Bonds!

[thepupil]

I know there's a thread on i-bonds, but this is about things we can buy more than $10K/social security number of. Plain old bonds, notes, debentures, obligations, etc. 

 

For my 401k (where i can only buy indices, ~4% of my investment portfolio), I switched out of stock index to buy the bond index today. I've bought slugs of i-bonds. I bought a AAA county GO today yielding 3-4% YTC/YTM (5-6.5% tax equivalent). Between all those, I've got like 10% of my portfolio in bonds and I'm loving it and looking forward to being way too early and losing more money in them and actually getting paid mid to even high single digits on bonds! 

 

This is an exciting time. Muh bonds in total are yielding 5.5% and in total have a duration of about 4 (both numbers heavily subsidized up in yield and down in duration by the slug of i-bonds), but even ignoring that there are good high quality companies out there whose bonds yield 5% (if you take a little duration risk) or 3-4% (taking less). i see some good muni's at high 3% ish yield which gets into the high 6's for high tax bracket folks in terms of tax equivalent. 

 

I recognize that inflation is running hot, and that 4-5% yield with inflaiton at 9% is "the same" as 0-1% yield with inflation at 3% (or worse!) but i think that fails to recognize the fact that you're now getting a fair bit of coupon which can be reinvested at higher yields if yields keep going up and really bonds have less duration than most equities unless you go real crazy far out. A 20 year bond w/ a fat coupon isn't that different than assuming some 10 yr out multiple in your DCF. 

 

For the first time in a long time, I think bonds are worth owning and a decent diversifier. 

 

Buy bonds! 

 

 

[Spekulatius]

I am with Druckenmiller. I only buy bonds when there is a dislocation every 5-10 years. Sweet spot is on the threshold of Investment grade BB to BBB-. I want to see around 10% yields for equity like returns.

 

Last opportunity was in March 2020 for a NY minute, then late 2014 in energy/ pipeline bonds and then of course 2008/2009. The rest of the time it’s just equities.

[Dinar]

Pupil, which munis do you find attractive?

 

Thank you in advance

[Gregmal]

I’m kinda with @Spekulatius. First I look and see a sub 10% coupon and am like ehh, for a full year? Meh. Then I’m like, inflation is basically equal to or greater than that. Why tie up the capital to make nothing or very little? Rather just put in some work on a few cash subs. ALX is still super cheap. BKEP at offer. ALCO even after the recent move probably like 60% of NAV with a $2 dividend. CLPR worst case probably just doesn’t go anywhere and you get paid there too. Could probably find a bunch more if I took the time.

[aws]

I don't see myself holding any bonds to maturity, but if rates swing enough I could definitely be talked into some longer term bonds with high single digit yields, with the hope of selling them for nice capital gains if rates go back down.

[Sweet]

2 hours ago, thepupil said:

I know there's a thread on i-bonds, but this is about things we can buy more than $10K/social security number of. Plain old bonds, notes, debentures, obligations, etc. 

 

For my 401k (where i can only buy indices, ~4% of my investment portfolio), I switched out of stock index to buy the bond index today. I've bought slugs of i-bonds. I bought a AAA county GO today yielding 3-4% YTC/YTM (5-6.5% tax equivalent). Between all those, I've got like 10% of my portfolio in bonds and I'm loving it and looking forward to being way too early and losing more money in them and actually getting paid mid to even high single digits on bonds! 

 

This is an exciting time. Muh bonds in total are yielding 5.5% and in total have a duration of about 4 (both numbers heavily subsidized up in yield and down in duration by the slug of i-bonds), but even ignoring that there are good high quality companies out there whose bonds yield 5% (if you take a little duration risk) or 3-4% (taking less). i see some good muni's at high 3% ish yield which gets into the high 6's for high tax bracket folks in terms of tax equivalent. 

