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

[pb4uski]

Callable vs Non-Callable

• 3134GYFN7 FEDERAL HOME LN MTG 5% 01/26/2028 Callable Price: 99.95 YTM/YTW 5.01%
  
• 3133EC3P7 FFCB 2.53% 11/23/2027 Non-Callable Price: 94.94 YTM 3.721%

I looked for secondary market GSE non-callables within +/- 3 months and took the highest YTM. Another datapoint... 5 year Treasury is 3.533%

I think 1.5% more is decent compensation for the call risk, but YMMV.

 

[Free bird]

So your expectation for lower rates going forward has a caveat of a higher than expected inflation print on April 14th?

 

[copyright1997reloaded]

WADR, I would opine that you know less than Moody's and S&P so I'll stick with them over you. Sorry.

You do you, stick with whatever you want, but being impolite isn't necessary.

However, given the GFC we should have learned that the rating agencies were at best "misinformed" in terms of how they rated structured products (MBS's). Many pension funds and others were restricted to only hold AAA securities and what do you know, a bunch of sh*t mortgages ended up getting AAA ratings.

FHLB loans to member banks are only as good as the member banks ability to pay (plus government "implied" backstops).

By the way, your kind of statement is one made quite often these days as a way of trying to put down discussion or an idea - that is to say, you don't have the degree or the title so what can you know compared to those who do? You don't know my background or what knowledge I may or may not have in this area.

One thing I do know, when I looked at MBS tranches prior to the collapse was little old "know less" me was smart enough to steer clear in investing in them, even though they were AAA "safe" and people around me (NYC financial district) were talking about them being great bargains.

 

[MichaelB]

Let’s all stick to the thread topic and remember to not make things personal.

 

[Montecfo]

Callable vs Non-Callable

• 3134GYFN7 FEDERAL HOME LN MTG 5% 01/26/2028 Callable Price: 99.95 YTM/YTW 5.01%
  
• 3133EC3P7 FFCB 2.53% 11/23/2027 Non-Callable Price: 94.94 YTM 3.721%

I looked for secondary market GSE non-callables within +/- 3 months and took the highest YTM. Another datapoint... 5 year Treasury is 3.533%

I think 1.5% more is decent compensation for the call risk, but YMMV.

I thought you might chime in. it is a good premium. When is this issue callable though?

 

[Montecfo]

So your expectation for lower rates going forward has a caveat of a higher than expected inflation print on April 14th?

Hello, Freebird. If the above was addressed to me, I would say my expectation of lower rates going forward is not dependent on inflation readings not meeting expectations. But a sustained spike in inflation would change it. Inflation did not rise in a straight line and there will be bumps this side as well I expect.

The longterm path is for low rates consistent with our modest baseline economic growth rate and demographics as I see it.

When data change my view will.

 

[Gumby]

....
When data change my view will.

John Maynard Keynes, is that you? A very laudable philosophy.

 

[Free bird]

Yes indeed I did want your opinion. So waiting until the next inflation report to buy CDs is not a great idea in your opinion?

 

[pb4uski]

I thought you might chime in. it is a good premium. When is this issue callable though?

Callable in whole Quarterly beginning 01/26/2024 with 5 days notice.

 

[Freedom56]

From the WSJ today:

Schwab says they can ride out a deposit flight.

"...the firm had more than $11 billion in unrealized losses on its hold-to-maturity bond portfolio at the end of 2022, exceeding its tangible common equity of just over $6 billion. "

"Schwab executives expected the Fed would raise rates 0.75 percentage point in 2022."

"Schwab said it has about $100 billion of cash flow from cash on hand, interest payments on bonds and net new assets it expects to bring in during the next year. The company said it can raise an additional $8 billion a month in CD sales."

In order to raise $8 billion a month in CD sales, Schwab has been offering higher coupons to jump ahead of other banks who are trying to raise liquidity. The problem is that they are losing even more on the interest rate spread.

https://www.wsj.com/articles/charle...-deposit-flight-a8b2a626?mod=latest_headlines

The bottom line is, we won't know all the issues with the banking sector, in particular regional banks, until they start reporting Q1 results next month. We have accounts at TDA that are transitioning to Schwab at the end of May. I'm considering a transition to another broker. Schwab will survive this but they will likely start increasing fees and trading spreads to compensate for their poor investment decisions.

 

[Free bird]

Does the FDIC have capacity/ability to insure all deposits @ 250k or is there a ceiling that requires congressional approval? If so would it be the same people & process to raise the debt ceiling to prevent a technical default on government bonds? Is there a scenario where bank CDs or treasury debt has a priority? Or is there no discernible difference between the two? Should the average person just ignore the current drama as well as the future drama as long as you follow the rules? My money market fund says it has treasuries & repurchase agreements with the federal reserve bank of New York. Are repurchase agreements from a federal reserve bank covered by FDIC insurance? If not are they similar to treasuries?

 

[Montecfo]

Yes indeed I did want your opinion. So waiting until the next inflation report to buy CDs is not a great idea in your opinion?

I would be buying between now and then. In fact I did.

But your results my vary.

Best strategy is to ladder.

