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

[aja8888]

Those Citi 5.7 and 6% offerings are not bonds but corporate notes, at least that is what I understand from reading the Prospectus.

 

[aja8888]

I bought an agency bond and a corporate bond. I own over 180 individual bonds and I am replacing rungs almost weekly. I post on a few boards and get asked all the time by folks about specific bonds I buy. The search tools are pretty simple to use. I encourage everyone to understand them because what I buy may not be appropriate for your situation.

As far as rates and timing, here is my feeling. In a year or whenever we reach the terminal rate will I feel bad that I only have 10% of my ladder at the absolute highest yield for the duration or will I look at my ladder in total and feel good about the amount of cash it kicks off? Yes, I could wait and buy a bunch at 6.5% or maybe 7% or I can add to my ladder now that throws off 130%+ of what I need to fund my retirement budget.
My current taxable ladder is at 5.9% and my muni is at 4.5%. I would be happy if things even ended there, but I’ll keep adding at yields above those. These really are the golden years of fixed income.

The real golden years were in the early 1980s when Treasury Bonds were in double digits. Imagine picking up a 30 year Treasury at 12+%? These are the "new" golden years.

 

[COcheesehead]

The real golden years were in the early 1980s when Treasury Bonds were in double digits. Imagine picking up a 30 year Treasury at 12+%? These are the "new" golden years.

I had 13% CDs back then in high school from my busboy earnings. When they matured I bought my first car with cash.

 

[aja8888]

I had 13% CDs back then in high school from my busboy earnings. When they matured I bought my first car with cash.

Very cool!

I was in LA, Ca working for ARCO at the time and I bought 12% CDs from Columbia Savings and Loan at the time. They financed my oldest daughter's college costs in later years.

Boy those were the days. As a working guy, I didn't have a lot of spare cash at the time. Imagine locking up 12% 30 year bonds at that time.

 

[Freedom56]

With the national debt where it is today at $31T, I'm betting the Fed will follow through with what they stated before with Fed funds rates around 4.25-4.5% and held there for an extended period of time. We won't see 13% CDs anytime soon.

 

[aja8888]

With the national debt where it is today at $31T, I'm betting the Fed will follow through with what they stated before with Fed funds rates around 4.25-4.5% and held there for an extended period of time. We won't see 13% CDs anytime soon.

I have to agree. Central Banks all over the world really like zero or negative interest rates as it keeps the poor class where they are and the wealthy in charge.

 

[11522914]

With the Jobs report that came out this morning saying the job market is still running HOT, you can bet that the FED will keep going with rate increases as inflation hasn't cooled off enough to raise unemployment numbers. I believe it will get worse from here on. Look at the sell off in the market today.

And November oil futures are up 16.5% since September 30th.

 

[NomDeER]

The de minimis rule for munis states discounts are taxed as a capital gain.

Is this also true if you buy Treasuries on the secondary market?

 

[jim584672]

Remember not to long ago those German bonds paying -0.5%? I couldn't figure out would would pay to have their money loaned out. That has got to be the dumbest thing ever. I wonder what they are trading at now.

 

[NomDeER]

I also prefer interest income along the way vs. a big capital gain, esp for longer maturities.

I feel the same way generally.

But, I'm wondering if there are situations where there is a benefit to having low interest when a bond is callable. For example, let's say that there is a corporate bond on the secondary market that has a coupon of 0.8% and a price of 86.75 for a YTM of about 5.3%. The bond is callable in a few months. But, why would they call a bond with a coupon of only 0.8%? Is buying at a discount with a low interest rate protection against having the bond called?

I may very well be missing something here because I don't know much about bonds.

 

[COcheesehead]

Is this also true if you buy Treasuries on the secondary market?

I don’t buy below par treasuries so I have not followed their taxation as closely. Sorry.

 

[Quattro73]

I feel the same way generally.

But, I'm wondering if there are situations where there is a benefit to having low interest when a bond is callable. For example, let's say that there is a corporate bond on the secondary market that has a coupon of 0.8% and a price of 86.75 for a YTM of about 5.3%. The bond is callable in a few months. But, why would they call a bond with a coupon of only 0.8%? Is buying at a discount with a low interest rate protection against having the bond called?

