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No. of Recommendations: 2
Just looked here... https://www.wsj.com/market-data/bonds

Look at those T-bill yields, wow... worse than your Chase savings account! :)

U.S. Treasurys 11:34 AM EDT 5/03/21
	     PRICE CHG	YIELD (%)
1-Year Bill	0/32	0.050
6-Month Bill	0/32	0.028
3-Month Bill	0/32	0.005
1-Month Bill	0/32	0.008
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No. of Recommendations: 1
Stas,

Yields are what they are. Nothing is gained by complaining about them. Instead, try to figure out why the Fed/Treasury cartel is destroying price-discovery in the financial markets and how to profit from the likely unintended consequences. Meanwhile, of course, there's the question of what to do with one's cash. What makes sense to me is some trading.

When 'trading' is mentioned, most immediately think "way too risky". But market-time is fractal, as Mandelbrot demonstrated, and there is no one who isn't 'a trader' and who doesn't 'trade', no matter what else they might call it. No matter what they buy, nor how long they intend to hold, they can't spend gains until they cash out. Whether the cash-out is seconds or decades away, the entry/exit process is exactly the same, and only price differences ultimately matter.

An hour holding a stock this morning gained me 3.4%. If just ten shares are bought for 8.21 and traded out of an hour later at 8.49, a mere $2.80 is gained. But how many 1-yr T-bills would one have to buy to achieve the same gain? (5.6 of them, if I haven't screwed up on my math.) That's crazy. Which set of risks would you rather accept? Buying $5,600 dollars of an "asset" whose purchasing-power a year's worth of inflation is sure to erode by 5%-10%, or making an occasional $100 bet whose 1-day gain might be enough to backstop one-third of a year's inflation loss?

Full-time trading is a tough gig, as is full-time investing, and most of us would rather have "a life" than what amounts to a second job. But the Fed intends to beggar us all with ZIRP, and I'm willing to trade a bit to preserve the purchasing-power of my cash while waiting for The Big Crash.

Arindam
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No. of Recommendations: 0
Right, no sense in complaining. It's really quite something to behold - a one-year bill yielding nothing! This ZIRP environment is a good test for those that have a pretty firm asset allocation. If you intend to keep x% in cash and prefer US T-bills due to them being the safest thing out there... can you stomach these returns (or rather lack thereof) while inflation is picking up? The good news for those hard-liners that also have US stocks as part of the allocation... is that it seems like whatever you throw dollars at in the stock market is going to go north and only north. And there are still some deals to be had in the high-yield bond space although not a whole lot. Some commodities have sky-rocketed (corn, lumber) but others are likely getting ready to launch (copper, silver). We'll see...

And agree, a few small & smart trades here and there these days - or writing some put options? - is a better way to go than counting on UST to deliver any income. Geesh, what a time!
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"...there are still some deals to be had in the high-yield bond space."

Stas,

Realistically, there aren't any bargains in the high-yields. What's offered --mainly energy sector bonds-- have prices higher --hence, yields lower-- than their risks justify buying. (IMHO, 'natch.)

Nor is copper "getting ready to launch." That train is already so far down the track it cannot be seen from the station. Pull a 1-year chart for the ETF that tracks copper producers and one of the better performers in that industry. Price gains are triples and sextuples of the broad market (for which RSP is a better benchmark than SPY). https://schrts.co/NETuWWwD

Nor have Treasuries delivered any income in the past decade once taxes and inflation are subtracted, as they have to be. At best, buying them was an attempt to conserve purchasing-power, but doing so certainly didn't preserve or appreciate it. (Again, IMHO, 'natch.)

That said, Treasuries might well have had a place in one's portfolio these past years. It all depends on one's goals. But the larger problem with ZIRP is this. Capital isn't aggregated, and price discovery is destroyed. Hence, future economic growth is sabotaged.

Arindam
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No. of Recommendations: 1
By "copper", I was referring to Dr. Copper, i.e. the metal itself. :) You can look at the contracts of high-grade material as traded on CME or check out ETN JJC. Like silver, prices have gone up substantially since the dump of the spring of 2020 but I believe there is more coming.