 

I recognize that inflation is running hot, and that 4-5% yield with inflaiton at 9% is "the same" as 0-1% yield with inflation at 3% (or worse!) but i think that fails to recognize the fact that you're now getting a fair bit of coupon which can be reinvested at higher yields if yields keep going up and really bonds have less duration than most equities unless you go real crazy far out. A 20 year bond w/ a fat coupon isn't that different than assuming some 10 yr out multiple in your DCF. 

 

For the first time in a long time, I think bonds are worth owning and a decent diversifier. 

 

Buy bonds! 

 

 

I don’t know how valuable it is to own a bond index.

 

One of the great benefits of a bond is that it redeems at par, and that’s great for controlling risk.

 

My understanding of bond indexes (which I admit is not great) is that it doesn’t redeem.  You buy and sell at whatever price the index is.

 

In a rising interest environment, doesn’t the price of the index fall?

 

Take AGG, yes it’s yielding more right now because rates are going up, but the price of the bond is down 15% since recent highs.

 

If rates keep rising, as most expect they will, that index will decrease in value.

 

.

 

Edited April 19, 2022 by Sweet

[thepupil]

12 hours ago, Dinar said:

Pupil, which munis do you find attractive?

 

Thank you in advance

 

here’s one I like. 3.8% to 2035, NYC triple tax free, guaranteed by Goldman Sachs and backed by their HQ. 

there are others, my flagship state university’s bonds are yielding >4%. 
 

I haven’t checked out the levered CEF’s in a while, maybe something to do there.

 

 

 

[thepupil]

12 hours ago, Sweet said:

I don’t know how valuable it is to own a bond index. How "valuable" it is probably depends on the stock/bond correlation. We've lived in (mostly) a negative stock-bond correlation environment (bonds go up when stocks fall), until recently the correlation is positive (both going down) as the rising rates/inflation/stimulus withdrawal takes hold. No one knows if/when we go back to negative or if the next big risk event will feature a negative correlation. The zero correlation of i-bonds is very nice, but i think it wise to mix in some real bonds, particularly with long duration/decent yields in for deflation/recession protection...I think that becomes more and more attractive as bonds increase in yield. 

 

One of the great benefits of a bond is that it redeems at par, and that’s great for controlling risk. 

 

My understanding of bond indexes (which I admit is not great) is that it doesn’t redeem.  You buy and sell at whatever price the index is. Yes the index owns the whole bond market. It is about 2/3 tsy's and MBS w/ govvy guarantee, yields about 3% and has a duration of 7 ish .  Stats below. If you sell, you will bear the consequences (positive or negative) of any change in yield, just like if you sell stocks and the multiple changes. 40% of the index is <5 years and another 38% is 5-10 years, so it's not like you're loading up on crazy amounts of duration. In the past I've thought it only worth it to own the far far end of the curve (a 30 yr treasury at 2.5% is more interesting to me than 5 yr at 1% for its deflation/depression protection), but with the rise in rates across the curve to about 3%, I actually think the belly is more attractive and think it may be best to own bonds across the whole curve (ie the index). I also have a pool of capital that can only  choose between indices (401k) that's 4% of my NW and in which i put a few k / month. Having this in bonds at these levels, I think provides more benefit to portfolio than having it in stock indices. 

 

In a rising interest environment, doesn’t the price of the index fall? of course. 

 

Take AGG, yes it’s yielding more right now because rates are going up, but the price of the bond is down 15% since recent highs. YES, I can only hope it continues. If the agg falls another 15%, it'd be yielding about 5%, I'll lose (at current allocation) 1-2% of my portfolio ceteris paribus (though I think I'd actually lose far more from my stocks, so not all else is equal). Ignoring those stock losses, I would feel far wealthier with the ability to invest in safe bonds at 5%. I'd probably increase bond allocation to something like 20% if this happens.  the biggest tension for me is bonds (exception of muni's and i-bonds) only make sense in tax advantaged accounts and space in those is kind of precious. 

 

If rates keep rising, as most expect they will, that index will decrease in value. As will all   most financial assets. 

