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

[jldavid47]

I agree you shouldn't count on those big rates at the end if callable, but if you're buying based on yield-to-worst then a stepped coupon shouldn't make much of a difference when comparing it with one that has a fixed issue. I've seen some that I wouldn't touch, and others that look appealing, all else being equal.

I agree but I have yet to see a stepped coupon with a YTW better than what I could get from a non-stepped issue for the same maturity.

 

[pb4uski]

Very confusing to me. At Schwab when I buy a government agency (FHLB) they immediately take the money from my cash account and the bond shows up in my inventory and I get a confirmation even if the settlement is 2 weeks away..Just bought one that does not settle until the 27th. This will leave me with a negative balance in my cash account...

I also have an order to buy Goldman Sachs that settles on the 14th that is still open....This makes it difficult to keep enough money in my cash account to cover my purchases when money is taken out for orders that settle on the 27th but not taken out for orders that settle on the 14th..

You can have a negative settlement account balance. I have two different accounts with six-figure negative settlement balances right now... in both cases they are new issue bonds that I bought that won't settle for a few weeks. I have more than enough money to cover those settlements in SWVXX money market fund that earns 3.8% and I have reminders on my calendar about moving the money.

At one point I had more in my settlement account... say -$65k but a $100k pending settlement in 3 weeks... I didn't want $35k sitting in limbo for 3 weeks so was actually able to buy $35k of SWVXX that reduced my settlement account from -$65k to -$100k... but I had to call in to do that $35k buy of SWVXX.

 

[jazz4cash]

If broker takes the funds prior to settlement date, when does interest begin to accrue? I thought there was an issue date for these securities with fixed payment coupons and dates.

 

[pb4uski]

Interest on the purchases bond doesn't start until the bond is issued, which is settlement date.

In the normal course of business the broker will take the funds out of your settlement account when your order is filled.

Here is the situation that I had. Since Schwab's settlement account only pays 0.4% I don't keep anything in there but all my dry powder is in SWVXX (money market) that pays 3.8%. Let's say that I have $250k in SWVXX. I can still buy bonds and whne I do my settlement account goes negative... so if I buy $100k of bonds my settlement account shows -$100k and I have to make sure that I sell $100k of SWVXX on or before the settlement date.

As a practical matter for secondary trades that settle t+2 I do the SWVXX sale right after I do the bond buy so I don't forget to do it and earning 3.4% less for 2 days isn't a big deal. However, for new issues, they don't settle for a long time, so my settlement account is negative and then a couple days before the bond will be issued I sell enough SWVXX to cover the settlement.

Last week, I had a situation where I had a -$100k settlement account balance from a $100k new issue bond buy that won't settle until Dec 21. Then on Dec 2, a covered call option that I wrote was exercised resulting in a sale of stock for $35k, increasing my settlement account to -$65k. I didn't want that $35k sitting earning nothing for almost 3 weeks so I bought $35k of SWVXX, putting my settlement account back to -$100k. I had to call my broker to do that $35k purchase... I couldn't do it online because their system showed that I didn't have enough money in my settlement account to buy $35k of SWVXX so I had to call my broker in order to do it.

 

[lawman]

If broker takes the funds prior to settlement date, when does interest begin to accrue? I thought there was an issue date for these securities with fixed payment coupons and dates.

As far as I know they get my money for free for 2 - 3 weeks before it settles...Having said that keep in mind my cash account doesn't draw interest anyway..To answer your question it does not begin to accrue interest until it settles..

 

[pb4uski]

lawman, there are ways around that but they require a little work... see post #1904

 

[Rocky mtn high]

FA just bought a 2 yr $100k cd which pays 5.10% for a small part of my IRA.

 

[lawman]

lawman, there are ways around that but they require a little work... see post #1904

I am aware that all will work well as long as I have money there when it settles..What can mess me up is when I have multiple orders some of which debit my account before they settle..

 

[jazz4cash]

As far as I know they get my money for free for 2 - 3 weeks before it settles...

That sucks big time. It does not make sense to me. When you buy treasuries at auction the funds stay in your settlement account until after the auction so your funds are always earing interest I believe.

 

[jazz4cash]

lawman, there are ways around that but they require a little work... see post #1904

Seems like a lot of work and you must have VIP status at Schwab. I hate calling in. I think Fido only let's me use the balances in my settlement accounts to place orders

 

[sengsational]

As far as I know they get my money for free for 2 - 3 weeks before it settles.

On new issues, do they still charge $1 per bond? Maybe taking this float is the way the brokerage house gets paid. I'd be curious how badly that hits your YTM. Makes me want to just buy on the secondary market.