You were probably looking at COPX, a popular copper miners ETF. Its return is amazing for one year even vs the market but that's partly because just about all miners were badly oversold - worse than other companies - a year ago. The return of COPX from trailing 24 months is about on par with the broad stock market, whether equal-weighted or market-weighted. (Like you, I really like RSP too.) So far in 2021, a 25% YTD increase in copper prices already but I'm concerned more is on the way. Well, concerned for buyers of copper as RM due to margin contraction, excited for the other side, I guess. :) But I'll save copper-talk for another day and maybe another forum?

The reason why I disagree re: "deals" in HY space is because of what you mentioned about Fed's ZIRP and general money supply expansion. It's distorting the markets so badly that getting refinanced even for a very risky business is not as hard as it should be so the concept of risk is, again, distorted. Lots of companies that probably should go under are staying afloat thanks to cheap and/or available credit - you'd think that to many of them loans/bonds should be priced with a much higher yield or ... not written at all. Just my opinion anyway.
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No. of Recommendations: 2
the Fed's ZIRP and general money supply expansion ... is distorting the markets so badly that getting refinanced even for a very risky business is not as hard as it should be. So the concept of risk is, again, distorted. Lots of companies that probably should go under are staying afloat thanks to cheap and/or available credit. "

Stas,

Shrewd point and the same one others are making. E.g., Booth estimates 20% of US companies are "zombies" and are being kept alive by the Fed. But now consider the risk-assessment task from the point of view of a risk-adverse value investor. Let's say someone's bond offers an above-the-current-market yield, but a yield that's lower than what used to be available on no-nonsense, double BB's, and the issuer's financials suck. Does it make any sense to buy their single-B debt --and more likely triple-CCC trash-- as an "investment", as opposed to a purely speculative, second-order bet?

I.e., the thinking would have to go like this. "This company is a dead man walking whose debt makes no sense at all to buy other than the possibility the Fed won't let the bonds fail."

The Fed or not, you can assume default-rates will increase going forward. So let's create a betting table based on 5-yr, historical default averages, which Moody's says runs something like this. Triple-AAAs have negligible defaults. AAs, maybe 1-2%. As, maybe 3%. BBBs, maybe 8%. BBs, maybe 13%. CCCs, maybe 21%. CCs, maybe 34%. Cs, maybe 55%. Those aren't their exact numbers, but close enough, and "Yes" the real numbers are pretty close to a Fib series. To build in a margin of safety, let's increase the predicted defaults for each rating by one notch, as well as note that triple-BBB ratings have exploded in number relative to historical distributions. In fact, most of the group would be downgraded to 'junk' if the rating agencies weren't being leaned on by the Fed. That's not a publicly known fact. But that's what's happening.

Now, here's our betting table. You should expect roughly 1/3 of every triple-BBB you buy to default. You should expect roughly half your double-BBs to default. You should expect roughly 90% of anything rated single-B or lower to default.

Those are horrible odds. But consider this. The right/wrong ratio of a classic, trend-following, stock trading system is about 35/65. In other words, you can expect 2 out of every 3 stock buys to lose money. Why can trend-followers make money with those (or even worse) odds ? Because they chop left-hand tails and let winners run. Now apply that game to bond investing, which is what I did for lot of years and made good money. Upper-tier credits don't need to be gamed. It's the lower-tier stuff that requires two things: prudent positions sizes and industry diversification. ("Buy widely; buy small.")

Right now, not enough junk is being offered to play that game. So I pass.

Arindam
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I'm a fairly vanilla bond investor. I have a 7-year bond ladder of investment grade bonds designed to mature at regular intervals in order to provide $X amount of cash each month & hopefully earn sufficient interest along the way to help buffer taxes, inflation, and the risk of loss. Thus far, I've had 30 months of bonds maturing and paying as expected or earlier than expectations, and I expect a 31st to do so in a couple of weeks. I've had a few pop in and out of investment grade, but (knock on wood) none have been at a serious default risk (yet).