I may very well be missing something here because I don't know much about bonds.

The issuer has no incentive to call….correct.

 

[Freedom56]

The issuer has no incentive to call….correct.

Correct, the issuer has no incentive to call. The secondary market is littered with low coupon bonds/notes.

 

[Freedom56]

For those posting about hanging on to their bond funds or not, I'm going to refer you back to what I stated at the beginning of this year (early February 2022):

If you own individual bonds and time your purchases to moments when bond fund managers are in panic selling mode, all you will lose is the premium as rates rise. You will lose this premium in any case as the bond approaches maturity. We are approaching a long overdue moment when yields become attractive as bond fund managers begin their liquidation. CEFs will also sell-off to levels well below asset value. Investor should be focused on two thing when investing in bonds:

1- Fixed coupon payments
2- Return of capital

This is not that different from buying CDs. Investors should then ask themselves whether they would buy a fund that invests in CDs with no guarantee of return of capital or buy individual CDs themselves? Passive bond funds will not shield you from market risk and consistently underperform a portfolio of individual bonds due to their tendency to buy high and sell low. For example, the funds that bought Apple 1.25% coupon 2030 notes at or over par are watching it trade at 90 cents on the dollar and could very well drop to a low of 70 cents on the dollar during moments of panic bond selling as rates rise. Passive bond funds sell their lowest yielding investments first. Active funds and individual bond investors avoid these bonds/notes causing precipitous drops until the yield to maturity becomes attractive again.

https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C925719&symbol=AAPL5030516

A fund that sells this note today will realize loss whereas an individual bond investor can buy today and hold it to maturity and earn the 1.25% coupon plus the capital gain at maturity and effectively earn 2.5% yield to maturity (YTM). If this Apple note were to trade down to 70 cents on the dollar, the YTM would be 6%. Over the past 18 months, the bond market has been flooded with issues like these so it will get very ugly for bond funds as rates rise but set up one of the best buying opportunities for individual bond investors.

The situation is going to be even more dire as we enter tax loss selling unless the Fed changes course. Don't count on that to happen. Notice where that Apple bond I referred to is today. Funds who held that bond and are selling it today are realizing a loss. There is no recovery for a fund that "buys high and sells low".

 

[jebmke]

For those posting about hanging on to their bond funds or not, I'm going to refer you back to what I stated at the beginning of this year (early February 2022):



The situation is going to be even more dire as we enter tax loss selling unless the Fed changes course. Don't count on that to happen. Notice where that Apple bond I referred to is today. Funds who held that bond and are selling it today are realizing a loss. There is no recovery for a fund that "buys high and sells low".

What portion of the bond market (Treasuries) are held by institutions or in deferred accounts where tax losses have no meaning?

I pay no attention to corporate bonds. I don't hold them individually or in groups -- never have. All my bonds are short-term except Tips I bought in 2008.

 

[Freedom56]

What portion of the bond market (Treasuries) are held by institutions or in deferred accounts where tax losses have no meaning?

I pay no attention to corporate bonds. I don't hold them individually or in groups -- never have. All my bonds are short-term except Tips I bought in 2008.

Bond Funds/ETFs hold about 21% of the outstanding bonds (government and corporate). The rest are held by banks, insurance companies, pension funds, and individuals. I have have no ideal what share are in tax deferred accounts.

 

[Chuckanut]

Remember not to long ago those German bonds paying -0.5%? I couldn't figure out would would pay to have their money loaned out. That has got to be the dumbest thing ever. I wonder what they are trading at now.

Emphasis added....

When I read the rates highlighted above, I decided to sell off almost all of my long and medium term bond fund holdings. Glad I did.

 

[MercyMe]

Those Citi 5.7 and 6% offerings are not bonds but corporate notes, at least that is what I understand from reading the Prospectus.

I'm new at this so pardon a stupid question. Why does it matter if its a note vs a bond?

 

[Freedom56]

I'm new at this so pardon a stupid question. Why does it matter if its a note vs a bond?

They are the same. The terms are used interchangeably . Notes normally have shorter terms than bonds. Bonds often have some covenants other protections since they are issued for longer durations.

