Very good article about bonds and other things in Barron's this week:
A plain-vanilla U.S. bond index fund like the Vanguard Total Bond Market BND –0.56% exchange-traded fund (BND) pays 4.7%, or a point more than the latest year-over-year reading on inflation. Policy makers this past week left rates unchanged but held open the possibility of another hike, and indicated that they expect rates to remain above prepandemic levels for years longer. Charles Schwab fixed-income strategist Kathy Jones points out that Treasury yields tend to peak before the last rate hike of the cycle. She sees now as a good time to lock in bond yields before they fall.
Robert Tipp, the chief investment strategist at PGIM Fixed Income, has advice for tactical bond buyers. The middle of the yield curve appears to have priced in expectations of future rate declines more fully than the rest of the curve, he says. If interest rates don’t fall, these bonds could be subject to “roll-ups.” That’s where prices gently decline as bonds age to match the higher yields that are available now on shorter issues. To reduce that roll-up potential, Tipp recommends a barbell approach focused on bonds shorter than two years and longer than 10.
But less-tactical investors who simply buy a broad basket of quality bonds are likely to be happy enough with their results, says Tipp. “Yield is destiny,” he says, meaning that starting yields are a pretty good indication of future results. Many investors have too little in bonds now, he says, either because they ditched them when yields were ultralow, and they haven’t returned, or simply because stocks have sharply outperformed bonds of late.
https://www.barrons.com/articles/fed-interest-rates-stocks-bonds-ec0ae56e?siteid=yhoof2
Have I Bonds? It's a Great Time to Swap Them for a Record-Rate CD
KEY TAKEAWAYS
- I bonds purchased between late 2021 and early 2023 paid initial rates between 6.89% and 9.62%. But the current rate is only between 3% and 4%.
- You can cash out an I bond any time after it has reached its 1-year anniversary.
- CDs returns are at record highs, with dozens of the best nationwide CDs from federally insured institutions paying 5.00% to 5.80% APY.
- CD rates are locked for the full length of a certificate's term, allowing you to secure a guaranteed rate for months or years into the future.
- Depending on when your I bond was issued, the best time to cash in is likely 15 or 21 months after your issue date.
Comments on an ETF class like Invesco Bulletshares - For instance BSCU?
No opinions or thoughts on an ETF with the characteristics of BSCU from Invesco?
(Considered individual bonds but complicated and not enough funds to diversify. More "typical" bond ETFs choices seem overwhelming and somewhat confusing. These Invesco type ETfs appear to be a good blend option - But would like to learn more...)
Well, it depends on your time frame and how willing you are in not selling the fund before its calculated maturity. I am presently in the process of buying US Treasuries with time frames from 6 to 11 years (laddering) and will report back once I am done. If you look at the performance page for the 2030 version of BSCU for example, its history doesn't go back that far, so hard to judge. Plus its return has not been that good. Remember you make money on these types of ETF's by the interest I presume they kick out on what ever time frame, and the price of the fund itself. So its possible you will make some interest on the fund but after 6 years the price of the fund itself may be less then you payed for it, however unlikely that is. Am I making any sense??
Right now the 6 year Zero Coupon US Treasury is about 4.7%, guaranteed.
@pizzaman Thanks for the reply - Not really smart enough to know if you're making sense regarding the BSCU ETF, hence the discussion.
Goal is finding best option to "lock-in" close to current interest rates until about 2031. If interest rates tend to fall going forward shouldn't NAV for BSCU type ETF tend to rise, increasing return above "coupon" for average holdings?
Yes, if interest rates go down in the future, the value of bond funds, bond ETF's and bonds bought directly (if you sell them before maturity it would be easier to sell them on the secondary market) will go up. I think the issue you are most interested in is "lock-in" close to current interest rates until about 2031. Bond funds are diffidently not "locked in". The interest they payout at what ever time frame is not static, it varies based on the performance of the underlying companies that comprise the fund. If the stock market tanks, the interest the companies pay out will likely go down, and vice versa. So, if you want to "lock in" about 4.7% for a payout in 2031, and don't plan on selling before the maturity date of 2031, Zero coupon US Treasuries is the way to go.
https://www.businessinsider.com/personal-finance/what-is-a-zero-coupon-bond?op=1
@pizzaman OK, first, if an individual bond maturing in 2031 with 5% coupon is purchased at a discount, let's say $90 or 10% below par and held to maturity - Then the return should be the %5 annually over years to maturity PLUS the 10% appreciation when the bond value returns to par at maturity. Right?
I *thought* that these "Bond Maturity ETFs" were designed to mimic individual bond behavior - Created on a specific fixed date with a basket of individual corporate bonds which created an "average" YTM, which in the case of BSCU is 5.2% per the Invesco fact sheet (attached). And if the ETF is purchased at a discount to initial NAV, just like an individual bond, then the return is the sum of YTM plus appreciation... (Interest rates fall NAV rises and vice versa)
What am I misunderstanding?
Thanks for the feedback!
Correct on your first sentence. As far as BSCU fact sheet, they speakith is Invesco language. What does "bullet maturity" mean? I have no idea. So I looked it up and the closest I could find is this: https://www.investopedia.com/terms/b/bulletbond.asp
From the fact sheet: As the fund matures, its maturity, duration and YTM will continue to decline. On its target date, BSCU will unwind and return all
capital to investors. This structure permits BSCU to be used as a building block for a bond ladder. What?????? Hard to understand investments make me nervous.
