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

[daylatedollarshort]

We've seen the downsides of bond index funds mentioned multiple times, but what about active funds, for example BCOIX? A cheap ER, does this avoid the issues that plague the bond index funds or not really?

Check out the yield compared to short term Treasuries, which have no risk of principal if you hold to maturity.

The only way you are going to make money in bond funds over the individual bonds discussed in this thread is if we have a sudden, big drop in interest rates before you can buy back into your bond fund (if you choose to do that once rates drop or level off). The more rates go up, the riskier it is right now to hold onto the funds filled with low yield bonds, like the ones Freedom56 has pointed out, some with yields under 1%. The more rates go up, the less those bonds are worth, and lower the NAV of your fund will go.

 

[aja8888]

Check out the yield compared to short term Treasuries, which have no risk of principal if you hold to maturity.

The only way you are going to make money in bond funds over the individual bonds discussed in this thread is if we have a sudden, big drop in interest rates before you can buy back into your bond fund (if you choose to do that once rates drop or level off). The more rates go up, the riskier it is right now to hold onto the funds filled with low yield bonds, like the ones Freedom56 has pointed out, some with yields under 1%. The more rates go up, the less those bonds are worth, and lower the NAV of your fund will go.

See post #424.

 

[daylatedollarshort]

This is a good article explaining why interest rates are still insanely low. And it mentions what I think is one of aja888's favorite rules, the Taylor rule.

https://seekingalpha.com/article/4534439-the-fed-is-not-serious-about-fighting-inflation-sell-bonds

"Essentially, if the Fed were concerned about controlling inflation, the current Fed Funds rate would be closer to 7% using the Taylor Rule, not the present 2.5% number. So, the Fed is nowhere near a "neutral" level to slow inflation, not even in the same ballpark. If anything, Fed Funds are incredibly low and continue to ENCOURAGE price increases in the overall economy. Having "real" interest rates in the negative -6% range (adjusted for CPI inflation) on the Treasury yield curve is like nothing seen in American history since we officially left a gold standard for dollars in the early 1970s."

 

[Freedom56]

We've seen the downsides of bond index funds mentioned multiple times, but what about active funds, for example BCOIX? A cheap ER, does this avoid the issues that plague the bond index funds or not really?

That fund has only returned 2% over the last 10 years. That's horrible. CDs would give you better returns. Active funds are only as good as the fund managers. The reality is that most fund managers are morons who don't care what they buy as long as they extract hidden trading fees and management fees. Many Fidelity advisors don't even understand that bonds funds are not even bonds. They are a completely different product with market risks that the holders don't understand. If the Fed does continue to raise rates through 2023, there will be a mass liquidation of these bond funds. It makes absolutely no sense to hold funds that continues to lose money with no capital protection and yields less than a one month treasury.

 

[COcheesehead]

Yields are creeping up again, but for the bonds I watch still below the June peak. Getting close though.

 

[ShokWaveRider]

I thought this was a good presentation from Stan the Annuity Man, I am not sold on his presentation style, I find it a little condescending at times, but his points are well made.

This particular one subscribes to my and my close retirement friend's way of thinking: "Crossing the Retirement Finish Line: Shootin' It Straight with Stan"

I FF through the annoying bits.

 

[stevelb]

Looks like a pretty good new issue:

38150APC3
Security type Corporate
Issuer Goldman Sachs Group Inc
Maturity 09/30/2026
Coupon 5.000

Step up
09/30/2022 5.00
03/30/2025 6.00
03/30/2026 7.00

Of course various callable dates. Settles on 9/30 so time to watch rates for a while before buying.

 

[lawman]

Looks like a pretty good new issue:

38150APC3
Security type Corporate
Issuer Goldman Sachs Group Inc
Maturity 09/30/2026
Coupon 5.000

Step up
09/30/2022 5.00
03/30/2025 6.00
03/30/2026 7.00

Of course various callable dates. Settles on 9/30 so time to watch rates for a while before buying.

Looking for investment grade bonds.. Tried to pull this up on Schwab but it does not come up..Anything more on this note or other good ones?

 

[lawman]

Schwab has available CUSIP# 22553QLS4. It's a new issue Credit Suisse 2 year note paying 5%.
Anything wrong with this?

 

[jldavid47]

Schwab has available CUSIP# 22553QLS4. It's a new issue Credit Suisse 2 year note paying 5%.
Anything wrong with this?

Nothing wrong with it as long as you think they will be able to pay off the note in 2 years.

 

[lawman]

Nothing wrong with it as long as you think they will be able to pay off the note in 2 years.

Are they in trouble?

 

[aja8888]

Are they in trouble?

I left you links to their credit problems over a month ago in another (?) thread.

 

[jldavid47]

Are they in trouble?

Not that I know of. I don't follow Credit Suisse. All banks are going to have problem if the yield curve continues to invert. They borrow short and lend long and right now borrowing short is expensive relative to lending long.

You have to remember something: If an investment looks too good to be true, it probably is.

 

[pb4uski]

I left you links to their credit problems over a month ago in another (?) thread.

Yes, I remember you doing that.... obviously lawman doesn't.

 

[Born2Fish]

I left you links to their credit problems over a month ago in another (?) thread.

Yes, I remember you doing that.... obviously lawman doesn't.

Here lately, I am getting a little gun-shy on risk.