Fool rules prohibit me from mentioning which company, but yesterday, I was able to buy an investment grade bond with a 7-year time horizon for a 2.9% yield to worst. In April and March, the same exercise got me a 2.4% yield to worst, while in February, the best I could get was a 1.9% yield to worst.

Net - while the Fed is doing its dead-level-best to manipulate interest rates to zero, the corporate bond market is starting to recognize the inflation risk and beginning to try to price it in.

Note that as mentioned, I'm a fairly vanilla bond investor. I basically search for my maturity window and ratings criteria, sort the bonds that come back in descending order by yield, and then look through the results that come back until I find one that is allowing purchases of the meager quantity that I need for my bond ladder. I'll then do a check for diversification, read the Moody's report if my broker offers a free one, maybe do some digging on my own for other financial points, and decide to buy or pass and move on to the next one.

I'm well aware that there are more advanced strategies to seek out better potential returns with bonds. That's not the role I need bonds to play in my portfolio, so I'm not actively seeking them out, but I'd be more than happy to learn from a more experienced bond investor.

Regards,
-Chuck
Home Fool
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I'm a fairly vanilla bond investor. I have a 7-year bond ladder of investment grade bonds designed to mature at regular intervals in order to provide $X amount of cash each month & hopefully earn sufficient interest along the way to help buffer taxes...

I'm right there with Chuck. My ladder stops at the end of 2027. I haven't bought any more bonds in well over a year. I just can't stomach buying a 2028 maturity yielding just around 2%.

Fool rules prohibit me from mentioning which company, but yesterday, I was able to buy an investment grade bond with a 7-year time horizon for a 2.9% yield to worst...

I use the Fidelity platform and just ran a screen for corporates maturing from 1/2028 through 4/2028. The only ones that interest me are still just yielding a shade over 2%. Think I will just continue to sit on a larger than usual cash pile for the time being. I do have a shopping list ready to go.

Jim
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Chuck,

Is there a reason you prefer bonds over something like a multi-year guarantee annuity (MYGA)?

You can get a guaranteed yield from those ranging from 2.7-3.1% depending on whether you use an A rated insurance company or are willing to go down to a B+ company.

The MYGA has state insurance which depending on the state usually ranges from $100K-$250K.

Just curious.

I put some money in 2 different MYGAs to use as bridge money from ~60 to 65 (or later). I rarely get into bonds or insurance stuff but the higher rates of the MYGA over something like CDs seemed to make up for the limited risk (I think!) I am taking since both are only 3 years.

Thanks.
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No. of Recommendations: 4
" I've had a few pop in and out of investment grade, but (knock on wood) none have been at a serious default risk (yet).

Chuck,

If any of your holdings were notched down below 'invest-grade', you aren't a 'vanilla' bond investor. You're screwing around with junk, pretending it's invest-grade. Yes, "technically", any bond rated Baa3/BBB- is "invest-grade". But if you believe that is always the case and reliably so, I've got a friend, who has a friend, who has a cousin, who would be happy to sell you some swamp land or a bridge or two. Seriously, think the matter through.

Most institutionals --pension funds, insurance companies, etc.-- can't own spec-grade debt. If the rating agencies downgrade an issue to spec-grade, those institutionals are required by their charter to dump it. Everyone knows that. The issuer, the rating agencies, and the bond owners. They all know the rules. Therefore, an issuer whose financials are shaky --even more so than usual-- will fudge their financials, and the rating agencies will close a blind eye to accommodate the deception, because they (1) they don't want to lose the issuer's business, and (2) they want to avoid the sh*t storm would happen if they started rating all debt honestly.

If you've read a couple hundred Moody's reports, you'll be surprised by two things: how useful those reports are and how preceptive they are. The guys and gals writing them deserve kudos, because they make our job as investors a lot easier. Where problems arise --as always-- is at the interfaces. When is a triple-AAA rated credit really a double-AA, or maybe even a triple-BBB?

