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

[Freedom56]

^^^ another reason to buy lower rated corporates is they can benefit from upgrades.

True, and AA and AAA have one way to go, down.

 

[savory]

Anything BBB+ and above is considered conservative in the financial and technology sectors. I would avoid AA and AAA corporates as they are overpriced and really don't offer any more security over BBB+ and A rated debt. Their yields are similar to CDs so there is no point in buying them over CDs. Stick to money center banks like JP Morgan, Bank of America, Wells Fargo, Citigroup or brokers like Goldman Sachs. The six major banks in Canada are extremely safe investments. E-commerce companies such as Ebay are also safe investments for corporate notes/bonds. Avoid the retail and mall sectors. There are far too many retail stores and malls in this country. Also avoid consumer discretionary companies. Callable bonds do get called when the issuer can refinance 1.5-2 points lower. If you want protection from callable bonds, there are many that are "make whole call" which forces the issuer to pay the holder a premium over par for the remainder of the term of the bond minus the prevailing treasury rate.


If you are starting out. Play it safe with A/BBB+ rates bonds from the major financial firms. Stay short term 1-3 years or 5 years maximum. New issues should revert up to the 5%/5 year coupons that we saw in June for new corporate issues. These issues rarely trade as most investors hold them to maturity and the issue sizes are relatively small but they occur frequently. At 5% coupons you would be earning twice what a typical bond fund yields but with capital protection that a bond fund will never provide.

Very helpful. Thanks

 

[Mulligan]

You have to wonder how often funds are getting stiffed on coupon payments. Some funds have almost 10,000 holdings and in the sleazy world of Wall Street with employees acting as auditors glued to their smartphones not their work, there has to be a lot of misappropriation of coupon/dividend payments. I had a case where DTC shorted the coupon payment by 8% which prompted an investigation by the issuer and then the SEC and the problem was resolved. The investigation cited a clerical error. However, I wondered why the same clerical error did not occur for the ten prior payments. An individual investor can keep track of their coupon and dividend payments, I wonder if all funds do? Given that funds lose so much "other peoples money", do they even care?

Whats the saying Freedom? Something like, “Nobody cares about your money more than you do”. Doesnt help much in this situation though does it unfortunately.

 

[freedom2022]

Anything BBB+ and above is considered conservative in the financial and technology sectors.

Hi Freedom56,

I lookup bond rating in Wikipedia.
Is BBB+ the lowest grade you recommend? Not BBB.
Thanks.

 

[Dash man]

We’ll, I just put in the largest bond order I’ve ever done. CUSIP 22550L2J9, a Credit Suisse bond at $99.636 maturing in August 2024 YTM ~4.939% with a 4.75% coupon Rated A by S&P

 

[baseman250]

With 250 min (at least that's what I currently see) that is quite an order!

We’ll, I just put in the largest bond order I’ve ever done. CUSIP 22550L2J9, a Credit Suisse bond at $99.636 maturing in August 2024 YTM ~4.939% with a 4.75% coupon Rated A by S&P

 

[Dash man]

With 250 min (at least that's what I currently see) that is quite an order!

Hasn’t filled yet. My first try was for a specific ask, but someone beat me to it. So now I have a limit order in to see if someone bites.

 

[baseman250]

I've only been doing lots of 10 in a small IRA. Until I separate from my current employer and roll my 401K, I won't be doing lots that size. My 401K has been in an age-based blended fund with the bond side in mostly bond funds. Ugh.

Hasn’t filled yet. My first try was for a specific ask, but someone beat me to it. So now I have a limit order in to see if someone bites.

 

[Freedom56]

Hasn’t filled yet. My first try was for a specific ask, but someone beat me to it. So now I have a limit order in to see if someone bites.

I would have put a lower limit order. The rating agencies are likely to downgrade CS to BBB+ or BBB, which is somewhat academic but it has some impact on yield. The probability of default is still low for the term in question.

