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

[Echard]

Thanks for the responses. T-bills are maturing weekly and I'm trying to put the cash back to work in higher yielding Corp bonds. I just need to chill a bit.

Same. One thing that has helped me is to calculate the delta interest between corp bonds and treasuries or money market. For example, if you have $1M in expiring treasuries or bonds ready to deploy, and you put them right now in A rated corporate bonds with 3-7 year maturities, then maybe you can squeeze out ~.5-.75% over Treasuries. That amounts to $5,000-$7,500 per year in income, BUT you are locking in that interest rate for those years. Is it worth it?

On the other hand, if the premium were 1-1.5%, or $10-15k, yup.

edit: actually the delta over money market probably is 1%.

 

[pb4uski]

I keep seeing folks happy with two or three year call protection on 8-10 year bonds. For me, that's a non-starter. Maybe because I remember the 1970's, but there is still a risk of higher rates and getting stuck with a bond for 10 years at a market price way below par isn't very appealing to me, when the interest rate premium above no call bonds is minimal.

I've been searching for a way to quantitatively evaluate these call protection provisions, rather than just eyeball it and either like it or not like it.

One way that I evaluate it is to look at the difference in yields for callable bonds vs similar credit and term non-callable bonds. Currently on Schwab they are offering a callable FHLB issue that matures in March 2026 (3130AVA44) and yields 5.985%. Meanwhile, there is a FHLB issue maturing in March 2026 that is non-callable (3130AUU36) and yielding 4.758% so it appears to me that they are paying an additional 1.2% for the call feature.

Is that enough? That is a judgement call, but I would take the extra 1.2% on a 3 year term.

 

[11522914]

That amounts to $5,000-$7,500 per year in income, BUT you are locking in that interest rate for those years. Is it worth it?

Give me about 5 to 7 years and I'll let you know.

 

[Echard]

One way that I evaluate it is to look at the difference in yields for callable bonds vs similar credit and term non-callable bonds. Currently on Schwab they are offering a callable FHLB issue that matures in March 2026 (3130AVA44) and yields 5.985%. Meanwhile, there is a FHLB issue maturing in March 2026 that is non-callable (3130AUU36) and yielding 4.758% so it appears to me that they are paying an additional 1.2% for the call feature.

Is that enough? That is a judgement call, but I would take the extra 1.2% on a 3 year term.

Wow, that definitely makes sense to take the callable one given you only have to live with it for 1 additional year, assuming current rates stay relatively within a reasonable range for the next 24 months.

 

[Montecfo]

One way that I evaluate it is to look at the difference in yields for callable bonds vs similar credit and term non-callable bonds. Currently on Schwab they are offering a callable FHLB issue that matures in March 2026 (3130AVA44) and yields 5.985%. Meanwhile, there is a FHLB issue maturing in March 2026 that is non-callable (3130AUU36) and yielding 4.758% so it appears to me that they are paying an additional 1.2% for the call feature.



Is that enough? That is a judgement call, but I would take the extra 1.2% on a 3 year term.

Callables I assume will be called, so I assume they mature at the call date.

Can be attractive. But I think you also want to fill out the long end of your ladder.

 

[Montecfo]

About fear of "locking in" current rates: does anyone remember 2018?

Same fears raised then. Many stayed short. Many got burned when rates collapsed.

Hence, ladder.

 

[Chuckanut]

Is that enough? That is a judgement call, but I would take the extra 1.2% on a 3 year term.

+1

A month or two ago, the callable premium on some issues I looked at was 0.5% more. Not enough. The latest three year I bought was pretty close to the above 1.2% premium.
Risk vs reward.

 

[jazz4cash]

Wow, that definitely makes sense to take the callable one given you only have to live with it for 1 additional year, assuming current rates stay relatively within a reasonable range for the next 24 months.

Yes, it’s much easier to evaluate for 3 yr paper but that (to me) is very different than the 8-10 paper you referenced with 3 yrs of protection. The one I quoted cost 60 bps for 5yrs vs 2 yrs protection. Very reasonable 4.6 vs 5.2%. The call protection is becoming more valuable IMO since rates appear to be headed lower after a year or so.

 

[Gearhead Jim]

I keep seeing folks happy with two or three year call protection on 8-10 year bonds. For me, that's a non-starter. Maybe because I remember the 1970's, but there is still a risk of higher rates and getting stuck with a bond for 10 years at a market price way below par isn't very appealing to me, when the interest rate premium above no call bonds is minimal.

I've been searching for a way to quantitatively evaluate these call protection provisions, rather than just eyeball it and either like it or not like it.

Unless yields stay flat, callable bonds look to me like a "Heads I win, Tails you lose" proposition.
If rates go up, the bond isn't called and you are stuck with the now-substandard rate (or selling at a below-par price) until maturity.
If rates go down, the bond is called and now you have to reinvest the money at lower rates.

 

[Echard]

So a reasonable conclusion on the call provision discussion is that for shorter term bonds (2-4 years), where there is a 1%+ difference in yields between callable and non-callable and call protection to within about a year or 2 of maturity, it seems to make sense to buy callable bonds. But for long-term bonds of 8-10 year maturities, it doesn't yet make sense.

 

[copyright1997reloaded]

So a reasonable conclusion on the call provision discussion is that for shorter term bonds (2-4 years), where there is a 1%+ difference in yields between callable and non-callable and call protection to within about a year or 2 of maturity, it seems to make sense to buy callable bonds. But for long-term bonds of 8-10 year maturities, it doesn't yet make sense.

