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

[Healthy Lifestyle]

Corporate defaults and bankruptcies are surging.
https://www.cnbc.com/2023/06/24/hig...mic-uncertainty-boost-corporate-defaults.html

These defaults and bankruptcies are surging for
small and some medium size companies that have high debt that need to borrow at higher rates.

 

[Freedom56]

Corporate defaults and bankruptcies are surging.
https://www.cnbc.com/2023/06/24/hig...mic-uncertainty-boost-corporate-defaults.html

Retailers and mall operators filing for bankruptcy is not a big surprise. The filing by Bed Bath and Beyond was long overdue despite the meme stock trading frenzy. During the pandemic, many urgent care clinics started popping up and now they are starting to fold as COVID funds have expired. Easy money resulted in excessive debt for many corporations that do not have sufficient free cash flow to service that debt.



As for personal bankruptcies (they impact banks and financials), we are at historical lows.


https://www.debt.org/bankruptcy/statistics/

 

[Echard]

I presume they mean resilient to mark-to-market volatility. I think having a ladder, holding to maturity, and limiting low quality corporates mitigates that risk for me.

I keep about 5 years of essential spending in treasuries and FUAMX and am moving to holding more as the shorter term corporates mature. There are a few times since I retired that it was reassuring to see that one class go up while everything else went down.

Luckily didn’t have to withdraw anything March 2020 but it was nice to see I had something go up when everything else was down.

And the five+ years in case we get another 1929 situation.

Well, I have a bit of a head scratcher. I just did monte carlo simulations (on portfolio visualizer) to compare investment portfolios with corporate vs treasury bonds. In each portfolio I assumed 50% stock (VTI), 35 year period, 2.9% withdrawal rates, and then for each portfolio varied the 50% of bonds to either be: corporate bonds, long-term treasury bonds, short-term treasury bonds, intermediate-term treasury bonds.

In a very surprising result, the treasury bond portfolios ALWAYS beat the corporate bond portfolio, often by a massive margin. In reading, it seem the extremely disassociated correlation between stocks and treasuries is the reason why. I can't make sense of it, because corporate bonds have a higher return than all of the treasury categories. I would have thought that the corporate bond portfolio would have a higher average return, but also a much higher chance of running out of money. While it did run out of money more often, it also had lower average return over the period. Weird.

Oh, I also did TIPS and they performed poorly, which was the opposite of what I would have guessed, because Scott Burns Couch Potato Portfolio has shown to perform very well historically.

 

[imbatman]

A few interesting new items on Fido - Goldman Sachs 5-year 6% (38150ATT2) callable but not until 1-year (July 5 2024).....if you are in a high state/local tax rate, FHLB 10-year 5.75% (3130AWGB0) callable but not until 1-year (June 28 2024), likely a better option and step up in credit quality at the same time.

 

[COcheesehead]

Went slumming again this morning 174610AK1 Citizen’s Financial BBB 30 month 7.2%+ yield.
I buy stuff like this for a very small part of my ladder. Sometimes I hold them, sometimes I trade them. Just depends what the market does.

 

[Earl E Retyre]

Went slumming again this morning 174610AK1 Citizen’s Financial BBB 30 month 7.2%+ yield.
I buy stuff like this for a very small part of my ladder. Sometimes I hold them, sometimes I trade them. Just depends what the market does.

I have never bought a corporate bond before ... please let me know if my understanding is correct. If I buy this bond, then I am guaranteed 7.2% yield for 30 months. However, unlike a brokered CD, it is not FDIC insured. So, if Citizen's Financial Bank were to file for bankruptcy then I could lose 100% of that investment. All true? If so, it is so tempting to buy some ... however, I am very conservative.

 

[COcheesehead]

I have never bought a corporate bond before ... please let me know if my understanding is correct. If I buy this bond, then I am guaranteed 7.2% yield for 30 months. However, unlike a brokered CD, it is not FDIC insured. So, if Citizen's Financial Bank were to file for bankruptcy then I could lose 100% of that investment. All true? If so, it is so tempting to buy some ... however, I am very conservative.

Yes, short of default you will get 7.2% yield annually for the duration of the bond. It is not insured. If you are conservative stay with CDs, agencies or treasuries.

 

[GravitySucks]

Well, I have a bit of a head scratcher. I just did monte carlo simulations (on portfolio visualizer)

Oh, I also did TIPS and they performed poorly, which was the opposite of what I would have guessed, because Scott Burns Couch Potato Portfolio has shown to perform very well historically.

Was that with a TIPS fund or straight TIPS bonds? I’ve been buying and planning on buying 5 and 10 year TIPS now that they’re yielding a bit over 1%.
Over a third of the FI portion of my portfolio matures in the next 9 months, the plan is to fill in the missing rungs of the ladder with Treasuries or CDs and the rest going into 10 year TIPS. I may have to jump on Portfolio Visualizer and play around.

 

[PhotoAviation61]

ROYAL BK CDA SER I MTN 6.00000% 06/30/2038 (78014RNP1) 1st call 6/30/25. Just showed up on Fidelity New Issue page.

