Bonds!

[thepupil]

5 minutes ago, Eldad said:

Or because the return is more back loaded towards 2045. Current cash yield would be way below a newer issue with a higher coupon even with the discount. Cash yield is almost 100 bps lower. 3.7ish vs 4.7ish. 

 

yes, the two bonds are different. the on the run 20 year has duration of 12.8 / current yield of 4.87% and is "yieldier", whereas the seasoned off the run 2.5% of 2045 has duration of 14.6, less yieldy (3.65% current) and more convex. The corresponding zero coupon bond has no current yield, yields 5.1% and has duration of 19.3 and is even more convex.

 

Said differently the off the run has a greater portion of its cash flows at the 20 year maturity than the new one with more coupons. Discount rates are highest at the 20 yr part of curve so it should yield more because its closer to being a 0 coupon bond.  

 

[Eldad]

On 4/21/2025 at 2:17 PM, rogermunibond said:

Long dated high grade corporate issuers could be deal if the US long bonds keep moving out.

That is what I’m looking at right now. Some like 50/60 year corporate trading at a large discount. 

Lots of countries with higher debt to gdp and lower growth than the US have much lower interest rates. Recessions, technological innovation, and declining populations are all very deflationary. 
 

I am reminded of the study I think in Security Analysis where Graham shows the same bond going back and forth between a huge discount to a premium and back again over a very long period of time. 
 

Even if you are wrong, if you reinvest the 6% for 50 years or whatever, you should be fine. And maybe you get a big pop with big time government bond buying again or naturally declining rates. I think this is a fairly asymmetric trade weighted heavily to the upside. 

[Red Lion]

24 minutes ago, Eldad said:

That is what I’m looking at right now. Some like 50/60 year corporate trading at a large discount. 

Lots of countries with higher debt to gdp and lower growth than the US have much lower interest rates. Recessions, technological innovation, and declining populations are all very deflationary. 
 

I am reminded of the study I think in Security Analysis where Graham shows the same bond going back and forth between a huge discount to a premium and back again over a very long period of time. 
 

Even if you are wrong, if you reinvest the 6% for 50 years or whatever, you should be fine. And maybe you get a big pop with big time government bond buying again or naturally declining rates. I think this is a fairly asymmetric trade weighted heavily to the upside. 

 

There have got to only be a handful of 50/60 year corporate bonds right? Seems like with the tight credit spreads maybe just playing a 30 year treasury?

[Eldad]

17 minutes ago, Red Lion said:

 

There have got to only be a handful of 50/60 year corporate bonds right? Seems like with the tight credit spreads maybe just playing a 30 year treasury?

Yeah you are right. There are not many and things would need to get worse, but I’m having fun looking. 

UNP 2071s trading at 0.66 cents on the dollar. Current cash yield of 5.75%. That one could get interesting with another drop. 

[Dinar]

48 minutes ago, Eldad said:

Yeah you are right. There are not many and things would need to get worse, but I’m having fun looking. 

UNP 2071s trading at 0.66 cents on the dollar. Current cash yield of 5.75%. That one could get interesting with another drop. 

Tax wise it is horrible, particularly due to de minimis rule

[thepupil]

@Dinar do you not have any tax advantaged vehicles? You regularly and accurately point out the terrible tax efficiency of various things but I’d assume you’d have some % in IRA, no?

[John Hjorth]

Why is it, that some people here on CofB&F are even spending time on stuff like this?

[Eldad]

2 minutes ago, John Hjorth said:

Why is it, that some people here on CofB&F are even spending time on stuff like this?

Yes. It’s not the smartest admittedly, but it’s keeping me busy and away from looking at what I believe are overvalued stocks. And I am looking to potentially make something like a half a percent of net worth investment, and I am something like 92% invested in stocks.  
 

I don’t think the de minimus rule applies to corporate bonds unless they are purchased with an original issue discount when originally issued. Not on the secondary market. 

[thepupil]

14 minutes ago, John Hjorth said:

Why is it, that some people here on CofB&F are even spending time on stuff like this?

Why not? Stocks are discounted cash flows, so are bonds.

[Eldad]

Is there anything more hated currently than a long bond? Usually that’s a great place to at least start sniffing around. 

