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

[COcheesehead]

I have a question about U.S. Treasuries..I've been buying some lately and I've noticed that when I place my order the cost comes up as a number less than the amount I am buying. For example if I buy $25,000.00 worth the cost will be something over $24,000.00 but less than $25,000.00..I thought that was the way zero's worked..These I am buying are not zero's but are priced like zero's as far as I can tell..I would expect a $25,000.00 treasury to cost $25,000.00..What's the deal?

You are buying these on the secondary market below par, correct?

 

[lawman]

You are buying these on the secondary market below par, correct?

Yes through the Schwab listings

 

[COcheesehead]

Yes through the Schwab listings

When you buy below par, the price is less than $1000 a bond. So when you enter 25 bonds, the price is $900 ish so your total is less than $25,000. Part of your return is interest and part is capital gains - the difference between par and the price you paid.

 

[lawman]

okay...I figured it out..Those priced below par will be cheaper and those priced above par will cost more..Price and coupon are the variables..

 

[lawman]

When you buy below par, the price is less than $1000 a bond. So when you enter 25 bonds, the price is $900 ish so your total is less than $25,000. Part of your return is interest and part is capital gains - the difference between par and the price you paid.

Thanks! I sure hope Schwab keeps up with all that and simplifies it for tax purposes..

 

[pb4uski]

okay...I figured it out..Those priced below par will be cheaper and those priced above par will cost more..Price and coupon are the variables..

Coupon is usually not a variable, it is fixed. Price is variable. As interest rates rise, the price falls and vice versa. If you buy below 100 then the yield to maturity will exceed the coupon (including zeros) and if you buy above 100 your yield to maturity will be less than the coupon.

 

[pb4uski]

New call this morning. At 6.45% I never thought that it would last long before being called. C'est la vie!

SecurityFFCB 6.45%37
DUE 10/19/37
CUSIP3133ENU24
Maturity dateJanuary 24, 2023

 

[Born2Fish]

New call this morning. At 6.45% I never thought that it would last long before being called. C'est la vie!

SecurityFFCB 6.45%37
DUE 10/19/37
CUSIP3133ENU24
Maturity dateJanuary 24, 2023

Oh, well...I netted ~$50 on my position. Could've been worse.

 

[COcheesehead]

New call this morning. At 6.45% I never thought that it would last long before being called. C'est la vie!

SecurityFFCB 6.45%37
DUE 10/19/37
CUSIP3133ENU24
Maturity dateJanuary 24, 2023

Owned the same one. Made $255 in interest. Reinvested the funds already yesterday.

 

[jldavid47]

I have callables past their call dates. Coupons are 4.8% to low 5%.

I have FHLB 5% 10/25/2024 callable bonds (CUSIP 3130ATHG5) with the first call date today (subsequent call dates are every 3 months from today). Apparently they are going to live for another 3 months as I have gotten no notice of call. If they got called it wouldn't be a disaster as I can reinvest in 6-month T-bills which recently have been yielding about 4.85% at auction.

 

[COcheesehead]

I have FHLB 5% 10/25/2024 callable bonds (CUSIP 3130ATHG5) with the first call date today (subsequent call dates are every 3 months from today). Apparently they are going to live for another 3 months as I have gotten no notice of call. If they got called it wouldn't be a disaster as I can reinvest in 6-month T-bills which recently have been yielding about 4.85% at auction.

I feel the same. I found yield when there was none a year or two ago. Today, you find yield just laying on the street.

 

[pb4uski]

Had a 5.95% GSE bond I bought 6 weeks ago called this morning.
No notice (that I noticed). The funds were sitting in pending this morning for a redemption dated today.
Went to find a replacement. New issues had a 5.65% GSE with very similar maturity but when I went to buy Fido said my qty was greater than # available.
So I surf the secondary market and find the same bond at 99.90 and a 0.10 fee making it $100 even... same as if I had bought it "new".
I suspect all of my callables are going to vaporize as on the first call date. I'm going to start laddering non-callables out to 2032. They're only 4%, but that 4% looked good back when rates were zip.

I had the same thing happen this morning. Got an email from Schwab that they sent out at 7:19 am this morning (Jan 25) that "A fixed income security in your account will be maturing soon." and said it would "mature" on January 24 and when I logged in the funds were in my settlement account... except mine was 6.45%.

 

[lawman]

I had the same thing happen this morning. Got an email from Schwab that they sent out at 7:19 am this morning (Jan 25) that "A fixed income security in your account will be maturing soon." and said it would "mature" on January 24 and when I logged in the funds were in my settlement account... except mine was 6.45%.

If that notice was for a called note wouldn't it identify the note? I get notifications of notes maturing all the time..

 

[pb4uski]

If that notice was for a called note wouldn't it identify the note? I get notifications of notes maturing all the time..

It did. Look at post #2557 above.

 

[jazz4cash]

okay...I figured it out..Those priced below par will be cheaper and those priced above par will cost more..Price and coupon are the variables..

It might help to dig out the trade confirmation statement. It contains all the details including commission/markup and interest paid to seller. Takes a bit of time to digest but not so hard.