 

[imbatman]

Was slumming around on ML, where I rarely find what I want due to most bonds having a 250K minimum....and found a 10K minimum, Capital One Floating SOFR+1.35% (so around 6.4% today and float is nice for a short-term rising environment per the Fed), matures May 2025 with first call May 2024 (14040HCR4). A little lower in the credit rating (BAA1/BBB) but would have to be a big implosion between now and 2 years to take down this $41B market cap bank.

 

[Freedom56]

Was slumming around on ML, where I rarely find what I want due to most bonds having a 250K minimum....and found a 10K minimum, Capital One Floating SOFR+1.35% (so around 6.4% today and float is nice for a short-term rising environment per the Fed), matures May 2025 with first call May 2024 (14040HCR4). A little lower in the credit rating (BAA1/BBB) but would have to be a big implosion between now and 2 years to take down this $41B market cap bank.

That one is trading below par so the yield is a little higher. Capital one is a well managed bank. I have owned their notes and preferred stock in the past.

 

[Echard]

Was that with a TIPS fund or straight TIPS bonds? I’ve been buying and planning on buying 5 and 10 year TIPS now that they’re yielding a bit over 1%.
Over a third of the FI portion of my portfolio matures in the next 9 months, the plan is to fill in the missing rungs of the ladder with Treasuries or CDs and the rest going into 10 year TIPS. I may have to jump on Portfolio Visualizer and play around.

I spent the weekend digging further into the data. The TIPS data comes from VIPSX. However, I noticed that Portfolio Visualizer uses variable time periods, based upon whatever data it has. VIPSX data goes back to 2001.

Because of data limitations, to compare apples to apples time periods, I had to use 2003-2022 data. In that time period, I was able to look at all bond types, and long term treasuries performed the best. However, it raises questions about how that would perform vs corporate bonds during time periods when rates were rising, like the 1970's. Unfortunately, Portfolio Visualizer doesn't have asset data for that time period.

 

[Freedom56]

Comments from Powell today on the possibility of two more rate hikes. If that happens, we will see CDs yielding 6% and many more small and regional banks failing. It appears that the Fed and treasury want more bank consolidation. After the market close the Fed will release the results of the 2023 stress tests for the largest banks. The market expects the big banks to pass but the issue will be all those thousands of banks that were not subjected to stress tests including some larger regional banks. A dark cloud will continue to surround those banks. Starting this fall, the Treasury will start issuing 5,10, 20, and 30 year bonds/notes as they reach their cap for issuance's of short term T-Bills and notes. This will start putting pressure on long term rates.



https://www.cnbc.com/2023/06/28/pow...ibility-of-hikes-at-consecutive-meetings.html

 

[Montecfo]

Comments from Powell today on the possibility of two more rate hikes. If that happens, we will see CDs yielding 6% and many more small and regional banks failing. It appears that the Fed and treasury want more bank consolidation. After the market close the Fed will release the results of the 2023 stress tests for the largest banks. The market expects the big banks to pass but the issue will be all those thousands of banks that were not subjected to stress tests including some larger regional banks. A dark cloud will continue to surround those banks. Starting this fall, the Fed will start issuing 5,10, 20, and 30 year bonds/notes as they reach their cap for issuance's of short term T-Bills and notes. This will start putting pressure on long term rates.



https://www.cnbc.com/2023/06/28/pow...ibility-of-hikes-at-consecutive-meetings.html

I read Powell's remarks. He is certainly a fan of the bully pulpit.

And he seems to misunderstand the word "pause".

If he does as he wants us to believe, those hikes will be short term in nature in my view.

Same with any 6% CDs.

And the curve will get even more inverted. Not good for LT lenders.

 

[Freedom56]

The easy money crowd on Wall Street would have you believe, that rate cuts are coming and that will normalize the yield curve. First it was rate cuts starting in January 23, then May 23, then June 23, then Sept 23, and now Jan 24. They have been 100% wrong. What if the yield curve flattens with long term rates moving up? Wall Street is far too complacent with long term rates with funds buying driving long term rates down. What will happen when the Treasury floods the market with long term notes and bonds later this year? Those funds will be unable to deal with the supply of new bonds and long rates have nowhere to go but up. That is an alternate scenario for a flattening yield curve that investors should prepare themselves for.

 

[Vincenzo Corleone]

The easy money crowd on Wall Street would have you believe, that rate cuts are coming and that will normalize the yield curve. First it was rate cuts starting in January 23, then May 23, then June 23, then Sept 23, and now Jan 24. They have been 100% wrong. What if the yield curve flattens with long term rates moving up? Wall Street is far too complacent with long term rates with funds buying driving long term rates down. What will happen when the Treasury floods the market with long term notes and bonds later this year? Those funds will be unable to deal with the supply of new bonds and long rates have nowhere to go but up. That is an alternate scenario for a flattening yield curve that investors should prepare themselves for.

Thanks for sharing your insights/opinions/experience. For dummies like me, would you please explain/elaborate on the boldface in the quote above?

 

[Freedom56]

Thanks for sharing your insights/opinions/experience. For dummies like me, would you please explain/elaborate on the boldface in the quote above?