From Moody's:


Related Issuers

Credit Suisse (USA), Inc.
Credit Suisse AG
Credit Suisse AG (Guernsey) Branch
Credit Suisse AG (London) Branch
Credit Suisse AG (Nassau) Branch

Rating Action: Moody's downgrades Credit Suisse Group AG's senior unsecured debt ratings to Baa2; outlook negative
01 Aug 2022
Credit Suisse AG's senior unsecured debt and deposit ratings downgraded to A2 and negative outlook maintained
London, August 01, 2022 -- Moody's Investors Service ("Moody's") today downgraded the senior unsecured debt ratings of Credit Suisse Group AG (CSG) by one notch to Baa2 from Baa1. At the same time, the rating agency downgraded the long-term senior unsecured debt and deposit ratings of Credit Suisse AG (CS) by one notch to A2 from A1.

The negative outlook on these ratings has been maintained.

The rating agency further downgraded CS's Baseline Credit Assessment (BCA) and Adjusted BCA to baa3 from baa2 and its long-term Counterparty Risk Assessment to A2(cr) from A1(cr). The long-term senior unsecured debt, issuer as well as deposit ratings of all of CS's subsidiaries - where applicable - have also been downgraded by one notch to A2 from A1. All short-term ratings were affirmed.

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL468319 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

--- DOWNGRADE OF THE BCA AND LONG-TERM RATINGS OF CREDIT SUISSE AG

The downgrade of CS's BCA, as well as its long-term ratings, reflects Moody's updated view on CS's credit profile as well as unchanged support for creditors under Moody's Advanced Loss Given Failure (Advanced LGF) analysis, which is applied to banks operating in jurisdictions with Operational Resolution Regimes.

The downgrade of CS's ratings reflects (1) the challenges the group is facing in successfully executing on its previously announced repositioning of its investment bank in the more difficult macroeconomic and market environment as well as uncertainty as to the business and financial implications of the group's plans to take further steps to achieve a more stable, capital light and better aligned investment banking business ; (2) the crystallisation of large financial losses during H1 2022, resulting in stress on the bank's financial profile and potential delays in technology investments and in the transformation of the business and an expectation of continued weak performance in 2022; (3) evidence of market share erosion and franchise impairment in the Investment Bank division, following deleveraging in capital-intensive businesses, exit from the prime brokerage business; and (4) the lengthy and resource-consuming risk, compliance and cultural remediation efforts that have progressed but are still underway; and (5) stabilising the group under the leadership of a new board and senior executive team will require time. These factors are partially mitigated by the firm's solid - although decreasing - capitalisation and strong liquidity and funding profiles.

Moody's considers weaknesses in CS's strategy, risk frameworks and controls, and compliance as a governance factors under its environmental, social, and governance (ESG) framework. Moody's reflects such governance deficiencies, in CS's very highly negative Governance Issuer Profile Score (G-5), one notch lower than the previous G-4, driven by a Financial Strategy and Risk management category score of 5 (very highly negative), from the previous 4. Moody's changed CS's ESG Credit Impact Score to CIS-5 (very highly negative) from CIS-4 (highly negative), whereby its governance risks have a very highly negative impact on current ratings.

The uncertainties regarding the bank's ability to successfully execute on the previously announced as well as yet to be defined restructuring strategy, governance deficiencies and top management instability, are captured by a one-notch downward adjustment for Corporate Behavior in CS's scorecard. The BCA is now positioned middle of the range (from top of the range), recognising continuing challenges and downside pressures on the group's solvency metrics.

--- DOWNGRADE OF THE LONG TERM DEBT RATINGS of CREDIT SUISSE GROUP AG

The downgrade of Credit Suisse Group AG's ratings reflects the downgrade of the ratings of its major subsidiary, Credit Suisse AG, as well as unchanged support for creditors under Moody's Advanced LGF framework.

--- NEGATIVE OUTLOOK

The negative outlook on CS's senior unsecured debt, long-term issuer and deposit ratings and on CSG's senior unsecured debt, reflects Moody's view of: (1) the challenge the group is facing in successfully executing on the previously announced organizational and cultural remediation efforts in the more difficult macroeconomic and market environment and the business and financial uncertainties in relation to the implications of further repositioning of the investment bank; (2) the potential for a deterioration of the capital position below the company guidance of a Common Equity Tier 1 ratio of 13-14%; (3) the risk that further large litigation charges may materialise in the medium term, further delaying a return to profitability; (4) a potential for a further deterioration of the asset risk profile of the group, driven by increased operational and execution risk; and (5) the potential for a substantial franchise impairment in the Investment Bank division, following aggressive deleveraging.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Although unlikely at present, given the negative outlook, the long-term ratings could be upgraded if CS: (1) maintains its solid capital position and liquidity and overall franchise during the restructuring period; (2) successfully executes on the restructuring plan, in particular the transition to a capital-light, advisory-led investment banking business and more focused markets business as evidenced by a sustainable improvement in its profitability by successfully increasing the share of revenue generated from the Wealth Management and Swiss Bank businesses, while returning to profits in its Investment Bank; (3) demonstrates that it has fully addressed and remediated the significant corporate governance, risk, audit or compliance control shortcomings; and (4) stabilizes the top management team.

