Bonds and Fixed Income

[BLADEMDA]

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So, I wanted to get opinions on the approach to Treasury bonds, ibonds, TIPs, TIPs ETFs, Municipal bonds, etc which you are placing in your portfolio. This year the volatility in the Bond market is almost a record.

Risk Free assets or low risk assets are my preference. Ibond at 9.62%, 6 month T-bills at 4.3%, 5 year ibond with a 1.7% yield plus inflation. CDs and Savings account are no longer the best choice for risk free assets.

 

[BLADEMDA]

Definition: The “real yield” of a TIPS is its yield above official future U.S. inflation, over the term of the TIPS. So a real yield of 1.80% means an investment in this TIPS will exceed U.S. inflation by 1.80% for 5 years. If inflation averages 2.5%, you’d get a nominal return of 4.3%, pretty much on par with a nominal U.S. Treasury. But if inflation averages 4.5%, you’d get a nominal return of 6.3%.

 

[BLADEMDA]

 

[BLADEMDA]

 

[BLADEMDA]

How can I compare TIPS to traditional Treasuries?​

Breakeven inflation rates. The breakeven rate is the difference between the yield of a nominal Treasury and the yield of a TIPS with a similar maturity. For TIPS investors, the breakeven rate can be considered a hurdle rate—it's what inflation would need to average over the life of the TIPS for it to outperform the nominal Treasury.
Breakeven rates are well off their recent highs. At 2.5%, the five-year TIPS breakeven rate is well off its recent high of 3.7% hit the past March. If the CPI were to average more than 2.5% over the next five years, the five-year TIPS would outperform a five-year nominal Treasury. (Likewise, if inflation averaged less than 2.5%, the nominal Treasury would outperform.)

TIPS yields are "real" yields, meaning they are already adjusted for inflation. But another way to consider those "real" yields is to consider the impact of inflation on the nominal returns.

The annual rate of inflation over the life of a TIPS is ultimately added to the stated yield when held to maturity. If inflation averages 3% for the next five years, for example, that 3% inflation rate would get added to the roughly 1.8% "real" yield that five-year TIPS offers today—resulting in a nominal return of 4.8% annually. The higher (or lower) inflation comes in, the higher (or lower) that nominal total return would be. That can be an important concept for investors who are worried that inflation will remain very elevated for a while.

 

[BLADEMDA]

The lockstep decline in bond and stock values has ruined balanced portfolios and diversification assumptions, of course, creating the worst nine-month stretch in several decades for the textbook 60/40 portfolio. Rock-bottom yields and above-average equity valuations are a starting point for inflation shocks and the take-no-prisoners Fed will do so. Yet as stock valuations fall and bond yields rise, the risk to the long-term buyer is decreasing and returns are expected to increase in the future. Which means that as bad as the 60/40 strategy has been this year, it is now at a better “entry price”. Market strategist Keith Lerner at Truist Investment Services ran some numbers on an estimated 60/40 return using current stock and bond conditions, finding that such a portfolio is poised to deliver 6.1% annually over the next decade; A year ago that estimate was 4.2%, a huge difference in performance anticipated in such a short period of time. That 6.1% (which is of course a projection and not a guarantee) is made up of a 7% S&P 500 total return and a bond-index gain of about 4.5%. Not very exciting, perhaps (the 10-year 60/40 annual return was 7.5%), but respectable. Further decline in the near term is certainly quite possible for stock and bond prices, but will lift the expected appreciation in a decade. “The key message is now that bonds are carrying their weight again and diversified portfolios are in a better position,” says Lerner. Huge returns on safe assets also mean that an investor is no longer penalized so much for risk aversion. Fifteen months ago, achieving a 6.5% yield meant buying CCC-rated junk debt, the lowest level of corporate credit with significant default risk inherent. Today, it is essentially a return on an investment-grade corporate bond index. Such changes to the financial system would certainly starve the most risk-averse companies of credit support, tip a good number into bankruptcy and make growth capital more scarce – not only great for economic dynamism in the short term, but Certainly part of the Fed’s program