 

[Free bird]

Okay. Many of you folks must have a mountain of CDs. I moved my money to Vanguard from multiple credit unions. During the zero rate era CUs were pretty competitive. I didn’t want five credit unions but it worked to get better deposit rates. When money market rates came off near zero I thought it was a good chance to put the money in one place. The credit unions have money market funds but they aren’t competitive. I haven’t bought a brokered CD before. I’m a little hesitant because it’s new to me. I really don’t want 20 30 or more CDs. Less than 10 would be good. So here I am learning.

 

[JDARNELL]

I spoke to my Schwab Financial Planner (who is a legacy friend from USAA) today. He was telling me that Fidelity was going after them with a big advertising blitz saying see Schwab has a bank and is in trouble. I said but banks and the financial unit are completely separate. He said yep but that is not what they are telling clients. He said so we increased what we are willing to pay people in bonus to move their money over to Schwab or to retain assets at Schwab.

He said most people are just picking up CDs, MMM, and just building cash.

 

[copyright1997reloaded]

Does the FDIC have capacity/ability to insure all deposits @ 250k or is there a ceiling that requires congressional approval? If so would it be the same people & process to raise the debt ceiling to prevent a technical default on government bonds? Is there a scenario where bank CDs or treasury debt has a priority? Or is there no discernible difference between the two? Should the average person just ignore the current drama as well as the future drama as long as you follow the rules? My money market fund says it has treasuries & repurchase agreements with the federal reserve bank of New York. Are repurchase agreements from a federal reserve bank covered by FDIC insurance? If not are they similar to treasuries?

It's complicated.

FDIC insurance is limited to 250k per various ways of titling. The limit is in the law (changed during the GFC from 100k to 250k).

There are potential workarounds as the FED (super majority voting) in conjunction with treasury can designate a potentially failing institution as representing systemic risk. This is called a "systemic risk exception" and is not intended to be a blanket above FDIC limit protection.

However, the Federal Reserve also has a slush fund (can't remember what it is called at the moment) which could also theoretically be used to backstop (my new favorite term for everything), but that fund is small in size compared to FDIC money available. (When I get a chance, I will research it further.)

 

[Freedom56]

We should see some nice yields on CDs in the coming days according to the bond specialist at Fidelity who reached out to me. These will be in the 9-18 month duration range from regional banks like this one:

 

[COcheesehead]

I bought some Huntington Bank, 1.5 year duration, 7.3% BAA/BBB+

 

[Freedom56]

I bought some Huntington Bank, 1.5 year duration, 7.3% BAA/BBB+

At what price? Scratch that... You mean the 2.62% coupon 8/2024?

 

[COcheesehead]

At what price? Scratch that... You mean the 2.62% coupon 8/2024?

Yes, 7.3% yield. 446150AQ7

 

[Echard]

I bought some Huntington Bank, 1.5 year duration, 7.3% BAA/BBB+

This is interesting. If regional banks don’t get clear support from the govt in the form of higher FDIC guarantees, won’t a bunch of them crater like we saw with other banks, making bonds potentially worthless? Bank runs can start quickly.

 

[COcheesehead]

This is interesting. If regional banks don’t get clear support from the govt in the form of higher FDIC guarantees, won’t a bunch of them crater like we saw with other banks, making bonds potentially worthless? Bank runs can start quickly.

I am so conservative with my bonds. Literally millions in high quality debt. Taking a $25k flyer on these is not even a risk. I read the Moody’s report, they are pretty solid for a BBB+ grade.

 

[Freedom56]

This is interesting. If regional banks don’t get clear support from the govt in the form of higher FDIC guarantees, won’t a bunch of them crater like we saw with other banks, making bonds potentially worthless? Bank runs can start quickly.

The problem today is that with online wire transfers, a bank run can happen pretty quickly. It's not like you have to wait in line at the teller. The CEO of Citigroup was discussing that on Bloomberg yesterday. No bank on the planet can survive a run on deposits. So it's all about confidence in the bank. Right now the money is flowing out of regional banks to the large money center banks. Board of directors at companies are even advising moving accounts from regional banks to the large banks. I'm surprised more banks aren't offering IntraFi to keep large balances FDIC insured.

The other issue is short sellers using social media to spread rumors. All it takes is short sellers shorting a regional bank stock spreading rumors to start a run like what happened at SVB.

 

[Chuckanut]

We should see some nice yields on CDs in the coming days according to the bond specialist at Fidelity who reached out to me. These will be in the 9-18 month duration range from regional banks like this one:

It's hard to turn down the extra dollars in an 18 month CDs at 5.4% as compared to 4+% CDs in the 4 to 5 year area. A bird in the hand....

 

[Freedom56]

It's hard to turn down the extra dollars in an 18 month CDs at 5.4% as compared to 4+% CDs in the 4 to 5 year area. A bird in the hand....

Even better, if you are buying jumbo CDs, you can call the Fidelity bond desk and get a discount on those CDs for an even better yield.

 

[Dtail]

Even better, if you are buying jumbo CDs, you can call the Fidelity bond desk and get a discount on those CDs for an even better yield.

What qualifies as Jumbo? 100k and above?