The ratings could be downgraded if: (1) the capital position consistently remains below the Common Equity Tier 1 guidance of around 13-14%; (2) CS suffers sustained client or franchise impairment in its Investment Bank or Wealth Management divisions leading to the group being loss making beyond 2023; (3) definition and implementation of the revised and as yet undefined strategic plan is further delayed or deemed creditor unfriendly; (4) existing legacy litigations crystallise into large unexpected losses further negatively impacting profitability; (and (5) enhancements of the bank's risk appetite, frameworks and controls fail to be successfully implemented.

The ratings could further be downgraded should there be a significant and larger-than-anticipated decrease in the bank's existing stock of loss-absorbing liabilities. Although regarded highly unlikely at present, this may lead to fewer notches of rating uplift as a result of Moody's Advanced LGF analysis.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL468319 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• EU Endorsement Status

• UK Endorsement Status

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Lead Analyst

• Releasing Office

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

 

[COcheesehead]

And that is why we diversify. Do do happens.

 

[Freedom56]

And that is why we diversify. Do do happens.

Many of the better yielding bonds/notes have minimum buy restrictions of $100K-$500K. I have one position with JP Morgan at $500K and recently TD Bank's issue had a minimum buy of $100K for a 5%/5 year coupon note that I bought. Both are pretty solid financial institutions. Also with corporates, there are a very limited number of issuers that are worth buying.

 

[COcheesehead]

Many of the better yielding bonds/notes have minimum buy restrictions of $100K-$500K. I have one position with JP Morgan at $500K and recently TD Bank's issue had a minimum buy of $100K for a 5%/5 year coupon note that I bought. Both are pretty solid financial institutions. Also with corporates, there are a very limited number of issuers that are worth buying.

Of course they do. I see this stuff every day, but if you are willing to shave a bit off the yield, you can get smaller lots. I have over 200 positions, none more than $45,000, vast majority $10,000 - $20,000. No way would I put $250,000 in one bond.

 

[Freedom56]

Of course they do. I see this stuff every day, but if you are willing to shave a bit off the yield, you can get smaller lots. I have over 200 positions, none more than $45,000, vast majority $10,000 - $20,000. No way would I put $250,000 in one bond.

I have gone as high as $800K with one issuer. It's pretty difficult to find 200 different issuers in the corporate bond world that offer reasonable yields. The vast majority of issuers are in sectors that I would never touch.

 

[COcheesehead]

I have gone as high as $800K with one issuer. It's pretty difficult to find 200 different issuers in the corporate bond world that offer reasonable yields. The vast majority of issuers are in sectors that I would never touch.

I only have about 20 corporate positions inside IRAs. The rest are in munis in a taxable account.

 

[Dash man]

Thanks for the input. I’m not too concerned about Credit Suisse with less than two years to maturity. The buy triggered while I was at a doctor‘a appointment at 99.635, so not too bad. It’ll be about a 4.95% yield and it’s in DW’s IRA. Been scooping up some treasuries too over the past couple of weeks at auction and will get some more next week.

 

[baseman250]

What to do...

I thought of starting a new thread, but this is a very "bond-centric" post and this thread is pretty active, so here it goes:

I sat on this blended age-based fund for way too long, but wondering if it would still be best to make the move. Here's the situation:

My 401k is in a blended Fidelity Fund (FIWTX) which is about 47% stock/53% bond. The bond side looks to be a mix of mostly treasury & corporate bond funds.

This 401K makes up 45% of my total nest egg. I do have a Large Cap Total Market option (FSKAX) and a stable fund option (Goldman Sachs SVC trust) I could move into. The stable value fund is at 1.32% YTD.

