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

[lawman]

All corporate notes with coupons 6% and higher have been sold out at TDA as bond yields have pulled back and the spreads have narrowed. I think we can count on Powell to say something next week to spook the markets again so we can get those 6%+ yields again. Hopefully my orders for GS and BOA will execute tomorrow. The Wells Fargo 6% 3 year note is pending execution. The secondary markets are littered with a lot of low coupon notes from banks and other companies. High grade notes from technology companies (A rated) are trading with very narrow spreads to treasuries and not worth buying at this point. It appears that fixed income investors are crowding into the stronger sectors in fixed income and bidding those securities up. In any case, I have no plans to buy any more new issues until I see a "6" or higher as the leading digit. I'm pretty confident that we will see better yields this tax loss selling season.

Thanks...I'm always interested in your thoughts..

 

[Freedom56]

The Bank of Canada signaled today that it is nearing the end of its interest-rate hiking campaign by raising 50 basis points instead of the expected 75 basis points.

 

[Sunset]

Canada just increased their official rate by 0.5 percentage. Lower than the expected 0.75 percent.

Perhaps this is feeding the thoughts by some of a slower increase coming.

Last thing Canadian need is a lower dollar value. It's already just 73 cents USD.

Cross posted as slow on the phone

 

[Freedom56]

Corporate balance sheets in general (excluding the money losing sectors) are healthy as they have refinanced their debt at historically low rates at the expense of investors who bought funds who in turn bought all those low coupon securities. Make no mistake, investors that buy individual bonds did not bid up issues to YTMs below 0.5%. Passive funds did that. The market has to look ahead to the reality of refinancing of that debt at much higher coupons. Those corporations that issued debt to buy back stock are in for a lot of trouble if they have to re-finance at higher coupons.

 

[Mulligan]

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

The Bank of Canada signaled today that it is nearing the end of its interest-rate hiking campaign by raising 50 basis points instead of the expected 75 basis points.

Freedom, I am not quite taking it the way the market is front loading info. Here is exactly what Bank of Canada said in paragraph below….The market creates its own agenda. BoC never said 75 or 50 to begin with. But that being said, I certainly believe the heavy lifting is behind though.

“Given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the Governing Council expects that the policy interest rate will need to rise further. Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding. Quantitative tightening is complementing increases in the policy rate. We are resolute in our commitment to restore price stability for Canadians and will continue to take action as required to achieve the 2% inflation target”.

 

[Freedom56]

Freedom, I am not quite taking it the way the market is front loading info. Here is exactly what Bank of Canada said in paragraph below….The market creates its own agenda. BoC never said 75 or 50 to begin with. But that being said, I certainly believe the heavy lifting is behind though.

“Given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the Governing Council expects that the policy interest rate will need to rise further. Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding. Quantitative tightening is complementing increases in the policy rate. We are resolute in our commitment to restore price stability for Canadians and will continue to take action as required to achieve the 2% inflation target”.

I interpreted that Canada will raise rates one more time and the Fed two more times before the end of the year and then wait until the end of next year to see if inflation is dropping. We are back to normal rates prior to 2008/9. The zero interest policy and war on savers is dead for now. The "golden period" where you can find suitable investments to roll maturities and coupon payments into CDs, treasuries, and high grade corporate debt will likely continue through next summer. You no longer have to look for obscure companies where the the CFO is in jail and the CEO is on parole to get yield. The issue is still the deflation of the super-bubble in equities. The trillion dollar market cap companies are only starting to deflate. Then there are the meme stocks that are still defying gravity and not even bankruptcy filings can bring them down to earth. Like the 2000 bubble, this one will take several years to deflate with some strong countertrend rallies.

 

[Mulligan]

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

I interpreted that Canada will raise rates one more time and the Fed two more times before the end of the year and then wait until the end of next year to see if inflation is dropping. We are back to normal rates prior to 2008/9. The zero interest policy and war on savers is dead for now. The "golden period" where you can find suitable investments to roll maturities and coupon payments into CDs, treasuries, and high grade corporate debt will likely continue through next summer. You no longer have to look for obscure companies where the the CFO is in jail and the CEO is on parole to get yield. The issue is still the deflation of the super-bubble in equities. The trillion dollar market cap companies are only starting to deflate. Then there are the meme stocks that are still defying gravity and not even bankruptcy filings can bring them down to earth. Like the 2000 bubble, this one will take several years to deflate with some strong countertrend rallies.

One more hike and sit is my perfect scenario. I already have decent Libors and 3 month CAD treasury preferred issues including up to IG status ready to roll over 9%. And some solid IG ute resets heading towards 9% next year if 5 year CAD can hold serve where its at. For first time ever I am “bonded” up a bit also.

 

[Freedom56]

One more hike and sit is my perfect scenario. I already have decent Libors and 3 month CAD treasury preferred issues including up to IG status ready to roll over 9%. And some solid IG ute resets heading towards 9% next year if 5 year CAD can hold serve where its at. For first time ever I am “bonded” up a bit also.

