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

[Freedom56]

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!

I am not buying Credit Suisse Debt. I don't own any. I only responded to a question. I only buy US money center banks and Canadian bank debt in the financial sector. I am buying 1-5 year durations now and since the beginning of this year. High grade bonds yielding over 5% are good enough and more than double what BND and other loser bond funds offer. Plus I get capital protection. If you want to talk about garbage barge, take a look at the holdings in that loser fund BND. If the Fed funds rate does go up to 4.5%, BND will trade down below $40 just to compete with CD yields. They can only prop up these bond funds for so long. Eventually they will collapse after massive fund out-flows which will likely start in November.

 

[baseman250]

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.

Most of the options in my 401K are age-based funds, so yes, most people probably think they are stuck. There's also a total stock fund and a stable fund which I finally moved to while maintaining my equity allocation. I wish I had done it sooner, but I was pretty "high" from the equity run up and admittingly wasn't paying attention to @Freedom56's posts.

I am fully rid of bond funds now and slowly building a ladder of corps & treasuries. It might be time to go "consultant" status here at work so I can finally control the dollars that are sitting in that 401k stable fund. It is really bothering me that I can't do anything else with it.

 

[baseman250]

I am not buying Credit Suisse Debt. I don't own any. I only responded to a question. I only buy US money center banks and Canadian bank debt in the financial sector. I am buying 1-5 year durations now and since the beginning of this year. High grade bonds yielding over 5% are good enough and more than double what BND and other loser bond funds offer. Plus I get capital protection. If you want to talk about garbage barge, take a look at the holdings in that loser fund BND. If the Fed funds rate does go up to 4.5%, BND will trade down below $40 just to compete with CD yields. They can only prop up these bond funds for so long. Eventually they will collapse after massive fund out-flows which will likely start in November.

Freedom56, do you have any suggested CUSIPs to keep an eye on when this all goes down? I did notice that with (some of) the Citigroup bonds, the bid/ask spreads are pretty wide making me think the orders are already in waiting for this event.

 

[BackcountryMe]

I am not buying Credit Suisse Debt. I don't own any. I only responded to a question. I only buy US money center banks and Canadian bank debt in the financial sector. I am buying 1-5 year durations now and since the beginning of this year. High grade bonds yielding over 5% are good enough and more than double what BND and other loser bond funds offer. Plus I get capital protection. If you want to talk about garbage barge, take a look at the holdings in that loser fund BND. If the Fed funds rate does go up to 4.5%, BND will trade down below $40 just to compete with CD yields. They can only prop up these bond funds for so long. Eventually they will collapse after massive fund out-flows which will likely start in November.

I'm just busting your chops on CS debt. Don't get me wrong. I appreciate your input on this!

Do you find new issues better than buying bonds from your broker? I've heard the brokers mark up bonds in a sneaky way.

One other question - why do you buy 5-year debt when the spread over 1-year is less than 100bps? 5-year debt at 5.X% is a bet that yields will fall or that inflation will come down, right?

 

[Freedom56]

2022 will be the year investors realize that bond funds are a scam and passive bond funds are especially dangerous to own. Most financial advisors don't even understand the difference between bonds and bond funds and that is pretty pathetic. They are completely different products. What amazes me is that buying treasuries and corporate bonds is not that different form buying CDs. Why would anyone want to take a risk free product like a U.S. treasury bill, note, or bond with a fixed term and complete capital protection and buy a fund that invests in U.S. treasuries and charges you a fee for doing so and adding capital and market risk?

On the issue of banks, keep in mind that common share holders have no protections but their bond holders have claims to the assets. Back in 2008, while many common share holders of money center banks got wiped out or nearly so, but the bond holders were not impacted.

 

[daver]

I’m still in Fido’s FXNAX bond fund. Presently I’m down about 15 percent relative to my cost basis. It’s a small percentage of my overall fix income bucket that consists of CDs, Stable Value and cash. Not sure if I should wait it out or lock in the loss and move to more CDs? I know lots of you moved out of bond funds earlier in the year, is too late at this point? TIA

 

[Freedom56]

I'm just busting your chops on CS debt. Don't get me wrong. I appreciate your input on this!

Do you find new issues better than buying bonds from your broker? I've heard the brokers mark up bonds in a sneaky way.

One other question - why do you buy 5-year debt when the spread over 1-year is less than 100bps? 5-year debt at 5.X% is a bet that yields will fall or that inflation will come down, right?