 

[Echard]

I would avoid specialty finance/Business development finance companies (Bain, Ares, Prospect Capital and others) if you believe that the economy is slowing down. They loan money to small businesses and are required to back up their debt with asset coverage. However, how they value those assets is another issue. The other issues is that these companies have managed to raise a lot of low coupon debt in 2020 and 2021. I used to own Allied Capital (AFC - Ares Capital) but it had a coupon of 6.75% and was called after they refinanced with much lower coupon debt. We are entering a period of interest rates staying higher for longer so you really need to look at coupons of 5% or higher now.

Why does the coupon matter if holding to maturity? I'm unclear why a company would be more incentivized to call a low coupon bond than a high coupon? Or maybe I'm misunderstanding your post.

 

[pb4uski]

How can it be that I enter a Fill or Kill order to buy a new issue and the order is open for hours or days on end? Stupid.

 

[Freedom56]

Why does the coupon matter if holding to maturity? I'm unclear why a company would be more incentivized to call a low coupon bond than a high coupon? Or maybe I'm misunderstanding your post.

For lower grade bonds, you really should buy only higher coupon notes/bonds. You want to be rewarded for holding higher risk securities.

 

[Echard]

For lower grade bonds, you really should buy only higher coupon notes/bonds. You want to be rewarded for holding higher risk securities.

Ah right, in the case of default you at least got something in interest payments.

 

[GaryInCO]

For lower grade bonds, you really should buy only higher coupon notes/bonds. You want to be rewarded for holding higher risk securities.

I was just looking at some high-yield bonds. Lots of Ba3/B+ or better yielding 11% or more. Would it be stupid to build a portfolio of these bonds, with small enough positions that it doesn't hurt too much if one goes poof?

Looks like they're all callable, but if I'm reading the table right, there are some that aren't callable for a year or more.

With a potential recession threatening, is that a bad time to buy these junky bonds?

 

[Quattro73]

From the callable aspect, keep in mind if the coupon is lower than the going rate, it isn’t likely to be called. The coupon is the cost to the company.

Of course buying low coupon debt at a steep discount means you will not realize your yield until it matures or you sell. So if consistent income is your goal then, that may not be the best, strategy. If you are looking to realize an overall return, different story.
Insofar as credit risk goes…..I’ll let you decide if it is worth it.

 

[Freedom56]

I was just looking at some high-yield bonds. Lots of Ba3/B+ or better yielding 11% or more. Would it be stupid to build a portfolio of these bonds, with small enough positions that it doesn't hurt too much if one goes poof?

Looks like they're all callable, but if I'm reading the table right, there are some that aren't callable for a year or more.

With a potential recession threatening, is that a bad time to buy these junky bonds?

It depends on the company and their free cash flow now though the duration of the bond and your risk tolerance. Some companies do okay during recessions and some fall apart. You can also lower your risk with high yield notes by buying only first lien or secured notes.

 

[COcheesehead]

I was just looking at some high-yield bonds. Lots of Ba3/B+ or better yielding 11% or more. Would it be stupid to build a portfolio of these bonds, with small enough positions that it doesn't hurt too much if one goes poof?

Looks like they're all callable, but if I'm reading the table right, there are some that aren't callable for a year or more.

With a potential recession threatening, is that a bad time to buy these junky bonds?

I buy bonds for income and capital preservation. I personally see no value in risking our retirement paycheck on a few extra dollars - a default is worse than not making a handful more in return.

There was just a thread on here about three muni bonds, two of which defaulted. It happens.

 

[finnski1]

I buy bonds for income and capital preservation. I personally see no value in risking our retirement paycheck on a few extra dollars - a default is worse than not making a handful more in return.

There was just a tread on here about three muni bonds, two of which defaulted. It happens.

I agree. I was very happy to nab a few recent Royal Bank of Canada issues, one at 6% coupon and one at 5.2% coupon. Very highly rated issues and one not callable for 5 years and the other a few years.
My goal also is to never pay over par.
Ideally par or less with highly rated issuers and very good yields and short duration. Not asking for much am I.

 

[Freedom56]

New issue offered at TDA. It is a 8 year note with 3 years of call protection.

The CUSIP number for the Notes is 78014RKQ2.
The Notes will accrue interest at the rate of 5.25% per annum.

Issuer: Royal Bank of Canada (“Royal Bank”)
Issue: Senior Global Medium-Term Notes, Series I
Underwriter: RBC Capital Markets, LLC
Currency: U.S. Dollars
Minimum Investment: $1,000 and minimum denominations of $1,000 in excess of $1,000
Pricing Date: February 10, 2023
Issue Date: February 14, 2023
Maturity Date: February 14, 2031
Type of Note: Fixed Rate Note
Interest Rate: 5.25% per annum
Interest Payment
Dates:
Semi-annually, on February 14th and August 14th of each year, commencing on August 14, 2023, and ending on the maturity date. If an Interest Payment Date is not a New York business day, interest will be paid on the next New York business day, without adjustment for period end dates and no interest will be paid in respect of the delay.

Redemption: Redeemable at our option. If we redeem the Notes, we will pay you the principal amount, together with the applicable interest payment.
Call Dates: The Notes are callable, in whole, but not in part, beginning on February 14, 2026, and on each Interest Payment Date thereafter upon 10 business days’ prior written notice.