I bought "CREDIT SUISSE AG LONDON BRANCH MTN, 4.4%, CUSIP 22553QH83", in late August, with a Moody's rating A2.

Should I try to sell this off?

 

[lawman]

I left you links to their credit problems over a month ago in another (?) thread.

I'll pass on Credit Suisse..Is Goldman Sachs safer?

 

[LARS]

Are they in trouble?

Don’t know that I would be buying at these levels given safer alternatives.

That said, the likelihood of the FED allowing another Lehman Brothers moment is about zero… though I suppose NOT zero.

 

[Freedom56]

Here lately, I am getting a little gun-shy on risk.

I bought "CREDIT SUISSE AG LONDON BRANCH MTN, 4.4%, CUSIP 22553QH83", in late August, with a Moody's rating A2.

Should I try to sell this off?

You should be okay with Credit Suisse. Switzerland just raised rates for the first time and now rates are no longer negative. Negative rates are very painful to banks. Personally, I prefer Canadian banks and large U.S. money center banks.

 

[Freedom56]

We are entering a very precarious period and one that will create some pretty big opportunities. Passive bond fund yields are far below even 30 day treasuries. This cannot continue. At some point there will be a massive liquidation event in those funds. The low coupon debt they hold will be hit pretty hard. Unlike individual bonds that mature at par and your capital is returned, there is no par value for bond funds.

 

[Born2Fish]

You should be okay with Credit Suisse. Switzerland just raised rates for the first time and now rates are no longer negative. Negative rates are very painful to banks. Personally, I prefer Canadian banks and large U.S. money center banks.

This Credit Suisse was an outlier. Others are U.S/Canadian.

Thanks for the response!

 

[Freedom56]

This Credit Suisse was an outlier. Others are U.S/Canadian.

Thanks for the response!

UBS also issued notes recently as well as Société Générale.

Credit Suisse has a nice office in Zurich. I passed by it yesterday while I was in Zurich. The issue is speculation of a capital raise which will dilute stock holders but will benefit bond holders.

 

[Freedom56]

This Credit Suisse was an outlier. Others are U.S/Canadian.

Thanks for the response!

UBS also issued notes recently as well as Société Générale.

Credit Suisse has a nice office in Zurich. I passed by it yesterday while I was in Zurich. The issue is speculation of a capital raise which will dilute stock holders but will benefit bond holders.

I had the same issue with Bank of America notes back in 2011. There was lots of speculation and even a downgrade from AA+ to A- and then to BBB+. But there was no issue and the notes matured in 2019.

 

[BackcountryMe]

UBS also issued notes recently as well as Société Générale.

Credit Suisse has a nice office in Zurich. I passed by it yesterday while I was in Zurich. The issue is speculation of a capital raise which will dilute stock holders but will benefit bond holders.

I had the same issue with Bank of America notes back in 2011. There was lots of speculation and even a downgrade from AA+ to A- and then to BBB+. But there was no issue and the notes matured in 2019.

I notice that Vanguard's Total Bond Market Index $BND still only yields 2.6%. This is almost 100bps below the entire yield curve. How is this possible? Am I missing something?

 

[Freedom56]

I notice that Vanguard's Total Bond Market Index $BND still only yields 2.6%. This is almost 100bps below the entire yield curve. How is this possible? Am I missing something?

This is what I have been saying from the beginning of the year. Bond funds are holding too much low coupon debt and cannot increase their distributions. They are doomed into a buy high and sell low mode. They were not designed to deal with rapid rise in rates so the pain is yet to be felt. They have another 20-25% downside risk to compensate for the lack of yield. Just do the math. Funds like BND will likely take out their 2008 low and reach a point where they have negative returns since inception. Bond funds are not bonds. Bonds have a par value and as an individual bond investor your are locked in to the yield at the time of purchase and your capital is returned to you at maturity or if it is called. Bond funds offer no par value nor any capital protection. We are at a point now that cash stuffed in a mattress has outperformed bond funds over the past 10 years. We may see a massive liquidation out of bond funds fairly soon as investors and those Bogleheads realized they have been duped. It makes no sense to buy a fund like BND when a 30 day treasury with zero capital risk yield more.

 

[BackcountryMe]

This is what I have been saying from the beginning of the year. Bond funds are holding too much low coupon debt and cannot increase their distributions. They are doomed into a buy high and sell low mode. They were not designed to deal with rapid rise in rates so the pain is yet to be felt. They have another 20-25% downside risk to compensate for the lack of yield. Just do the math. Funds like BND will likely take out their 2008 low and reach a point where they have negative returns since inception. Bond funds are not bonds. Bonds have a par value and as an individual bond investor your are locked in to the yield at the time of purchase and your capital is returned to you at maturity or if it is called. Bond funds offer no par value nor any capital protection. We are at a point now that cash stuffed in a mattress has outperformed bond funds over the past 10 years. We may see a massive liquidation out of bond funds fairly soon as investors and those Bogleheads realized they have been duped. It makes no sense to buy a fund like BND when a 30 day treasury with zero capital risk yield more.

I completely agree with you. The only explanation I can find is that there is simply 401k money stuck in this fund with no alternative. BND has a duration of ~7. Crazy! Really... there's no explanation for it.

My only question is where do you go on the yield curve right now? It doesn't pay to go beyond one year.

P.S. I'm surprised you're buying Credit Suisse debt. That bank is a garbage barge!