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

[COcheesehead]

Careful. That report does not include interest from T-bills. I got suckered by that last year and kept wondering why the number seemed so low before I ran the numbers myself. Now I simply keep a tab in my fixed income spreadsheet to give me a more accurate estimate.

Anything that acts like a zero will not show. For example I have low coupon treasuries where the bulk of the gain will be as a cap gain. It does not show that. I keep a separate spreadsheet where I add in money money, CEF and estimated zero accrued interest to arrive at my total income for the year.

 

[David3]

Your broker will send you a 1099-OID (original issue discount). The IRS isn't going to let you ignore it

There is a good writeup on the topic of bond taxes by Baird here.

 

[Montecfo]

Pb4uski,

I recall your retreat from stocks. I certainly agree stocks are generally overvalued here, though there are some good values.

With the higher bond yields and that overvaluation, I trimmed my equity allocation sharply in Feb right at the top of that rally.

If rates rise sufficiently, those funds may end up in bonds.

And if we get another big equity rally I may do it again. Just a value call.

 

[Freedom56]

Do you see any risk of these high yielding MMs taking a hair cut? They are not FDIC insured, just SIPC insured.

MM funds invest in very short term treasuries and commercial paper. If the shortest end of the yield curve drops, MM fund yields will drop. In a zero rate environment, MM funds would have the most difficulty maintaining a NAV of $1.

 

[11522914]

Pb4uski,

I recall your retreat from stocks. I certainly agree stocks are generally overvalued here, though there are some good values.

With the higher bond yields and that overvaluation, I trimmed my equity allocation sharply in Feb right at the top of that rally.

If rates rise sufficiently, those funds may end up in bonds.

And if we get another big equity rally I may do it again. Just a value call.

Good point. Agree completely except that I got out of ALL equities in June 22. I'm saving some cash to "most likely" start DCA when SPY gets in the $350 range. If not I'll eventually lock in most funds for income. Investing for income in today's market has worked out really well for me. Wife just started collecting SS at 62 and I'm riding until 70 or whenever. The cool thing is bond income/MM funds + wife's SS + 2 small non-cola pensions = income exceeds expense budget. No reason to collect SS for me at this time but option remains open and my SS is much larger than wife's. Life is good.

 

[Freedom56]

SIVB is now halted after dropping another 69%.

https://www.bloomberg.com/news/arti...in-as-clients-threaten-to-pull-cash#xj4y7vzkg

 

[copyright1997reloaded]

SIVB is now halted after dropping another 69%.

https://www.bloomberg.com/news/arti...in-as-clients-threaten-to-pull-cash#xj4y7vzkg

It is also worth noting that quite a few other financial institutions are trading "heavy".

Disclaimer: I am a stock holder in Schwab (SCHW) via my previous Ameritrade holding (AMTD). I find it interesting that Schwab Bank is at the top of the current 1-2 year non-callable CD offerings and that it (Schwab) equity has gotten clobbered in the last few days. I am not saying they are in trouble, but wouldn't be surprised if there aren't quite a few institutions holding now underwater fixed income investments. (Note that holding "safe" government bond issues was a part of the making banks safer post GFC.)
(Note: I might buy some of the latest Schwab Bank CD, but I will also be VERY careful to not go over FDIC limits.)

I don't want to rehash (or get banned) the never ending debate here regarding "single issue bonds are good because they can be held to maturity", but SIVB has a lot of assets in this category that were/are underwater....along with deposits (their liability) that is running out the door. So even though they have these safe T-Bills/Notes, they are likely to be out of business very soon. NOTE: I am not saying they are the same as an individual holding underwater bonds....but individuals also have things that happen in their lives requiring use of capital earlier than expected.

To all - stay safe out there. I believe we will see more SIVB like situations (which makes investing riskier), but I also believe we will also see more opportunities because things start breaking (and there is a tendency to throw the baby out with the bathwater).

 

[11522914]

The spreads on high grade corporates and treasuries are ridiculous. JP Morgan 1 year notes were yielding less that one year treasuries. We have seen this movie before in early 2018 when corporate notes yielded about the same or less that treasuries and then came a market correction and massive redemption of bond funds that widened the spreads. It's a matter of time before spreads normalize. The heavy lifting of rates are done. The Fed can't keep raising rates like the early 80's with the current level of national debt. The level of national debt will also put a floor on rates. It's highly unlikely that we are moving back to zero rates any time soon. A more plausible scenario is the Fed just pauses like the Bank of Canada is doing and holding rates steady until inflation drops which could hold rates up at these levels though mid 2025.

The 10 and 30 year treasury yields are still too low. The equity markets are still in bubble territory and it seems that may people have forgotten that the dotcom bubble took three years to bottom. Those meme stock traders are sending strong signals to the Fed that the stock market casino is alive and well funded. There is a flight to safety trade that is keeping yields at the long end artificially low. Equity investors would rather earn 5% versus -20%. Many investors are also ditching bond funds that yield next to nothing and are buying individual bonds and treasuries. I would rather keep dry powder in a MM fund than accept these low spreads. When 5 and 7 year treasuries cross 5%, I'll load up. When 5 and 7 year high grade non-callable bonds yield cross 6% I'll also load up.