Just brining the Fed funds rate to 4.5% and holding would be great for a lot of savers and fixed income investors. Until banks issue new preferred stock at higher coupons, the short duration bonds are a better investment. We would need the crazy sell-offs of March 2020 to lure me back to preferred stocks. But I am keeping an eye on them.

 

[Mulligan]

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

Just brining the Fed funds rate to 4.5% and holding would be great for a lot of savers and fixed income investors. Until banks issue new preferred stock at higher coupons, the short duration bonds are a better investment. We would need the crazy sell-offs of March 2020 to lure me back to preferred stocks. But I am keeping an eye on them.

My preference is IG utility preferreds over banks, but I do have one CUBI-F that trades solidly around par being it is a live floater. The payments lag however, as it will only be 8% this coming payment before going to 9% the following. My Sallie Mae preferred will be over 10% following divi. I actually have done better with my preferred stocks than I have my 2-3 year duration bonds I have bought. They are in the hole. But as you know they will eventually come around and mature at par.

 

[Rianne]

Since we've laddered $200k+ and want to sell those notes to combine and make the big buy next year, how will that fan out? Will we lose $ selling notes purchased at lower interest rates?

For example, a $1000, 3.5% treasury note was bought at $97 for 3 year time period on March 31, 2021. How do the coupon rate and interest work when selling? Does it just depend on the moment of selling? If interest rates continue to rise, should that note be sold sooner than later?

 

[COcheesehead]

Since we've laddered $200k+ and want to sell those notes to combine and make the big buy next year, how will that fan out? Will we lose $ selling notes purchased at lower interest rates?

For example, a $1000, 3.5% treasury note was bought at $97 for 3 year time period on March 31, 2021. How do the coupon rate and interest work when selling? Does it just depend on the moment of selling? If interest rates continue to rise, should that note be sold sooner than later?

The value of the bond, if you sell early is market driven. The lower the coupon, the longer the duration, the lower the value.
I have sold lower coupon bonds, but only when the market value of the bond, plus interest received, was positive.
In general, it’s best to buy bonds to hold until maturity, then you have no loss of capital. That is what a ladder strategy is all about. Constantly having maturing bonds to take advantage of the current market.
If rates drop below 3.5% in your example, god forbid, you’ll have an above par bond, but don’t count on it.

 

[Freedom56]

Since we've laddered $200k+ and want to sell those notes to combine and make the big buy next year, how will that fan out? Will we lose $ selling notes purchased at lower interest rates?

For example, a $1000, 3.5% treasury note was bought at $97 for 3 year time period on March 31, 2021. How do the coupon rate and interest work when selling? Does it just depend on the moment of selling? If interest rates continue to rise, should that note be sold sooner than later?

It all depends where rates are and the duration of the note. In your example a 3 year 3.5% bought at $97 would trade higher next year if rates stay around where they are now since the duration is down to two years. As time ticks forward, short duration notes converge towards par value ($100). Most people who buy short term treasuries and retail corporate notes hold them to par, collect the coupons and receive their money back and then roll over to the next investment.

 

[Chuckanut]

I interpreted that Canada will raise rates one more time and the Fed two more times before the end of the year and then wait until the end of next year to see if inflation is dropping. We are back to normal rates prior to 2008/9. The zero interest policy and war on savers is dead for now.

Emphasis added above.....

+1

I know a lot of people are panicking over this interest rate increase, but in my life interest rates have spent far more time at these current levels than the ultra-low levels we have seen for the last 10-12 years. Or the very high rates of the late '70s and early '80s. We really are much more normal now, IMO.

 

[JoeWras]

Emphasis added above.....

+1

I know a lot of people are panicking over this interest rate increase, but in my life interest rates have spent far me time at these current levels than the ultra-low levels we have seen for the last 10-12 years. Or the very high rates of the late '70s and early '80s. We really are much more normal now, IMO.

Yep. And it's tempting to say: "In this social media age, everything is instant gratification and short term thinking. That's why we lost perspective."

Nah, that's gone on forever. Gold rush, anyone?

 

[Rianne]

The value of the bond, if you sell early is market driven. The lower the coupon, the longer the duration, the lower the value.
I have sold lower coupon bonds, but only when the market value of the bond, plus interest received, was positive.
In general, it’s best to buy bonds to hold until maturity, then you have no loss of capital. That is what a ladder strategy is all about. Constantly having maturing bonds to take advantage of the current market.
If rates drop below 3.5% in your example, god forbid, you’ll have an above par bond, but don’t count on it.

Yes, god forbid. I kept thinking, hold the cash...rates are rising. But thought 3.5%! We'll let the ladder play out. Kind of a new concept since we were taught 60/40 with the 40 as bond funds. We sold those last April for a loss as they kept on losing. Bond funds are a thing of the past.