Long term rates are determined by the market (supply and demand). With the debt limit increase to $35T, the treasury has been issuing T-Bills and short term notes. They will soon reach their cap and start issuing longer term notes. About $600B will be auctioned during the remainder of 2023, and about $1.7T in 2024. Funds can only buy if there are inflows and with most intermediate to long term bond funds still yielding 2.7% or less, investors are unlikely to shift new money to those funds. Those funds will potentially fees significantly more pain that in 2022. Pensions are also buyers of long term treasury's. So if we have a situation where supply exceeds demand, the price of the long term bond will fall and yields will rise until a supply/demand balance is achieved. The large banks have been warning the Fed of this situation.


So what does it mean for the average fixed income investors? We are setting up for a scenario where you will be able to lock attractive yields at 5-10 years duration starting later this year and into 2024. Your late 2023 and 2024 maturities will likely be invested at even higher yields.

 

[Mulligan]

Comments from Powell today on the possibility of two more rate hikes. If that happens, we will see CDs yielding 6% and many more small and regional banks failing. It appears that the Fed and treasury want more bank consolidation. After the market close the Fed will release the results of the 2023 stress tests for the largest banks. The market expects the big banks to pass but the issue will be all those thousands of banks that were not subjected to stress tests including some larger regional banks. A dark cloud will continue to surround those banks. Starting this fall, the Treasury will start issuing 5,10, 20, and 30 year bonds/notes as they reach their cap for issuance's of short term T-Bills and notes. This will start putting pressure on long term rates.



https://www.cnbc.com/2023/06/28/pow...ibility-of-hikes-at-consecutive-meetings.html

6% barrier has already been broached at one credit union….

Credit Union One of Oklahoma, an institution that serves the greater Oklahoma City area, is offering a 6-month share certificate with an interest rate of 6.167% APY (Annual Percentage Yield). A share certificate is what credit unions call a certificate of deposit, or CD. Credit Union One of Oklahoma has a $2,500 minimum requirement for opening this certificate.

 

[Freedom56]

6% barrier has already been broached at one credit union….

Credit Union One of Oklahoma, an institution that serves the greater Oklahoma City area, is offering a 6-month share certificate with an interest rate of 6.167% APY (Annual Percentage Yield). A share certificate is what credit unions call a certificate of deposit, or CD. Credit Union One of Oklahoma has a $2,500 minimum requirement for opening this certificate.

It's a matter of time before Wells Fargo starts offering 6% interest CDs that pay monthly. At that point fixed income investing will become "no brainer" investing.

 

[aja8888]

It's a matter of time before Wells Fargo starts offering 6% interest CDs that pay monthly. At that point fixed income investing will become "no brainer" investing.

When that happens, I am filling the pot.

 

[GenXguy]

It's a matter of time before Wells Fargo starts offering 6% interest CDs that pay monthly. At that point fixed income investing will become "no brainer" investing.

For 6 month term?

6% interest will get me about 4.33% annualized return after taxes in a non-retirement account. So after that, then factor in year over year inflation, and there's no extra money to speak of to spend, even worse when not using the lower gubment inflation figure. But at least it would come close to keeping up with the gubment inflation figures in the short term. I'll try to cut back on travel and restaurants to make up for it. It certainly won't let me recoup what I lost to very high inflation in the the previous few years when CDs were paying less than 1%. And my case is certainly NOT extreme.

 

[aja8888]

For 6 month term?

6% interest will get me about 4.33% annualized return after taxes in a non-retirement account. So after that, then factor in year over year inflation, and there's no extra money to speak of to spend, even worse when not using the lower gubment inflation figure. But at least it would come close to keeping up with the gubment inflation figures in the short term. I'll try to cut back on travel and restaurants to make up for it. It certainly won't let me recoup what I lost to very high inflation in the the previous few years when CDs were paying less than 1%.

Growing your own food helps too!

 

[Dtail]

When that happens, I am filling the pot.

Same here, but not sure how much of the IRA I might transfer to FI, but will definitely be aggressively refilling the current FI buckets.

 

[Mulligan]

It's a matter of time before Wells Fargo starts offering 6% interest CDs that pay monthly. At that point fixed income investing will become "no brainer" investing.

I need 6% 5 year noncallable to get my investing loins stimulated to buy more CDs. I really have enough already especially in shorter duration. I think my last extended duration CD of plus 6% was around 2007.

 

[Freedom56]

I need 6% 5 year noncallable to get my investing loins stimulated to buy more CDs. I really have enough already especially in shorter duration. I think my last extended duration CD of plus 6% was around 2007.

I bet you would back up the truck if you got bonds like the JP Morgan 8% non-callable at par. I'm going to start hoarding cash from coupon payments and just hold them in MM funds unless I see low risk 6%+ yields. I was concerned about my 6.25% - 6.75% notes from TD Bank, Bank of America, Goldman Sachs, being called this October/November but after listening to Powell today, not only am I not worried about call risk, It gives me hope that we will see 7%+ coupons from Goldman Sachs.