I'm curious if today's almost 23 basis point drop in the 10 year Treasury changes your outlook on the 5 - 7 year treasuries and non-callable high grade corporates. Thanks

 

[Freedom56]

It is also worth noting that quite a few other financial institutions are trading "heavy".

Disclaimer: I am a stock holder in Schwab (SCHW) via my previous Ameritrade holding (AMTD). I find it interesting that Schwab Bank is at the top of the current 1-2 year non-callable CD offerings and that it (Schwab) equity has gotten clobbered in the last few days. I am not saying they are in trouble, but wouldn't be surprised if there aren't quite a few institutions holding now underwater fixed income investments. (Note that holding "safe" government bond issues was a part of the making banks safer post GFC.)
(Note: I might buy some of the latest Schwab Bank CD, but I will also be VERY careful to not go over FDIC limits.)

I don't want to rehash (or get banned) the never ending debate here regarding "single issue bonds are good because they can be held to maturity", but SIVB has a lot of assets in this category that were/are underwater....along with deposits (their liability) that is running out the door. So even though they have these safe T-Bills/Notes, they are likely to be out of business very soon. NOTE: I am not saying they are the same as an individual holding underwater bonds....but individuals also have things that happen in their lives requiring use of capital earlier than expected.

To all - stay safe out there. I believe we will see more SIVB like situations (which makes investing riskier), but I also believe we will also see more opportunities because things start breaking (and there is a tendency to throw the baby out with the bathwater).

It has noting to do with holding single issue bonds. Low coupons and long durations are dangerous combinations. Most individual investors would not lock 30 years at 1.25% or 10 years at 1% or 5 years at 0.5%. Most individual investors exercise some common sense. Buying a 5% 5 year note and holding it to maturity is a very different scenario to buying a .4% 5 year note and holding it to maturity. SIVB locked in 10 year treasuries at an average yield of 1.79% and sold those at a loss and invested in one year treasuries at 5% according to recent reports. This is why many bond funds are in the same predicament except they aren't required to sell securities to meet capital ratios. The holders of those funds will absorb the losses over time as most funds don't hold bonds to maturity.

 

[Rickt]

SVB Bonds maturing in October, 2026 trading at YTM of over 15% CUSIP SIVB5288202

https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C1002456&symbol=SIVB5288202

Anyone buying ??

 

[Born2Fish]

The long end is begrudgingly inching up then dropping any excuse it can get. I reached a new low today. Bought a 5% 3 year monthly paying noncallable CD from UBS.

Me, too (except 5%, 3.5 year)!

 

[Freedom56]

I'm curious if today's almost 23 basis point drop in the 10 year Treasury changes your outlook on the 5 - 7 year treasuries and non-callable high grade corporates. Thanks

You are seeing a flight to safety trade and speculation that the Fed may start cutting rates. We have seen many of these moves in the past. Many investors believe the market is headed for a crash. What happens with yields will depend on the next move by the Fed. It would be prudent for the Fed to hold rates at these levels for an extended period of time and let the yield curve normalize and inflation ease over time. The Bank of Canada is doing just that. I will not buy 5-7 duration non-callable corporates at current yields. The yield spreads make no sense. The 5 to 7 year treasury yields are also too low.

 

[Montecfo]

SVB has failed. Now controlled by regulators.

 

[Rickt]

so what does that mean for SVB's bondholders?
does it even make sense buying its bonds at this point ....they are currently trading at $49.86

 

[bmcgonig]

SVB has failed. Now controlled by regulators.

https://www.fdic.gov/news/press-releases/2023/pr23016.html

Lost equity. 250k insured and available Monday. Over that then you’re a creditor it seems.

 

[Montecfo]

https://www.fdic.gov/news/press-releases/2023/pr23016.html

Lost equity. 250k insured and available Monday. Over that then you’re a creditor it seems.

This could really hurt some small companies. if SVB finances you, they require you to have accounts there. Those companies could have lost funds in this failure.

 

[bmcgonig]

This could really hurt some small companies. if SVB finances you, they require you to have accounts there. Those companies could have lost funds in this failure.

And according to Bloomberg 93% of deposits are uninsured. Can these companies even make payroll?

 

[Montecfo]

First Republic now halted. PacWest down sharply. PacWest is another venture bank like SVB. But seems like we are seeing some contagion here.

Eta: DITTO Western Alliance

 

[jazz4cash]

I’m rather impressed how quickly FDIC is moving. Insured depositors will have access Monday. I always assumed it could take weeks…not to say it won’t be a bumpy ride to make a withdrawal.

 

[copyright1997reloaded]

I’m rather impressed how quickly FDIC is moving. Insured depositors will have access Monday. I always assumed it could take weeks…not to say it won’t be a bumpy ride to make a withdrawal.