It's interesting, I looked at our 10-year bond fund capital gains in the tIRA. 1.5%. Granted, the divdends were re-invested.

 

[Freedom56]

Emphasis added above.....

+1

I know a lot of people are panicking over this interest rate increase, but in my life interest rates have spent far me time at these current levels than the ultra-low levels we have seen for the last 10-12 years. Or the very high rates of the late '70s and early '80s. We really are much more normal now, IMO.

I hope we stay at the target rates (i.e at a 4.5%-4.9% Fed funds rate) for a while. It will be painful for the speculative segments of the equity markets and funds holding low coupon debt, but most retirees with cash will be able to earn risk free income.

 

[COcheesehead]

Yep. And it's tempting to say: "In this social media age, everything is instant gratification and short term thinking. That's why we lost perspective."

Nah, that's gone on forever. Gold rush, anyone?

I live in Colorado, there is history of instant gratification everywhere…gold, silver, uranium, now pot. The early bird in some cases, gets the worm though too. There are a lot of pot millionaires.

 

[Chuckanut]

Yep. And it's tempting to say: "In this social media age, everything is instant gratification and short term thinking. That's why we lost perspective."

Nah, that's gone on forever. Gold rush, anyone?

In a world full of short term thinkers, the person who can see to the horizon is king.

 

[COcheesehead]

Yes, god forbid. I kept thinking, hold the cash...rates are rising. But thought 3.5%! We'll let the ladder play out. Kind of a new concept since we were taught 60/40 with the 40 as bond funds. We sold those last April for a loss as they kept on losing. Bond funds are a thing of the past.

It's interesting, I looked at our 10-year bond fund capital gains in the tIRA. 1.5%. Granted, the divdends were re-invested.

My money market pays 3.07%. Never thought I’d see the day.
The whole interest thing has caused me to rethink a lot of stuff. I used to prepay things, now it pays to pay as you go and sit on the cash.

 

[Freedom56]

Yes, god forbid. I kept thinking, hold the cash...rates are rising. But thought 3.5%! We'll let the ladder play out. Kind of a new concept since we were taught 60/40 with the 40 as bond funds. We sold those last April for a loss as they kept on losing. Bond funds are a thing of the past.

It's interesting, I looked at our 10-year bond fund capital gains in the tIRA. 1.5%. Granted, the divdends were re-invested.

Prior to 2008 a lot of individual investors bought their own treasuries, CDs, preferred stocks, and corporate notes. Then came the passive funds which invest based on a fictitious index that makes absolutely no sense. Wall Street conned people into believing that these were risk free investments offering protection. Many investors moved their money into these funds. People are going to shift back when they realize that they can buy a 5 year CD today and earn 4.75% with no capital loss versus a bond fund with a distribution of 2.2% and slow capital erosion.

 

[Freedom56]

My money market pays 3.07%. Never thought I’d see the day.
The whole interest thing has caused me to rethink a lot of stuff. I used to prepay things, now it pays to pay as you go and sit on the cash.

You need to embrace the "golden period", there is no pressure to be fully invested. You can sit back and wait for right opportunities. I just hope I get my allotment of GS 6.75% notes.

 

[COcheesehead]

You need to embrace the "golden period", there is no pressure to be fully invested. You can sit back and wait for right opportunities. I just hope I get my allotment of GS 6.75% notes.

I am waiting for mine too. I have a boatload of bonds maturing before Dec 15th of this year. I’ll have a ton of cash to put to good use.

 

[Born2Fish]

My 5 year TD bank note (6.25%) order was just filled at TD Ameritrade (TDA).

Still waiting to see if the 5 year callable Goldman Sachs note (6.75% ) gets filled.

The highest new issue corp note I see today at TDA is 6.1%, 5 yr callable, Citigroup global markets. Settlement date is 11/17/22 (3 weeks away). I guess Citi wants to see what the Fed does/says during next week's Nov rate hike meeting before finalizing this offer.

I placed an order early-on for the 5 year, 6.75% Goldman Sachs new issue and the order status was quickly shown as "pending", and the "Cancel" button is not selectable. They tied up my cash...

I am not going to place an order for the Citi until there is some certainty from the Fed meeting.

Lesson learned.

 

[Rianne]

I'm interested in cash flow (and preserving the principle and the interest paid at the end) as I stated a while back and Freedom explained the coupon going to the settlement account. Will a coupon reach 5% for a 10-year note? Ha! If that happens, we are truly golden.

 

[COcheesehead]

I'm interested in cash flow (and preserving the principle and the interest paid at the end) as I stated a while back and Freedom explained the coupon going to the settlement account. Will a coupon reach 5% for a 10-year note? Ha! If that happens, we are truly golden.

There are already bonds yielding above 6% for 10. There was a recent new issue yielding 7% for 10 years.