"Can't happen", you say? Bullsh*t. Happens all the time, with the most egregious case being GE's debt. Back in the day, GE was a triple-AAA credit. But it offered YTM's that paralleled those of Mexico's sovereign debt, then rated triple-BBB. Clearly, one or both of those ratings were wrong. As subsequent events revealed, GE was cooking their books, and these days it is rated as the traders back then were saying it should be rated, namely, triple-BBB.

Lesson: "Trust, but verify". If the agency-implied rating differs from the market-implied rating, trust the traders to have gotten it right.

Ques: How does one figure out what a bond's 'market-implied' rating is?
Ans: Comparative shopping, which is the essence of the bond investing. "How much am I being paid to accept how much risk?" In other words, if the reward is there, so is the risk *unless* the debt is truly mispriced, which the "average" bond investor hasn't the skills to determine.

In Ben Graham's words, the question needing to be answered is this: "Is this bond really a bargain?" I'd argue the whole of the bond market is so over-bought as to be risky beyond what a prudent investor should attempt, as is most of the current stock market. For traders in either market, there are still opportunities. But not for defensive --Graham's term-- investors. They need to sit on their hands, or do something more productive, like take a walk. Soon enough, The Big Crash will come, and then, not only will there be bargains aplenty, but debt will again offer gains comparable to equity, as happened in '09-10, which were fabulous years for us coupon clippers.

Arindam
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Hi richinaz --

Is there a reason you prefer bonds over something like a multi-year guarantee annuity (MYGA)?

A few --

First, liquidity. Poking around after being inspired by your question, it appears that many of the higher yield MYGAs have strict liquidity restrictions that limit the ability to take money out before maturity. One function my bond ladder serves is as a form of 'ballast' in the account where I manage my options investments. To serve that purpose, the investment needs to be able to be liquidated if necessary.

Second, the fine print. Many of the higher yield MYGAs that I've been able to see publicly have fine print restrictions or fees that make it look like "the large print giveth, the fine print taketh away" such that the yield I'd actually receive would be below the advertised amounts.

Third, contract minimums. Many of the higher yield MYGAs that I've been able to see publicly have higher minimum contract amounts than I would need to serve my monthly bond ladder. Granted, that one I could get away with by using something like quarterly or every six month maturity windows instead of monthly, but even then I'm sacrificing convenience as well as liquidity to get to essentially where I am with the bonds.

Regards,
-Chuck
Home Fool
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No. of Recommendations: 1
Hi Arindam -

Let's talk about what I view as the riskiest bond in my portfolio. It's a bond for natural gas producer EQT that is scheduled to mature in October 2022, with CUSIP 26884LAE9.

It's currently BB rated and not profitable. However, it has around 0.54 debt to equity ratio, has EBITA well above its interest costs, and has a debt maturity schedule such that it has many bigger hurdles after my bond matures. In today's earnings release, it also mentioned that it extended its revolving credit line to 2023, which is after my bond matures. Is there a risk? yeah. The biggest risk is that if natural gas prices go down and stay down, it'll be hosed. On that front, I'm of the opinion that since natural gas is among the cleaner of the fossil fuels, its use isn't likely to be outlawed in the next year and a half.

Could I be wrong? Maybe. But I'm not losing sleep over it.

I don't just chase yields...

Regards,
-Chuck
Home Fool
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Oh yeah --

Disclosure: I own bonds for natural gas producer EQT that is scheduled to mature in October 2022, with CUSIP 26884LAE9.

Regards,
-Chuck
Home Fool
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No. of Recommendations: 1
Chuck,

Thanks.

I don't disagree with any of that and was just curious. I don't need the liquidity and the slightly higher (2.7%) rates worked for me. Also the tax is deferred until I take it out down the road.
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It's a bond for natural gas producer EQT that is scheduled to mature in October 2022, with CUSIP 26884LAE9.

It's currently BB rated


It was just upgraded to BB+ and the yield is not at all attractive anymore.
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