I'm most interested in the fact that the FDIC set up a new entity (Deposit Insurance National Bank of Santa Clara (DINB)) to takeover the assets rather than another institution "offering" to takeover. (For example, when JP Morgan Chase "bought" WaMu at $2/share.)

Either it was because they want to nip this in the bud quickly or they (FDIC) found no interest from another institution taking it over.

 

[Mulligan]

Me, too (except 5%, 3.5 year)!

I would have done that but UBS 5% 3 year was the longest duration over 5% I could find. Which one was this CD?

 

[Born2Fish]

I would have done that but UBS 5% 3 year was the longest duration over 5% I could find. Which one was this CD?

At Fidelity, New Issue

CUSIP DSN392635
Description FIRST NATIONAL BANK 5.000000 09/23/2026 03/23/2023

Searched for it by CUSIP at Fidelity and it showed Qty available: 0.
Sold out.

I should have included the CUSIP and Dealer on my first post. Sorry.

 

[Montecfo]

It is also worth noting that quite a few other financial institutions are trading "heavy".



Disclaimer: I am a stock holder in Schwab (SCHW) via my previous Ameritrade holding (AMTD). I find it interesting that Schwab Bank is at the top of the current 1-2 year non-callable CD offerings and that it (Schwab) equity has gotten clobbered in the last few days. I am not saying they are in trouble, but wouldn't be surprised if there aren't quite a few institutions holding now underwater fixed income investments. (Note that holding "safe" government bond issues was a part of the making banks safer post GFC.)

(Note: I might buy some of the latest Schwab Bank CD, but I will also be VERY careful to not go over FDIC limits.)



I don't want to rehash (or get banned) the never ending debate here regarding "single issue bonds are good because they can be held to maturity", but SIVB has a lot of assets in this category that were/are underwater....along with deposits (their liability) that is running out the door. So even though they have these safe T-Bills/Notes, they are likely to be out of business very soon. NOTE: I am not saying they are the same as an individual holding underwater bonds....but individuals also have things that happen in their lives requiring use of capital earlier than expected.



To all - stay safe out there. I believe we will see more SIVB like situations (which makes investing riskier), but I also believe we will also see more opportunities because things start breaking (and there is a tendency to throw the baby out with the bathwater).

I would expect virtually every bank has underwater securities. That by itself is not so much the problem depending on the holdings and positioning. The problem is having to reclassify those from held to maturity (HTM) to mark to market (MTM). Doing so means you have large losses to book, meaning you may need more capital.

If you have a run on deposits this can happen.

Whether this is contagious remains to be seen. SVB is not a typical bank. It is a venture bank who banks largely startup and early stage companies, meaning those companies have huge deposits there. My startup was a customer some years ago so I have some familiarity.

Continuing to look for contagion.

 

[pb4uski]

....The problem is having to reclassify those from held to maturity (HTM) to mark to market (MTM). Doing so means you have large losses to book, meaning you may need more capital.

If you have a run on deposits this can happen. ...

Yes, a depositor run, even a small run can cause a bank to no longer have the ability to hold debt securities to maturity and you have to have both the ability and intent to hold to maturity... and worse yet, if you sell even a single HTM security, it taints the entire portfolio and all HTM securities need to be reclassified to AFS and unrealized losses recorded.

 

[Freedom56]

It is also worth noting that quite a few other financial institutions are trading "heavy".

Disclaimer: I am a stock holder in Schwab (SCHW) via my previous Ameritrade holding (AMTD). I find it interesting that Schwab Bank is at the top of the current 1-2 year non-callable CD offerings and that it (Schwab) equity has gotten clobbered in the last few days. I am not saying they are in trouble, but wouldn't be surprised if there aren't quite a few institutions holding now underwater fixed income investments. (Note that holding "safe" government bond issues was a part of the making banks safer post GFC.)
(Note: I might buy some of the latest Schwab Bank CD, but I will also be VERY careful to not go over FDIC limits.)

The issues with Schwab are explained here:

Without quoting the material directly in the article and violating copyright, the issue is that with rates at 5% investors are less willing to leave their cash in a near zero interest sweep account. That would result in lower net interest margins. The other big issue is that they have a material amount fixed income securities on their balance sheets that are underwater but there is no issue with liquidity.

https://www.barrons.com/articles/charles-schwab-stock-price-bank-selloff-4bb1ae5f?mod=hp_LEAD_1_B_4

We (wife and I joint tenancy) own Schwab CDs that are 100% FDIC insured so, I really am not concerned. We have accounts at TDA that are invested in Bonds and CDs. We closed our Schwab account after Schwab bought TDA from TD Bank.

After seeing how much uninsured funds were kept at SVB by many companies, one has to wonder if these companies have ever heard of T-bills and other short term instruments? When I was working, the division of the corporation I worked for maintained a Treasury Direct Corporate Entity account. We routinely floated tens of millions in T-Bills monthly to earn interest on cash balances. We never left excess cash sitting at our company bank account. Our risk management never allowed us to lock more than 6 month durations in treasuries at our division level.