I buy both new issues that make sense and mostly in the secondary market with limit orders only. I'm buying up to 5 year duration as I don't see rates continuing to rise over the next five years as there is too much debt in the system that would have be be re-financed. The national debt is at $30 trillion. How high can rates really go? Watch the two year treasury. This is a leading indicator of where the market thinks the Fed funds rate will be 12-18 months from now. The bond market is pretty reactive to the actions of the Fed and pretty efficient at projecting future rates. The stock market is not efficient as stocks are massively overpriced. At one time a billion dollars was a lot of money (and still is). The stock market casino now thinks in terms of trillions of dollars. No company today deserves a trillion dollar plus market cap. Bankrupt and nearly bankrupt companies should not be valued in the billions like they are today. The stock market super bubble is only starting to pop. Just like the 2000 bubble, this one will unravel over 2-3 years with multiple bear market rallies.

 

[BackcountryMe]

2022 will be the year investors realize that bond funds are a scam and passive bond funds are especially dangerous to own. Most financial advisors don't even understand the difference between bonds and bond funds and that is pretty pathetic. They are completely different products. What amazes me is that buying treasuries and corporate bonds is not that different form buying CDs. Why would anyone want to take a risk free product like a U.S. treasury bill, note, or bond with a fixed term and complete capital protection and buy a fund that invests in U.S. treasuries and charges you a fee for doing so and adding capital and market risk?

On the issue of banks, keep in mind that common share holders have no protections but their bond holders have claims to the assets. Back in 2008, while many common share holders of money center banks got wiped out or nearly so, but the bond holders were not impacted.

I know I've seen a Vanguard whitepaper saying that rising interest rates don't matter for bond funds (in the long run), but I can't seem to find it anymore.

To your point on the Boglecult, I believe the original Trinity study was based on holding corporate and treasury bonds, not high bond funds. Perhaps that point is lost in the dogma.

 

[daylatedollarshort]

I’m still in Fido’s FXNAX bond fund. Presently I’m down about 15 percent relative to my cost basis. It’s a small percentage of my overall fix income bucket that consists of CDs, Stable Value and cash. Not sure if I should wait it out or lock in the loss and move to more CDs? I know lots of you moved out of bond funds earlier in the year, is too late at this point? TIA

Someone else asked that recently and the discussion is here - https://www.early-retirement.org/forums/f44/bond-funds-in-an-ira-prognostication-please-115439.html

 

[daver]

Someone else asked that recently and the discussion is here - https://www.early-retirement.org/forums/f44/bond-funds-in-an-ira-prognostication-please-115439.html

Thanks...

 

[all4j]

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?

Would you share your source for BND yield? I took a quick peek & SEC yield is 3.76% (pre market close today)....

 

[Phroig]

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

Would you share your source for BND yield? I took a quick peek & SEC yield is 3.76% (pre market close today)....

The average coupon seems to be 2.6%, not the yield. YTM is 3.9%.

 

[11522914]

Freedom56

Could you please explain the positives and negatives on callable versus non-callable bonds.

I know callable generally pay higher interest but it's usually 10-30 basis points.. Is that the only benefit. It would suck locking into 5 year and something happens that lowers rates in 2 years and bonds start getting called. Then you have to reinvest at current rates and would lose 3 years.

How often do they actually get called and how far below the note rate will they start calling.

It appears the majority today are callable so probably not much choice anyway.

TIA

 

[pb4uski]

Would you share your source for BND yield? I took a quick peek & SEC yield is 3.76% (pre market close today)....

2.6% is the coupon. Portfolio yield is 3.9% and ER is .03% so SEC yield doesn't seem out-of-line.

Duration is 6.7... that would be enough to keep me away.

I can buy 3 year GSE bonds that yield 5% so BND isn't very attractive at all.

 

[Freedom56]

Freedom56

Could you please explain the positives and negatives on callable versus non-callable bonds.

I know callable generally pay higher interest but it's usually 10-30 basis points.. Is that the only benefit. It would suck locking into 5 year and something happens that lowers rates in 2 years and bonds start getting called. Then you have to reinvest at current rates and would lose 3 years.

How often do they actually get called and how far below the note rate will they start calling.

It appears the majority today are callable so probably not much choice anyway.