 

.Listen guys, I'm not going full 60/40 or gasp 40/60 on y'all but all i know is I'll be knifecatching this bond bear market all the way down. Get pumped for negative real returns! get excited!

 

 

 

 

 

 

[Sweet]

Thanks, you know what you are doing.

 

I agree that if interest rates rose that it is something I would consider.

 

Not for me currently though, would rather hold cash at this moment when there is for sure more tightening.

[thepupil]

Bonds Today: +0.6%

Netflix Today: -34.7%

 

Bonds outperforming Netflix by over 35% today. 

 

you heard it here first fellas. 

[lnofeisone]

20 minutes ago, thepupil said:

Bonds Today: +0.6%

Netflix Today: -34.7%

 

Bonds outperforming Netflix by over 35% today. 

 

you heard it here first fellas. 

Hilarious. 

 

My only contribution here is that if you are a resident of DC, all municipal bonds (any state) are tax free for you. Obviously, not enough to juice returns to 10% but when there are massive dislocations (as Spek and Greg called out), it can be a consideration. 

[HubbadaPow]

I like individual muni bonds in taxable accounts so I can take tax losses while preserving the yield.  Tax free income with occasional tax losses is a nice combo.  Any rich person who doesn't own some bonds is crazy. 

[Simba]

If you can buy bonds outright and own to maturity, I agree locking in coupon / return is quite decent 

 

That being said, I wouldn't own anything with very long term duration.  

 

 

[ValueMaven]

Closed End Muni Funds have been CRUSHED YTD ... some down -25% to -30%.  I live in NYC and have been looking at Blackrock MuniYield NewYork Quality Fund: NYSE: MYN.  -8% discount to NAV ... fairly high quality ... and about an 11% tax adjusted yield ... these are super long duration assets with leverage.  I do agree there is some wreckage here that is worth looking into for those of us that general hate fixed income 

[bizaro86]

I'm not an American taxpayer, so Munis don't interest me. 

 

My only current fixed income is a big slug of CSU.DB (exchange traded debenture on the TSX) trades at $145 per $100 of par value. Coupon is inflation rate linked at Canada's CPI + 6.5%, maturity in 2040. 

 

Only reason it trades this low is that they have the option to call it with 5 years notice. But they haven't even though it would have been economic for them to do so since roughly 1 minute after they issued it. Basically you're counting on John Leonard continuing to treat everyone at least fairly, and if he doesn't you'll still get a decent fixed income return at current inflation. Payer is CSU, which has one of the longest threads on the board. 

 

I think it may be difficult to buy as a non Canadian, and of course it is very illiquid.

[SharperDingaan]

We've done well by bonds, but in all cases it was a bet against the market - and we had to risk significant cash.

 

The only time to buy a bond index, is when you expect the yield curve to decline over time. Today, in most places, we are looking at the yield curve rising 150-300 bp. Hence, anything with a straight future cash stream is going to discount to a lower PV, and the longer the duration the worse it is going to be. To get around this you either need the convexity of a high coupon (mostly junk bonds), or a convertible.

 

We've bought distressed bonds that ultimately matured at par, and zero-coupon sovereigns at market yields > 14%. We did well, but ultimately it just wasn't worth the mental stress or the portfolio restrictions over extended periods. Dropping 50K on 1M+ of Greek zero-coupons attracts a great deal of ridicule, and a great deal of envy when you subsequently exit, a few months later. 

 

Obviously, there is a need for some FI investment - however, it is almost always better to hold it as T-Bills, and as part of a broader strategy.

Walk away from your non-recourse mortgage (US) today, with little consequence, and your banker will hate you. But walk into his/her bank the next day. with 100K of T-Bills, and he/she will happily give you a margin loan against it, at great rates, while smiling nicely, and gritting his/her teeth. You're still scum, but the loan is secured against the federal reserve - and now your shit don't smell!

 

FI is held primarily for security, and it's pretty hard to beat a US T-Bill.

