For bonds, you may hear about individual bonds or bond funds (which hold a variety of bonds). Ask them to clarify every they say, and put it in writing.

I think I am reading in your post that you want safety and don't want to pay taxes. So either you or someone has mentioned Municipal bonds. You don't need this money now, but want it to grow safely.

Instead of thinking in terms of safe and not-safe, you'll want to think of those extremes on a ruler, with many intermediate values of safety.

You may find out that Fidelity Advisor is not exactly your friend. He has a job, and that is to sell you on the idea of investing in products that are good for Fidelity. There is no charity in the investing business.

For each idea that is mentioned here or elsewhere, it is a good idea to write them down, and look at each term until you understand such.
 
target2019 said:
You may find out that Fidelity Advisor is not exactly your friend. He has a job, and that is to sell you on the idea of investing in products that are good for Fidelity. There is no charity in the investing business.
Click to expand...

This is the exact reason I asked. Meeting with any of these advisors is like going to buy a new car. Lol. I learned a lot from what you all wrote allready. I will see what the rates are and if i can minimize the taxes, if not I can always go the CD route. I will continue to learn stuff along the way. This planning stuff is a PITA. But nessassary.
 
Slim11 said:
This is the exact reason I asked. Meeting with any of these advisors is like going to buy a new car. Lol. I learned a lot from what you all wrote allready. I will see what the rates are and if i can minimize the taxes, if not I can always go the CD route. I will continue to learn stuff along the way. This planning stuff is a PITA. But nessassary.
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Out in front of us all is inflation. Inflation is an inknown, and it directly affects the spending power of your 500K. How many years of inflation will go by before you use the money?

If I had 500K, I would also want safety, no taxes, and a great return. But I would also look ahead to when I would need the money.

You're on the right trail. Eventually you'll have several solutions to pick from.

Yes, these salesman have all received marching orders. So they are working harder to show the company they can cull some of your money, without killing you off. Lol.

I would listen to what they say, and ask for their projections on paper. That will be one possible solution.
 
I dont need the money right away. Plus I am younger at 50, this is only part of my new stay ahead of the game strategy. I wish I knew more about all this stuff years ago. I think I was semi educated in some financial stuff. TBH when you retire the should hand you out a packet explaining somethings. Instead of passing it off to call the compony that manages the plans, then they just try to sell you diffrent produts. I am working on this money, then my 457 plan ( maybe converting it in small peices to a roth IRA) , after that I will work on rebalancing my stocks. Right now my pension is enough to live on for the next 10 years. After that I may need some cash, but I think that will come from eaither the 457, or my cds.
 
Question for all you bond experts that may help the OP. When all is said and done, and forgetting about the safety (that the FDIC gives you for CD's) does your bond portfolio really generate "significantly" more to your bottom line than a well structured and simple CD ladder does? Particularly in a high or rising interest environement?

Or are you looking for diversification, longer terms, tax avoidance (in some cases) etc?
 
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Car-Guy said:
Question for all you bond experts that may help the OP. When all is said and done, and forgetting about the safety (that the FDIC gives you for CD's) does your bond portfolio really generate "significantly" more to your bottom line than a well structured and simple CD ladder does? Particularly in a high or rising interest environement?

Or are you looking for diversification, longer terms, tax avoidance (in some cases) etc?
Click to expand...

My delta over CDs averages about 1.3% - 1.4% more. So “significantly”, no. Thousands of dollars, yes, but not life changing.
The advantage is locking in reliable income. I know that I will have significant income, more than we need, for 10+ years. I can’t say that for CDs.
My plan was a bridge to SS at 70 with high current income and capital preservation. So the plan is working.
 
Car-Guy said:
Question for all you bond experts that may help the OP. When all is said and done, and forgetting about the safety (that the FDIC gives you for CD's) does your bond portfolio really generate "significantly" more to your bottom line than a well structured and simple CD ladder does? Particularly in a high or rising interest environment?

Or are you looking for diversification, longer terms, tax avoidance (in some cases) etc?
Click to expand...

I favor treasuries, because they are as safe as any CD, are exempt from state tax and cannot be called.

The magnitude of the second benefit, of course, depends on the state in which you live and whether you are investing in a taxable account or not. My current marginal state tax rate is about 6% (in CT, our tax system includes a lot of gimmicks that have cliffs, so ascertaining one's exact marginal rate is difficult), so, for me, to be equivalent, the rate on a CD must be higher for the same term. For example, say a 1 year treasury yields 5%. In order to net the same after tax money, I would need a 1 year CD at 5/(1 - .06) = 5.32%. If I were investing inside an IRA, I wouldn't care and would just go for the higher yield, because it would all be taxed as ordinary income by the state when I take a distribution. My thinking would be the same if I lived in a state with no income tax; just go with the higher rate.

There is also the risk with brokered CDs that you will get called and then will be forced to reinvest at a lower rate. With treasuries, you are able to keep the rate until it matures. It makes planning your ladder easier. Yes, there are also non-callable CD's, but that call protection typically comes at a price in the form of a lower yield.
 
Car-Guy said:
Question for all you bond experts that may help the OP. When all is said and done, and forgetting about the safety (that the FDIC gives you for CD's) does your bond portfolio really generate "significantly" more to your bottom line than a well structured and simple CD ladder does? Particularly in a high or rising interest environement?