 

[Jerry1]

Is there no bond fund that buys and holds to maturity? I’m sure I can handle buying and holding a portfolio of bonds, but it would be nice if I could just by into a fund that does it for me. I’m thinking with a short duration fund, there should be no need to be selling bonds at a loss.

I understand that a fund would need liquidity to handle people getting in and out of the fund, but I’m sure that could be handled. Maybe a set percentage of the fund held in cash. Of course that would temper the return, but probably not by much.

 

[jim584672]

Is there no bond fund that buys and holds to maturity? I’m sure I can handle buying and holding a portfolio of bonds, but it would be nice if I could just by into a fund that does it for me. I’m thinking with a short duration fund, there should be no need to be selling bonds at a loss.

I understand that a fund would need liquidity to handle people getting in and out of the fund, but I’m sure that could be handled. Maybe a set percentage of the fund held in cash. Of course that would temper the return, but probably not by much.

Bulletshares ETFs hold until maturity and distribute at the end. In the old days people would buy Unit Investment Trusts with a set portfolio.

 

[all4j]

Bulletshares ETFs hold until maturity and distribute at the end. In the old days people would buy Unit Investment Trusts with a set portfolio.

More broadly, they are called defined maturity etfs & various companies have them. Some for treasuries, corporates, muni etc.

Correct that there can be a cash drag. Also, can get muddy as the end draws near & fund wraps up.

 

[Fotodog]

Well, I’ve done it. After reading every post in this thread, doing lots of additional research, and meeting with my Schwab rep, I sold my bond fund which is in my IRA. I had to overcome the aversion to selling an investment when it’s down, but I view this as a lateral move for my bond allocation which stops the bleeding. Again, many thanks to Freedom56 for starting this thread, and all the others who have contributed. Here’s my rationale:

1) The bond fund currently yields 2.45%. Although that should slowly increase, that rate is even lower than what Schwab’s MM fund or an online savings account earns. And much less than individual bonds yield.

2) The fund has a duration of 6.4 years. I’ve seen various discussions on when I would recover my paper losses, but it seems the minimum is likely to be that time frame. Perhaps double, depending on interest rates.

3) By selling the fund and investing in individual bonds, after doing the math I should “break even” in about 3 years due to the higher yields.

Since I need some income next year from my IRA, I’m thinking of setting up a ladder of 3, 6, and 12 months. When the 3 month matures, buy another 6 month bond.

Any thoughts or recommendations on smart purchases are greatly appreciated!

 

[Freedom56]

Is there no bond fund that buys and holds to maturity? I’m sure I can handle buying and holding a portfolio of bonds, but it would be nice if I could just by into a fund that does it for me. I’m thinking with a short duration fund, there should be no need to be selling bonds at a loss.

I understand that a fund would need liquidity to handle people getting in and out of the fund, but I’m sure that could be handled. Maybe a set percentage of the fund held in cash. Of course that would temper the return, but probably not by much.

Just buy jumbo CDs or treasury notes. Those ETFs that hold bonds/notes to maturity perform terribly on average. The are taking a regular management fee for an initial buy of a portfolio. Does that make sense?

 

[Golden sunsets]

Here are some preferred stocks I am tracking for this years tax loss selling season. There are many more preferred stocks out there from obscure companies but I only buy from from investment grade issuers. If 2022 is anything like prior tax loss selling seasons, it will be especially brutal this year unless the Fed changes course. Par value is $25 and dividends are paid quarterly. With short term high grade corporate notes yielding 5-6%, These preferred stocks will only become interesting when yields hit 8-9%. For those who don't think that's possible, look back to March 2020 when yields jumped to 11-12%. Funds always sell off the lowest coupon preferred stocks first. There are a few higher coupon preferred stocks remaining that have yet to be called and all should drop below par in the coming months. Never buy a preferred stock above par.

For those who don't want to manage a portfolio of preferred stocks, I included a list of preferred closed end funds. There are actively managed and are leveraged and pay distributions monthly. They will become a buy when they trade well below asset value and their yields exceed 10%. PDT is one of the best performers with a solid track record dating back to the early 90's.

Freedom; What site do you use to track your watchlist, or is it your own spreadsheet you've designed?