 

SD

 

 

 

Edited April 22, 2022 by SharperDingaan

[thepupil]

 

here's an example, Magellan 5.15% of 2043. 33% LTV, ~3.5x levered, BBB (edge of IG)...just traded below its MArch 2020 price and is down about 30 points from the highs on both rate backup and spread widening. this is  in my opinion a pretty safe bond. and it offers a 5.25% return. buy $50K of this stuff at 5% in your IRA, buy $50K of i-bonds at floating 9% and you have $100K of paper yielding 7% with duration of 6. that's not half bad. inflation slows and your i-bond yield sinks your probably printing money on your MMP long bonds. inflation keeps up and rates rise and you're reinvesting at rates not seen for a decade. 

 

 

[ValueMaven]

@thepupilstupid question but does an MLP bond issue a K1 like the stock??  

[thepupil]

5 minutes ago, ValueMaven said:

@thepupilstupid question but does an MLP bond issue a K1 like the stock??  

no. the reason one gets a K-1 is because an MLP is a partnership that passes through revenue/expenses etc to its holders. the k-1 shows you your share of all that stuff. bonds are just bonds regardless if the borrower happens to be a partnership. 

[ValueMaven]

@thepupilhow about Preferreds?  This Liberty Preferred: LBDRP is unique and has sold off very hard recently from about $30 to $26.  It's backed by Charter's cash flow and is a legacy preferred in the capital structure from Liberty's merger with GCI.  7% coupon and par is $25 ... so you are getting it at a YTM of high 6% currently 

[thepupil]

14 hours ago, ValueMaven said:

@thepupilhow about Preferreds?  This Liberty Preferred: LBDRP is unique and has sold off very hard recently from about $30 to $26.  It's backed by Charter's cash flow and is a legacy preferred in the capital structure from Liberty's merger with GCI.  7% coupon and par is $25 ... so you are getting it at a YTM of high 6% currently 

 

I am generally adverse to preferreds for a number of reasons. 

 

1) negative convexity. preferreds (and munis, and MBS) all have callability that i don't like because i want the full benefit of capital appreciation if rates go down 

2) fewer rights

3) worse capital treatment by regulators so demand from something like an insurance company won't ever be the same as a big sexy IG rated bond

4) generally owned by procyclical retail yield pigs...weak hands to be taken advantage of in times of stress 

 

with that said, this one seems interesting in that it doesn't appear to be callable, it's a corporate issuer and therefore would qualify for qualified dividends, it's very small so the incentive to screw it over in some extractive way is not really there, seems pretty interesting to me tbh

 

it's a clear liquidity discount in that this only trades $125K / day...I'd be a little wary of that...maybe require a bit more extra yield relative tot he 2028's at 6.1% (though they don't have the punch of the duration) 

 

 

Edited April 29, 2022 by thepupil

[tede02]

It's amazing how much Treasury yields have moved. The 10-year yield has basically doubled this year. 1-year Treasury now at 2%. Looking attractive on a relative basis compared to the various high-yield savings. 

 

 

[thepupil]

this has been a good (stupidly short term) market call so far. bonds are flat as the drive up in rates stalled, US / Global stocks down 11% and nasdaq down 16%...the problem is i like stocks so much i'm tempted to just sell my bonds buy more stocks lol...but 11%  market timing move on a very small portion of portfolio  isn't why i did this...staying the course...

 

the vanguard bond index yields 3.4% and is 2/3 treasuries & government MBS...hoping i actually start losing money here and bonds become a bit more rela of an alternative (though I fear the effects of that on the rest of the portfolio. 

[CorpRaider]

What do you think of this statement?  "As a retail peon, I should buy no fixed income until I have exhausted my annual limit each year of both series I and series ee savings bonds."  A 3.5% nominal with a 20 year term, tax deferred and exempt from state taxes, is still pretty good, no?

[TwoCitiesCapital]

I'm guessing that we may have seen the top in yields for the intermediate term. 

 

I expect CPI and PMIs to start slowing down over the next few months and for yields to reflect a readjustment in rate hike expectations.