TIA

Callable bonds are good only if they are make whole call. The new issues coming out are mostly callable as issuers are betting on rates to drop 2 -3 years out. In such a case it's better to just buy notes with the highest coupon 3-5 years out and get a higher yield than a 1-2 year note. An issuer will only call the note or CD if current rates are much lower than the coupon payments due to the cost of refinancing. In the secondary market, high grade bonds carry very low coupons for the most part. Bonds/notes issued from 2020 and on have coupons that are one seventh of what they are today and of course they are non-callable. Two of my high yield holdings were just called yesterday. They mature in 2023 and 2024 but they both have make whole call provisions and are close to maturity but they carry coupons of 6.75% and 7.5%. The issuer will pay par plus the NPV of the difference between current treasury rates and the remaining coupon payments to make me whole for the early call.

 

[Freedom56]

2.6% is the coupon. Portfolio yield is 3.9% and ER is .03% so SEC yield doesn't seem out-of-line.

Duration is 6.7... that would be enough to keep me away.

I can buy 3 year GSE bonds that yield 5% so BND isn't very attractive at all.

SEC yields mean nothing as it assumes that the fund will hold the security to maturity which in the case of BND it does not. BND will be selling those securities at a loss as redemptions surge. The average effective maturity of BND is 8.9 years. No sane investor is going put money into a fund that yields 2.6% with zero capital protection and about a 30-50% downside risk. Look at some of the holdings in BND. It owns 2026 0.875% notes from the African Development Bank and the 2024 0.45% coupon notes from Amazon. An individual bond investor would never buy those notes at or above par let alone buy them at all. The BND fund portfolio is littered with notes like that. However BND is just losing other peoples money so does Vanguard really care as long as they pocket their management fee and fleece investors with hidden trading fees?

 

[beachfire]

I am not buying Credit Suisse Debt. I don't own any. I only responded to a question. I only buy US money center banks and Canadian bank debt in the financial sector. I am buying 1-5 year durations now and since the beginning of this year. High grade bonds yielding over 5% are good enough and more than double what BND and other loser bond funds offer. Plus I get capital protection. If you want to talk about garbage barge, take a look at the holdings in that loser fund BND. If the Fed funds rate does go up to 4.5%, BND will trade down below $40 just to compete with CD yields. They can only prop up these bond funds for so long. Eventually they will collapse after massive fund out-flows which will likely start in November.

Freedom 56 - why are you focused on 1-5 year maturities? If one believes rates will be much lower in 3-5 years, why not build out a 10 year ladder with high grade corporates and secure these higher rates for a much longer period? Thanks for any thoughts.

 

[11522914]

Callable bonds are good only if they are make whole call. The new issues coming out are mostly callable as issuers are betting on rates to drop 2 -3 years out. In such a case it's better to just buy notes with the highest coupon 3-5 years out and get a higher yield than a 1-2 year note. An issuer will only call the note or CD if current rates are much lower than the coupon payments due to the cost of refinancing. In the secondary market, high grade bonds carry very low coupons for the most part. Bonds/notes issued from 2020 and on have coupons that are one seventh of what they are today and of course they are non-callable. Two of my high yield holdings were just called yesterday. They mature in 2023 and 2024 but they both have make whole call provisions and are close to maturity but they carry coupons of 6.75% and 7.5%. The issuer will pay par plus the NPV of the difference between current treasury rates and the remaining coupon payments to make me whole for the early call.

Thanks. Can you provide a little more detail on what your last sentence means? Using your particular bonds can you show me what that means using math? Sorry, having hard time getting what that means.

 

[jldavid47]

Freedom 56 - why are you focused on 1-5 year maturities? If one believes rates will be much lower in 3-5 years, why not build out a 10 year ladder with high grade corporates and secure these higher rates for a much longer period? Thanks for any thoughts.

Because right now the trend for rates across the yield curve is up. There is plenty of time to lengthen the duration of a ladder. You do what the trend tells you to do and if you are a fixed income investor the trend is telling you to keep maturities short (however you want to personally define that). A year from now could be a different conversation.

 

[Freedom56]

Freedom 56 - why are you focused on 1-5 year maturities? If one believes rates will be much lower in 3-5 years, why not build out a 10 year ladder with high grade corporates and secure these higher rates for a much longer period? Thanks for any thoughts.