The percentage that is reasonable is a function of market dynamics and expectations. For example, the more volatility in rates, the higher the premium should be, and the higher the non-callable yield, the higher the premium should be. Yes, in general there should be higher premium paid for a longer dated option. Over time, as the time to first call drops, the premium should fall (reflected in the price of the instrument).

 

[Born2Fish]

WELLS FARGO BANK NATL ASSN CD 5.25000% 03/17/2025, NON-Callable, CUSIP-DSN376133.

Monthly interest payments.

Corp Note issuers need to get in the game.

Why would I take on higher risk of a Corp Note when I can get 2 years non-callable FDIC-insured?

 

[pb4uski]

So a reasonable conclusion on the call provision discussion is that for shorter term bonds (2-4 years), where there is a 1%+ difference in yields between callable and non-callable and call protection to within about a year or 2 of maturity, it seems to make sense to buy callable bonds. But for long-term bonds of 8-10 year maturities, it doesn't yet make sense.

I think it depends. For example, in December I bought 3130ATZE0, a FHLB 6.38% 12/21/2037 Callable in June 2023 at par. I normally would not buy a 15 year maturity bond but my thinking was that if it goes the entire 15 years then I'm happy with 6.38% and if it gets called in June 2023 I would be happy with 6.38% for 6 months.

Schwab shows some bids at 6.499%YTM and 10.338% YTC so I don't see a call in the near term and meanwhile I'll take the 6.38%

 

[Born2Fish]

I think it depends. For example, in December I bought 3130ATZE0, a FHLB 6.38% 12/21/2037 Callable in June 2023 at par. I normally would not buy a 15 year maturity bond but my thinking was that if it goes the entire 15 years then I'm happy with 6.38% and if it gets called in June 2023 I would be happy with 6.38% for 6 months.

Schwab shows some bids at 6.499%YTM and 10.338% YTC so I don't see a call in the near term and meanwhile I'll take the 6.38%

OK, that is a horse of a different color! I think there is a reasonable chance that it will NOT get called in June if the Fed makes some big moves up in Rates. And the yield is rewarding.

I missed that one.

Do you see anything that looks attractive now? (I have accts at TDA and FIDO)

 

[Freedom56]

Some new corporate bond deals are coming:

TD Bank 5.6% 5 year notes with 3 years of call protection.

https://www.sec.gov/Archives/edgar/data/947263/000114036123010471/brhc10049441_424b2.htm

TD Bank 6% 5 year note with 1 year call protection.

https://www.sec.gov/Archives/edgar/data/947263/000114036123010299/brhc10049351_424b2.htm

It's a just a matter of time before high grade corporates yield 6%+ for 5 years with call protection. The higher for longer reality is slowly sinking into the market.

 

[swk7907]

WELLS FARGO BANK NATL ASSN CD 5.25000% 03/17/2025, NON-Callable, CUSIP-DSN376133.

Monthly interest payments.

Corp Note issuers need to get in the game.

Why would I take on higher risk of a Corp Note when I can get 2 years non-callable FDIC-insured?

Or just get a 2yr treasury which is currently yielding 5.07%. Seems it is worth giving up 18bps to get all the benefits of a treasury (credit and liquidity and state tax free).

 

[swk7907]

OK, that is a horse of a different color! I think there is a reasonable chance that it will NOT get called in June if the Fed makes some big moves up in Rates. And the yield is rewarding.

I missed that one.

Do you see anything that looks attractive now? (I have accts at TDA and FIDO)

There is one on Fidelity for a new issue - 3130AVDP4

12 years with 9 months of call protection. Coupon is 6.44%

 

[Chuckanut]

There is one on Fidelity for a new issue - 3130AVDP4



12 years with 9 months of call protection. Coupon is 6.44%

I don’t know. How often can it be called?

 

[imbatman]

I don’t know. How often can it be called?

Continuous starting 12/22/2023.....note the issue date is 03/22 so buying today is eating 2-weeks of interest

 

[swk7907]

I don’t know. How often can it be called?

It's continuously callable but so is the one that he had mentioned wanting to find a similar one.

 

[swk7907]

Continuous starting 12/22/2023.....note the issue date is 03/22 so buying today is eating 2-weeks of interest

Depends on where you buy it. At Fidelity they don't take the money out of your money market until the issue data so you will earn money market rates in the meantime.

 

[pb4uski]

Continuous starting 12/22/2023.....note the issue date is 03/22 so buying today is eating 2-weeks of interest

+1 not at Schwab either. You can carry a negative settlement account balance and keep the money in SWVXX at 4.48% as long as you cover it before it funds.

 

[imbatman]

Interesting! I did this at Fido and did see the pending settlement withdrawal listed starting the day the order filled, but I did not realize they left the balance in my MM sweep until actual issuance a few weeks later, good to know. Thanks for sharing.

 

[Chuckanut]

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

Continuous starting 12/22/2023.....note the issue date is 03/22 so buying today is eating 2-weeks of interest

I feel like it’s playing poker with a statistical genius who counts the cards.

 

[sengsational]

I've been searching for a way to quantitatively evaluate these call protection provisions, rather than just eyeball it and either like it or not like it.

I haven't been searching, but I have been pondering the same.

Contrasting callable vs non in the secondary market is a data point, but then relies on gut feel (is 1.2% worth being locked in for 8 years on the smallish chance we have another 1970's type rate situation?)

I'm thinking that if they can come up with a pricing model for options (Black-Scholes), maybe one of those Chicago business school types have a model for callable bonds.

I'm thinking it would depend so much on the unpredictable future interest rates, that would have to be an input to the model, and nobody is going to agree to knowing that input, so you're back to a gut feel.