[John Hjorth]

1 hour ago, Eldad said:

Yes. It’s not the smartest admittedly, but it’s keeping me busy and away from looking at what I believe are overvalued stocks. And I am looking to potentially make something like a half a percent of net worth investment, and I am something like 92% invested in stocks.  
 

I don’t think the de minimus rule applies to corporate bonds unless they are purchased with an original issue discount when originally issued. Not on the secondary market. 

 

55 minutes ago, thepupil said:

Why not? Stocks are discounted cash flows, so are bonds.

 

48 minutes ago, Eldad said:

Is there anything more hated currently than a long bond? Usually that’s a great place to at least start sniffing around. 

 

@Eldad and @thepupil,

 

I'm sorry if I above offended you.

 

That was really not my intent.

 

But I'm sure you both are capable of actually finding for you interesting, attractive, pretty stable stuff at reasonable prices running at ~15 per cent ROE, cash flow positive, without problems in todays environment.

 

Who to engage with and to kiss is always a strictly personal matter. But please also think about not wasting your time on something not worthy of your time, with no real upside. Doing so is just the perfect object for locking you in where you already are, in stead of spending your time, energy and attention on something bringing you on the move forwards to a  - for yourself - better future.

Edited April 22, 2025 by John Hjorth

[Dinar]

52 minutes ago, Eldad said:

Yes. It’s not the smartest admittedly, but it’s keeping me busy and away from looking at what I believe are overvalued stocks. And I am looking to potentially make something like a half a percent of net worth investment, and I am something like 92% invested in stocks.  
 

I don’t think the de minimus rule applies to corporate bonds unless they are purchased with an original issue discount when originally issued. Not on the secondary market. 

I was told that this applies to corporate bonds or treasuries bought at a discount in the secondary market.  That is you are taxed each year on the theoretical accretion.  But I am neither a CPA or a tax lawyer, so if it matters to you, check with one or go to the IRS publication.  

[thepupil]

11 hours ago, John Hjorth said:

 

 

 

@Eldad and @thepupil,

 

I'm sorry if I above offended you.

 

That was really not my intent.

 

But I'm sure you both are capable of actually finding for you interesting, attractive, pretty stable stuff at reasonable prices running at ~15 per cent ROE, cash flow positive, without problems in todays environment.

 

Who to engage with and to kiss is always a strictly personal matter. But please also think about not wasting your time on something not worthy of your time, with no real upside. Doing so is just the perfect object for locking you in where you already are, in stead of spending your time, energy and attention on something bringing you on the move forwards to a  - for yourself - better future.

Not offended at all.

 

i disagree that there is “no real upside”. 
 

long term bonds offer significant upside and downside. 
 

The 30 year zero trades for 24 cents. Long term rates go to 3% I a dire economic scenario, that’s worth 40, +66%. Not the expectation but an illustration . If 20 yr rates are 3.5% in ten years, a 30 yr zero bought today makes 7%/yr for 10 years. Not terrible.

There were plenty of safe corporate bonds  that returned 15,20 30+% if purchased in ‘22 sell off since spreads and rates blew out. 
 

also beyond the pure upside is the potential for low or negative correlation with ones other investments, potentially beneficial for decreasing drawdowns and having something to sell in a pinch. 
 

Also, while it’s a minority of my spending, I’ m short a 25 year amortizing 2 7/8% “bond” (my mortgage) to the tune of about $40k/yr so the price of nominal long term cash flows is of interest to me. Of course I can try to offset that with equities instead of bonds, but good to have bonds as a potential tool. 

Edited April 23, 2025 by thepupil

[Spekulatius]

4 hours ago, Eldad said:

Yeah you are right. There are not many and things would need to get worse, but I’m having fun looking. 

UNP 2071s trading at 0.66 cents on the dollar. Current cash yield of 5.75%. That one could get interesting with another drop. 

Why would you deal with corporate bonds yielding 5.75% when you can buy treasuries yielding almost 5%?. A 0.75% risk spread  is a joke. 

Edited April 23, 2025 by Spekulatius

[lnofeisone]

3 hours ago, Dinar said:

I was told that this applies to corporate bonds or treasuries bought at a discount in the secondary market.  That is you are taxed each year on the theoretical accretion.  But I am neither a CPA or a tax lawyer, so if it matters to you, check with one or go to the IRS publication.  