 

[pb4uski]

Wouldn't $1 per bond be roughly a 2 bps reduction to YTM on a 5 year bond?

 

[Closet_Gamer]

So, I have almost 1/2 of our retirement nestegg sitting in a 3.7% MM, awaiting "opportunities". The original plan was to wait for the December Fed meeting, but I am now thinking that the 50 bps increase in the Fed funds rate is likely already baked in and it seems unlikely that they will do anything that moves rates at that meeting that isn't already baked in, and that even if they announce something unexpected it isn't going to impact the long end of the curve. For me the long end is mostly 5+ year maturities.

So now I'm thinking that it might be better to fill in the long rungs of my ladder now and grab those higher rates while they are still available. Or am I being too impatient? Maybe I should read this thred less often?

Thoughts?

You're one of the most insightful people on this forum, so if you don't know then I don't have a clue!

Its possible that the biggest single factor isn't the fed or oil or employment.

Its China's relationship with Covid. Unsnagging global supply chains should put a lot of downward pressure on prices. I've read that container prices have already imploded. If China can get and stay out of lockdown a lot of things will go from scarcity to surplus.

Chinese leadership seems to be stepping back from the brink on zero covid in response to the unrest of late. But if reports are accurate their population is so poorly positioned - immunity, vaccines, demographics and healthcare system -- for a Covid outbreak that they could see an epic wave that could crush their healthcare and cause even more unrest.

The Chinese government is heavily invested in using Covid as a vehicle to show that they have a better system. Zero covid is clearly not viable. But their other options are not great.

Why they haven't bitten the bullet and done a deal for billions of Western, mRNA vaccines is beyond me. I get that they think that would be embarrassing but they are playing with fire.

 

[COcheesehead]

On new issues, do they still charge $1 per bond? Maybe taking this float is the way the brokerage house gets paid. I'd be curious how badly that hits your YTM. Makes me want to just buy on the secondary market.

The $1 per bond is for secondary market purchases. New issues are “free”.

 

[sengsational]

The $1 per bond is for secondary market purchases. New issues are “free”.

Except that someone is sitting on your money for some days or weeks. I just figured the cost of Rocky's 2 year, 100K bond, a few posts back, if he'd had to wait 3 weeks. It took a 5.10% YTM down to 4.96% YTM (cost him $260).

 

[pb4uski]

You're one of the most insightful people on this forum, so if you don't know then I don't have a clue!

Its possible that the biggest single factor isn't the fed or oil or employment.

Its China's relationship with Covid. Unsnagging global supply chains should put a lot of downward pressure on prices. I've read that container prices have already imploded. If China can get and stay out of lockdown a lot of things will go from scarcity to surplus.

Chinese leadership seems to be stepping back from the brink on zero covid in response to the unrest of late. But if reports are accurate their population is so poorly positioned - immunity, vaccines, demographics and healthcare system -- for a Covid outbreak that they could see an epic wave that could crush their healthcare and cause even more unrest.

The Chinese government is heavily invested in using Covid as a vehicle to show that they have a better system. Zero covid is clearly not viable. But their other options are not great.

Why they haven't bitten the bullet and done a deal for billions of Western, mRNA vaccines is beyond me. I get that they think that would be embarrassing but they are playing with fire.

Thank you for the kind words. Ever since my crystal ball broke I'm bumbling along like everyone else. However, I saw an article just yesterday in WSJ at makes us'all here look like financial geniuses:

The $42 Billion Question: Why Aren’t Americans Ditching Big Banks?

Big banks still pay next to nothing on savings, but their customers aren’t yet moving much money to higher-yielding alternatives

Americans are missing out on billions of dollars in interest by keeping their savings at the biggest U.S. banks.

The Federal Reserve has raised interest rates to their highest level since early 2008, just before a near failure of the financial system plunged the American economy into recession. Yet the biggest commercial banks are still paying peanuts to savers.

In theory, savers could have earned $42 billion more in interest in the third quarter if they moved their money out of the five largest U.S. banks by deposits to the five highest-yield savings accounts—none of which are offered by the big banks—according to a Wall Street Journal analysis of S&P Global Market Intelligence data. ...

I agree that China is another important issue and my guess that national pride is why they have not bought proven Western vaccines. Since the Chinese are expert at stealing our IP, I would have thought that they would have stolen the formula long ago.

 

[Mulligan]

Except that someone is sitting on your money for some days or weeks. I just figured the cost of Rocky's 2 year, 100K bond, a few posts back, if he'd had to wait 3 weeks. It took a 5.10% YTM down to 4.96% YTM (cost him $260).