Or are you looking for diversification, longer terms, tax avoidance (in some cases) etc?
Click to expand...
I'm not a bond expert, but have read many bond threads...

This answer from AI gets to the root of the question as I see it. The past does not predict the future. And consider all of Gumby's points.

I asked Bard:

Is there historical data to support the case for individual bonds over individual certificates of deposit?
Click to expand...
Bard says:

Yes, there is historical data to support the case for individual bonds over individual certificates of deposit (CDs). Over the long term, bonds have outperformed CDs by a significant margin.
Click to expand...

More here:

https://g.co/bard/share/323f8cea6b35

I think you can enter a starting date and period length to get better answers as to what the difference *was*. But then you're up against the mysterious future, and whether the difference will hold up for your future period.
 
So, the last three posts would all seem to suggest that it is worth learning about Bonds vs CD's, as the OP is asking. Or as I say it, "the juice is worth the squeeze". IMO, understanding both in the fixed income investing space is important.
 
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Car-Guy said:
Question for all you bond experts that may help the OP. When all is said and done, and forgetting about the safety (that the FDIC gives you for CD's) does your bond portfolio really generate "significantly" more to your bottom line than a well structured and simple CD ladder does? Particularly in a high or rising interest environement?

Or are you looking for diversification, longer terms, tax avoidance (in some cases) etc?
Click to expand...

I would say my portfolio probably doesn't generate dignificantly more than a well structured and simple CD ladder, but it is hard to assess even for just my CDs as they were all bought at different times. Also, I have agency bonds and high quality corporate bonds in the stable.
 
Agency / GSE - risk reward vs plain treasuries

Good Morning
I'm learning the ropes with individual bond investing / laddering as we unwind our apartment buildings and sail off into the sunset. We're 58 years old.

My question is about GSE's or Agency bonds. I'm laddering out to 7-ish years with TIPs, iBonds (new 1.4% inflation kicker), regular treasuries, brokered CDs and yesterday I grabbed a 7 year FHLB(?) bond at 6.5%ish. I also supplement with the bulletshares investment grade class to avoid having to worry about diversification. I'm intuiting that GSE's are, in practice, ALMOST as risk free as treasuries. How cautious should I be here do you think? I'm not thinking of REPLACING my treasury allocation with GSEs, just supplementing. i.e. if I have 50K to put toward one year of the ladder, I might do 15K TIP, 15K treasury note or bond, 10K GSE, 10K Bulletshare (maybe supplementing with bulletshare "junk bond" 5K). Does this sound reasonable?
 
hotwired said:
Good Morning
I'm learning the ropes with individual bond investing / laddering as we unwind our apartment buildings and sail off into the sunset. We're 58 years old.

My question is about GSE's or Agency bonds. I'm laddering out to 7-ish years with TIPs, iBonds (new 1.4% inflation kicker), regular treasuries, brokered CDs and yesterday I grabbed a 7 year FHLB(?) bond at 6.5%.
Click to expand...

Personally, I like your plan use a variety of bonds out past the 5 year area. But, then I plan to name my next dog - Diversification. :D I am not so sure about the EZ glide-path back to 2% inflation especially with two wars today, and other threats on the horizon. I hope I am wrong.

My Ibonds were for emergency money, but the newer fixed rate 1.4% bonds have me thinking they make a very nice variable length step to add to my bond ladder. And I get some choice as to that length. :)

Everybody has different needs. Good luck.
 
pb4uski said:
I limit myself to $x per issuer for corporates, only investment grade issuers (BBB- or better from S&P) and generally A or better.
Click to expand...

The hardest part for me is relying on ratings agencies for corporates. In other words, don't think I can research the company and come with a good risk understanding by myself. That means that I have to accept their rating as a good measure of risk. Its not easy given some of the history of these.
Have stayed on treasuries and agencies so far, but surely will like to get some of the higher rates on corporates.
BTW, I'm 65%-70% stock, so its not an overall avoidance of risk.
 
perez99 said:
The hardest part for me is relying on ratings agencies for corporates. In other words, don't think I can research the company and come with a good risk understanding by myself. That means that I have to accept their rating as a good measure of risk. Its not easy given some of the history of these.
Have stayed on treasuries and agencies so far, but surely will like to get some of the higher rates on corporates.
BTW, I'm 65%-70% stock, so its not an overall avoidance of risk.
Click to expand...

The rating is a point in time. There are other more dynamic indicators you can look at for corporates that give you clues on their safety. Read the issuer events and watch for credit outlooks. I have never had a bond default in my possession. I just keep an eye on things, minutes a week is all you need.
 
Though I stop short at pet-naming, I too am a diversification geek! I probably diWORSE-ify at times, (a Peter Lynch-ism), but all in all I think it really works.

I'm struggling with the iBond issue as well. I've got 3 LLCs, so my wife and I are able to buy "5 batches" per year. I've started unwinding the .04 percenters, re-deploying it to cash, then max out the 1.4%'s in January. This website: https://tipswatch.com helps with this. GREAT resource. He even has a chart showing the perfect timing to unload the ibonds with the lower inflation kicker. (i.e. timing it so the 3 months interest you lose is at a lower rate)
 
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