Should I keep things as-is or move out of the blended fund and into the FSKAX and Stable Fund? I have no plans to change my AA, just trying to minimize bond fund losses. I hope to roll this 401K into a self-managed IRA within the next two years when I separate from my employer.

Thanks,

 

[Freedom56]

Just keep in mind that when it comes to foreign banks the large Canadian banks, CIBC, TD, Royal Bank, Bank of Montreal, and Scotia Bank are ultra safe and even safer than large money center banks in the US.

 

[Freedom56]

Remember to ease into a ladder as the Fed continues to raise rates. Keep some "dry powder" for this November and December as it is tax loss selling season and we will likely see some acceleration in redemptions of bond funds. This will put pressure on prices of individual bonds. The low coupon bonds will get whacked the hardest followed by the higher coupon bonds. This creates opportunities for individual bond holders.

 

[lawman]

Remember to ease into a ladder as the Fed continues to raise rates. Keep some "dry powder" for this November and December as it is tax loss selling season and we will likely see some acceleration in redemptions of bond funds. This will put pressure on prices of individual bonds. The low coupon bonds will get whacked the hardest followed by the higher coupon bonds. This creates opportunities for individual bond holders.

For one who does not need the income and plans to hold til maturity does coupon matter

 

[Dash man]

Remember to ease into a ladder as the Fed continues to raise rates. Keep some "dry powder" for this November and December as it is tax loss selling season and we will likely see some acceleration in redemptions of bond funds. This will put pressure on prices of individual bonds. The low coupon bonds will get whacked the hardest followed by the higher coupon bonds. This creates opportunities for individual bond holders.

Sounds like a good plan for a bunch of maturing treasuries I have in November.

 

[Freedom56]

For one who does not need the income and plans to hold til maturity does coupon matter

No it does not but, you should be receiving a much higher YTM for a low coupon bond/note versus a higher coupon one with the same duration. If past tax loss selling seasons are a guide, then high grade notes with 2 years to maturity may see YTMs up to 6-6.5% and even higher. This year we have the Fed raising rates at the same time. We even had one Fed official state that they will raise the Fed funds rate to over 4% and hold it there through 2023. That's a pretty clear signal that the "golden period" will continue into next year and beyond. Think what will happen to bond funds that have distribution yields around 2.4% or less and no means of increasing them since they are holding low coupon debt.

 

[jazz4cash]

I thought of starting a new thread, but this is a very "bond-centric" post and this thread is pretty active, so here it goes:



I sat on this blended age-based fund for way too long,



Thanks,

So that is a Target Date fund and doesn’t fit too well in this thread. The target date for this fund is 2020 so the asset mix is what the management deems appropriate for someone 2 years into retirement ( or more accurately taking withdrawals from the fund for two years). Is that your situation? I think you answered your own question.

 

[Golden sunsets]

Question Freedom. DH and I have recently purchased several Canadian bank bonds in our IRA's. (We generally hold positions that will mature in a 10 year ladder that match our RMD's with the rest invested in equities.) I wondered recently if we are sacrificing income on these issues due to foreign taxes withheld that we can't claim a foreign tax credit on due to their IRA status. I figured you'd know.

 

[baseman250]

Yeah, I thought it was a little bit of a stretch to post the question here. I guess what I’m really asking is this… considering the bond portion of this fund only makes up a fraction of my total portfolio, would it be worth moving to the total market fund and the stable value fund to better protect against further bond fund losses.

I have very limited choices inside the 401k, and I’m using this particular age-based fund (2020) to achieve my AA of about 70/30 when all other holdings (IRAs, brokerage) are considered.

Anyway, maybe I will create a new thread. Thanks.

So that is a Target Date fund and doesn’t fit too well in this thread. The target date for this fund is 2020 so the asset mix is what the management deems appropriate for someone 2 years into retirement ( or more accurately taking withdrawals from the fund for two years). Is that your situation? I think you answered your own question.

 

[Freedom56]

Question Freedom. DH and I have recently purchased several Canadian bank bonds in our IRA's. (We generally hold positions that will mature in a 10 year ladder that match our RMD's with the rest invested in equities.) I wondered recently if we are sacrificing income on these issues due to foreign taxes withheld that we can't claim a foreign tax credit on due to their IRA status. I figured you'd know.

Anything held is IRAs is not subject to any Canadian tax withholdings per the tax treaty with Canada.