Tell me about it. Mine is worse. I put some money in a 30 day CD at 4.2% and they get 6 free days of hold. But I mostly did it to impound the money from my itchy trigger finger, ha.

 

[COcheesehead]

Except that someone is sitting on your money for some days or weeks. I just figured the cost of Rocky's 2 year, 100K bond, a few posts back, if he'd had to wait 3 weeks. It took a 5.10% YTM down to 4.96% YTM (cost him $260).

The other side of that is opportunity cost though too. I’ve seen new issues sell out in a day or two. So there’s that angle as well.

 

[Chuckanut]

China is also tightening up on the former very free market approach they had. Covid or no Covid, they are going to continue doing this. Apparently the current leadership is in to big industrial projects like the old Soviet Union was. Build more steel mills and fewer consumer products. Hmm... how will that workout?

Covid or no Covid the current leadership wants more government control of what companies and people do. They have a citizen monitoring network that is the envy of every other authoritarian regime in the world. IMO, that will end up being a long term benefit for countries like the USA, assuming we don't foolishly go down the same path.

Back on topic.....

FWIW, cast my vote for the Fed to slow increases in early 2023 and then keep rates at that level for 6-12 months and see what happens. My time machine is still broken so no guarantees.

 

[jazz4cash]

On new issues, do they still charge $1 per bond? Maybe taking this float is the way the brokerage house gets paid. I'd be curious how badly that hits your YTM. Makes me want to just buy on the secondary market.

The new issue prospectus spells it out on the few that I have gleaned. Broker collects par ($1000), keeps 2-3% and passes the remainder to issuer. They get more than $1/bond but it’s out of issuer’s pocket.

 

[milford]

For those starting to load up on bonds, can you let me know why you are choosing it over CDs besides I'm assuming the yield is a bit higher, but there is a little more risk of default?Is there anything else I'm missing?

 

[Winemaker]

For those starting to load up on bonds, can you let me know why you are choosing it over CDs besides I'm assuming the yield is a bit higher, but there is a little more risk of default?Is there anything else I'm missing?

I'll ask the same question but ask about high grade bank or utility preferreds? They are very liquid, ladder building(able), and pay quarterly.

For example, Spire PR A 5.9% issue, currently paying 6.1819%, trading at $23.38, if called at $25, a nice capital gain. May be able to pick up more if tax loss selling continues.

 

[Mulligan]

I'll ask the same question but ask about high grade bank or utility preferreds? They are very liquid, ladder building(able), and pay quarterly.



For example, Spire PR A 5.9% issue, currently paying 6.1819%, trading at $23.38, if called at $25, a nice capital gain. May be able to pick up more if tax loss selling continues.

Milford and Winemaker for me personally I have done them all recently. About 6 weeks/two months ago you could get longer duration of 10-15 year make whole, higher cap stack senior unsecured utility bonds for better yields than even lower stack utility preferreds of even same company. So I bought them. Should have bought even more, but bonds are harder to flip/trade because they kill you on spread fees.
Preferreds hold asymmetric risk and are lower cap stack. Plus they are more price sensitive to long end of yield curve. Preferreds in general can trade like stocks when stock market tanks and trade like bonds when bond market tanks. So at times they can be the worst of both worlds. That being said I still own a lot though my focus is on the ones that are reaching double digits in yield because they are live floaters (adjustment yield, plus 3 month Libor). To conflate the issue I also own some preferreds that really are term dated bonds actually such as KTN and KTH. I recently bought a lot of PLDGP. Though a true preferred I view it like a high quality 4 year bond of YTM. In fact the company has such little debt to capital and only this one small old preferred, I view its payments more secure than most bonds.

 

[Rianne]

Who makes money on CDs? There's no fee if purchased in VG, the bank pays a good interest rate. Does VG make $ from the bank or vice versa?

 

[DawgMan]

As someone new to laddering individual bonds/treasuries/CDs, when do you pull the trigger to buy maturities beyond 5 years? Or do you continue to just buy the shorter term higher yields and address them as they mature? Right now, the Fed seems to be telegraphing continued bumps, but perhaps getting smaller through 2023 with perhaps some reductions starting in 2024 once we are knee deep in the Big R! Longer term yields seem to reflect this as well. None the less, for those of us who are bucketing our laddered bonds for money to pull when equities are down, at what point do we say __% yield is good enough and lock in some 5 - 10 year bonds and call it a day? I have about 80% of my 10 year bond ladder maturing between Jan - Aug of 2023 so trying to feel out next best play. I get its all crystal ball stuff, but knowing what we know today, how does this affect your targeted bond buying over the next 3 - 6 months?

Perhaps the answer is buried somewhere in the 1900 threads??