Markets are returning to the 'old normal' of higher bond yields – what it means for investors - Business News

Bonds have been the main source of trouble for their owners this year and a key factor in the pain the Federal Reserve believes the economy and markets must

biz.crast.net

 

[s109442]

Both me and my wife put 10k in I-Bonds the rate is 9.62. That rate drops to 9.48 in November. An interesting take on why i think inflation has peaked. 2 year treasury bond pay 4.3 - the ten year is less. Corporate individual bond‘s paying north of 5.9. Goldman Sachs is the bond I buy - I will hold this bond until maturity.

have fun -I get to scuba dive everyday next week!

 

[kidthor]

Both me and my wife put 10k in I-Bonds the rate is 9.62. That rate drops to 9.48 in November. An interesting take on why i think inflation has peaked. 2 year treasury bond pay 4.3 - the ten year is less. Corporate individual bond‘s paying north of 5.9. Goldman Sachs is the bond I buy - I will hold this bond until maturity.

have fun -I get to scuba dive everyday next week!

Stupid question - but is there a benefit from buying from Goldman or whoever vs straight from the US Treasury?

 

[deleted1130227]

Stupid question - but is there a benefit from buying from Goldman or whoever vs straight from the US Treasury?

The only way to buy Ibonds or EE Bonds is from Treasury Direct.

TIPs and other Treasury instruments may be bought from Treasury Direct. Only at Auction. They may also be bought from Fidelity, Vanguard, et al. Auction or Secondary Market.

 

[pastafan]

I Bonds now or will fixed rate increase with the next interest reset?

 

[deleted1130227]

You don't have to decide until April, but my gut says before the May 1 reset is the right call.

 

[Ashers]

The only way to buy Ibonds or EE Bonds is from Treasury Direct.

TIPs and other Treasury instruments may be bought from Treasury Direct. Only at Auction. They may also be bought from Fidelity, Vanguard, et al. Auction or Secondary Market.

You can buy more than 10k/year in I-bonds if you use your tax returns. They are paper though.

I've bought 60k in I-bonds the last 3 years (10k personal 10k business). They've made more than the market.

My bank now has a 5% 15 month CD. Technically, it's a credit union, NFCU, so I put some money in there too. This is money I've been sitting on in a money market from selling my house 2 years ago, and I haven't bought anything yet. Even if I cash out the I-bonds before 5 years, I just lose 3 months of interest.

Edit 60k in I bonds over the last 3 years because I can't pay attention to what I'm saying while watching tv. 20k/y because I have 2 accounts.

 

[pastafan]

The paper I bond can be mailed in to the treasury and they will import it to your account. I did this but processing time is ridiculously long i.e. it's over four months and they still haven't completed transaction.

 

[deleted1130227]

The paper I bond can be mailed in to the treasury and they will import it to your account. I did this but processing time is ridiculously long i.e. it's over four months and they still haven't completed transaction.

I bonds have become VERY popular over the last year. I suspect that the Treasury's personnel dedicated to servicing them are overwhelmed. Your Bond is still earning interest.

 

[GassYous]

I bonds have become VERY popular over the last year. I suspect that the Treasury's personnel dedicated to servicing them are overwhelmed. Your Bond is still earning interest.

That's what happens when you give a 9% rate but I didn't put any because I don't like keeping track of multiple accounts and don't like that you lose interest if you pull it out too early. I felt like the rate will drop soon.

 

[pastafan]

That's what happens when you give a 9% rate but I didn't put any because I don't like keeping track of multiple accounts and don't like that you lose interest if you pull it out too early. I felt like the rate will drop soon.

Unless inflation tanks, this is a long term hold. Amount of interest lost is minuscule.

 

[linkin06]

I prefer to have cash on hand to Buy the Dip