My portfolio average maturity is: 4.74 years. The average coupon is 6.4% and the average yield to maturity is 7.2%. The longest maturity I am holding now is 8.8 years and the shortest is 1.3 years (which has just been called). It does not pay to go beyond 5 years at this point. Three to four years is the sweet spot at this point. Plus with any company I really can't see their prospects beyond a 5 year horizon. I invest in only a narrow range of sectors (financials, technology, telecom, pharma, healthcare) and with sectors like technology the industry changes too fast to look 10-20 years out. With shorter durations there is also less volatility in my portfolio. I will lock in longer durations later in the rate hike cycle.

 

[Freedom56]

Thanks. Can you provide a little more detail on what your last sentence means? Using your particular bonds can you show me what that means using math? Sorry, having hard time getting what that means.

NPV is Net Present Value. One bond matures December 2023 and pays 6.75%. I bought it in June 2022 (a few months ago) for $98.10. I have three interest payments until maturity. I have a $100K par value of this bond and from now until maturity, I am owed $6750+$1687.50 for a total of $8437.50 in interest. The issuer of this bond will pay me par value of $1000 plus the net present value of the difference between treasury yields of the same duration which is currently 4.15%. So If I took the $100K and bought treasury bills, I would receive about $4150+ $1037.5 or $5187.5 total interest and therefore would be short $3250 due to this early call. To make me whole again, the issuer will pay me the net present value of the $3250 interest (discounted to today) that I am short in addition to the full par redemption. They will also pay the accrued interest on the bond. I hope that clears it up.

 

[11522914]

NPV is Net Present Value. One bond matures December 2023 and pays 6.75%. I bought it in June 2022 (a few months ago) for $98.10. I have three interest payments until maturity. I have a $100K par value of this bond and from now until maturity, I am owed $6750+$1687.50 for a total of $8437.50 in interest. The issuer of this bond will pay me par value of $1000 plus the net present value of the difference between treasury yields of the same duration which is currently 4.15%. So If I took the $100K and bought treasury bills, I would receive about $4150+ $1037.5 or $5187.5 total interest and therefore would be short $3250 due to this early call. To make me whole again, the issuer will pay me the net present value of the $3250 interest (discounted to today) that I am short in addition to the full par redemption. They will also pay the accrued interest on the bond. I hope that clears it up.

That certainly does. Thanks again

 

[Freedom56]

Just to confirm... There is no withholding tax by Canada for interest income from bonds/notes issued by Canadian banks in the U.S. I received my first quarterly payment from Toronto Dominion Bank today. This is one of those rare notes that pays quarterly instead of semi-annually.

INTEREST TORONTO DOMINION BANK SER D MTN 5.00000% 06/30/2027
Symbol 89114X2S1
Description TORONTO DOMINION BANK SER D MTN 5.00000% 06/30/2027
Amount $1,250.00

I'm okay earning a worry free 5% from a segment of my portfolio with capital protection.

 

[baseman250]

Freedom56, I see some new issues for Toronto Dominion being offered (I see them on Vanguard), but the description includes the word "bail-in." A quick search indicates these might not be the same risk level as bond offerings that don't have that word in the description. Would this be correct?

Just to confirm... There is no withholding tax by Canada for interest income from bonds/notes issued by Canadian banks in the U.S. I received my first quarterly payment from Toronto Dominion Bank today. This is one of those rare notes that pays quarterly instead of semi-annually.

INTEREST TORONTO DOMINION BANK SER D MTN 5.00000% 06/30/2027
Symbol 89114X2S1
Description TORONTO DOMINION BANK SER D MTN 5.00000% 06/30/2027
Amount $1,250.00

I'm okay earning a worry free 5% from a segment of my portfolio with capital protection.

 

[Freedom56]

Freedom56, I see some new issues for Toronto Dominion being offered (I see them on Vanguard), but the description includes the word "bail-in." A quick search indicates these might not be the same risk level as bond offerings that don't have that word in the description. Would this be correct?

Bank bail-ins became the new norm with the passing of the Dodd-Frank Wall Street Reform and Consumer Act, which was ushered in as a response to the Great Recession. The federal government will no longer inject taxpayer dollars to prevent big bank failure.

Canadian and other foreign banks follow bail-in regulations in the event of a default. The aim of a bail-in is to recapitalize a bank and restore compliance with the capital requirements. The bonds are converted into equity during the bail-in. This is no different than any corporation. In the event of default, the secured bond holders are first in line. Unsecured bond holders (the majority) are given equity in the restructured company and common shareholders are wiped out. TD Bank's capitalization is extremely strong so I'm not that concerned.