This is the correct take. OID is at issue. Buying on the secondary market is called a market discount. You can get a weird situation where a bond has both OID and market discount. 

 

The most significant difference for taxes is how you choose to accrete. With OID, you can only accrete annually. With market discount, you can choose to accrete annually or the entire discount as income at disposition/maturity. 

[Eldad]

10 hours ago, Spekulatius said:

Why would you deal with corporate bonds yielding 5.75% when you can buy treasuries yielding almost 5%?. A 0.75% risk spread  is a joke. 

YTM is over 6. Not aware of any treasury with a 5%+ cash yield. If you are playing the rate cut, it offers a bigger discount to close with a higher coupon if you are wrong. 

[Eldad]

9 hours ago, lnofeisone said:

This is the correct take. OID is at issue. Buying on the secondary market is called a market discount. You can get a weird situation where a bond has both OID and market discount. 

 

The most significant difference for taxes is how you choose to accrete. With OID, you can only accrete annually. With market discount, you can choose to accrete annually or the entire discount as income at disposition/maturity. 

Read IRS Pub 550. That is correct. Thanks

[thepupil]

38 minutes ago, Eldad said:

YTM is over 6. Not aware of any treasury with a 5%+ cash yield. If you are playing the rate cut, it offers a bigger discount to close with a higher coupon if you are wrong. 

 

 

I see the 30 year bond as ~98 /  4.73% YTM / 4.71% current yield

 

The 46 year 2071 UNP bonds are 67.25 / 5.86% YTM / 5.65% current yield

 

So on a YTM basis you get ~113 bps more for the credit/liquidity/16 year difference in tenor etc.

 

A bond nerd nuance here: the Z spread is actually 216 bps. https://en.wikipedia.org/wiki/Z-spread

 

the two bonds have roughly similar duration, though the discounted UNP bond has slightly more convexity than the treasury bond since the treasury becomes a premium bond w/ additional appreciation so pull to par becomes your enemy instead of your friend. a 1% decrease in YTM yields 20% appreciation for the UNP bond and 18% for treasury. A zero gives you about 31%. 

 

so if you reframe the UNP bond as having more cash yield, more convexity, and 120-200 bps more than the nearest tenor treasury / treasury curve, assuming no tax, I can certianly see why one would want some of the UNP bond over 30 yr treasury...

 

for me it's a toss up. I do like long low coupon corps (universities/railroads/things like that) once they get to certain yields. the biggest issue is so do other buyers of duration and these are illiquid as tar because they're locked up in people's hands. the ability to monetize when one wants to is more uncertain than treasuries. I own some 2100+ bonds for my parents that I can't relaly buy or sell though this has more to do with fidelity sucking than anything. 

 

 

 

 

 

 

 

 

 

Edited April 23, 2025 by thepupil

[Gregmal]

People will always remember ….shit what’s today’s date?…whatever today is, will go down in history for the historic move in treasuries!

 

 

[Blake Hampton]

 

 

[Blake Hampton]

How I suspect Trump will be in the future:

 

[Spekulatius]

Watch his odd lots episode and think again before going too deep into treasuries:

https://podcasts.apple.com/us/podcast/odd-lots/id1056200096?i=1000703968744

[Hektor]

3 hours ago, Spekulatius said:

Watch his odd lots episode and think again before going too deep into treasuries:

https://podcasts.apple.com/us/podcast/odd-lots/id1056200096?i=1000703968744

I would love to hear what our bond people think about this?

 

The gist is “there is nothing stopping the treasury department from saying that we’re are extending the maturity date of your bond to a future day-month-year”

[dealraker]

3 hours ago, Spekulatius said:

Watch his odd lots episode and think again before going too deep into treasuries:

https://podcasts.apple.com/us/podcast/odd-lots/id1056200096?i=1000703968744

Yes...this is my view Ralf, that the real excitement is going to come within Treasury debt.

[Spekulatius]

46 minutes ago, Hektor said:

I would love to hear what our bond people think about this?

 

The gist is “there is nothing stopping the treasury department from saying that we’re are extending the maturity date of your bond to a future day-month-year”

Thats the gist of it, Think Mar a Largo accord, We will extent maturity of your bond from 5 years to 100 years.  Sue us! We have the Supreme Court covered. LOL.  It might blow up the banking system though and create Japanese style zombie banks.