@bo3b There is a lot to unpack related to your questions and pizzaman's response. Some of the key considerations that I would use to compare among the options that have been discussed include: (there are others, but these are what I look at most)
1. Goal for this particular investment - income, growth, capital preservation (all real adjusted for inflation)
2. YTM - total return if held to maturity for an individual bond or for bond fund it is somewhere between the duration and 2 times duration.
3. Reinvestment Risk - If rates fall, any distribution must be invested at the YTM or your YTM will be reduced somewhat
4. Duration - sensitivity to interest rate fluctuations (i.e. Interest rate risk) Roughly for every 1% in interest rate change, the fund price will increase/decrease by the duration. example: duration = 5 yrs, fund will decline by 5%.
5. Credit risk - Treasuries - almost zero, Corporates - look at portfolio ratings breakdown- take into consideration historical default rates and recovery to adjust YTM expectations
6. Holding period - is it greater/shorter than the duration - how long will you be able to hold the bond/bond fund
7. Inflation risk - longer duration bonds will have more inflation risk just because of the uncertainty
8. Interest rate environment - High/Low rates relative to historical, are they rising/declining - probability of what the future might be. We are in a relatively high rate environment right now so duration risk becomes less an issue compared to when rates were almost zero.
9. Other Market Conditions - growing economy, recession expectations, fed policy We are in a growing economy, recession expectations all over the map so who knows and fed policy is restrictive with the possibility of future rate increases and no clear indication of when rates might decline. Could we be in a new interest rate regime.
The BSCU fund by Invesco is a defined maturity bond fund that invests in corporate bonds that mature around the year 2030 as an alternative to buying individual bonds with similar maturity. They make a distribution monthly so that may or may not be important to you. The manager can and will adjust the portfolio in response to redemptions/purchases and other market considerations. The good thing is it is professionally managed, has a low expense ratio. The YTM is 5.93% and duration is 5.72 yrs. This is what you should expect if you hold the fund until it the final maturity date sometime in 2030 (need to look at fund prospectus). This does have credit risk, inflation risk and interest rate risk if you have to sell prior to final distribution.
They also have a treasury 2030 fund that has a YTM of 4.67% and duration of 6.09 yrs. There is no credit risk, but it does have both inflation and interest rate risk. Are you willing to accept the additional credit risk for the added yield?
These defined maturity bond funds can be used to set up a bond type ladder by purchasing funds with maturity dates corresponding to your desired ladder dates like individual bonds. You do need to be aware that as the bond approaches the maturity date, the YTM and duration will decline rapidly as the manager needs to unwind the portfolio and move it into some cash like instrument.
You could purchase zero-coupon bonds (corporate, municipal, treasury) that mature in 2030 as an alternative. The YTM for a treasury STRIP is about 4.7% with a duration of 7 years. These bonds are purchased at a discount based on the current interest rate and maturity. There are no coupon payments, instead you will receive the par value of the bond at maturity. You will pay taxes every year on the phantom income. Since the duration of a zero coupon bond is equal to the maturity, the longer the maturity the more volatile the bond price will be which adds additional risk if you need to sell prior to maturity. For example, the YTM on a 20 year zero coupon bond is about 4.9% today but for every 1% change in rates, the bond price will fluctuate about 20%. This is what happened in 2020 to long duration bonds and bond funds. These might be ok if you do not go out very far on maturity. Trying to predict what your income needs are 10 years from now is not something I have a lot of faith in.
Other options for a 7-year time frame would be TIPS if you want to take inflation risk out of the equation. You could by individual TIPS or Blackrock does have a TIPS defined maturity fund. There are also MYGA's that go out 7 years that have a YTM = 5.6% from an A rated provider. There is no interest rate risk or reinvestment risk. You can buy several MYGA's from different providers to reduce the "credit risk" just like you would with single corporate bonds.
If your time frame is more notional like 7 to 12 years, plain bond funds like Vanguard's treasury VGIT with YTM = 5.5% and 5.1 yr duration and/or corporate VCIT with YTM = 5.6% and duration of 6.2 yrs. These intermediate funds target a range of maturities (e.g. 5-10 yrs) and they maintain that maturity into perpetuity. If interest rates continue to rise, then the bond YTM will also increase but that will extend the time period that you need to hold it to get the new YTM. This is the approach I have chosen (along with TIPS and shorter duration funds) because I do not have a rigid time frame to cash in my investments. If I were saving for college and I knew when the money was needed, I might opt for the defined maturity fund.
Hope this helps.
@golich428 Thanks for taking the time to reply. Lots of great feedback and I think you touch on the key info I needed to confirm.
The manager can and will adjust the portfolio in response to redemptions/purchases and other market considerations. The good thing is it is professionally managed, has a low expense ratio. The YTM is 5.93% and duration is 5.72 yrs. This is what you should expect if you hold the fund until it the final maturity date sometime in 2030 (need to look at fund prospectus). This does have credit risk, inflation risk and interest rate risk if you have to sell prior to final distribution.
And your coverage of alternate options seem more complicated which is the exact reason the Invesco Bulletshares might be attractive.
@bo3b The other options are not more complicated if you spend a little more time with them, they just have different trade-offs and, in most cases, it is about your preferences, goals, and trade-offs that you are looking for. One thing I should have mentioned is that it is not all or nothing. I have a portfolio of bonds (TIPS, short duration, long duration, corporate, treasury etc.) and I look at YTM and duration as a weighted average. As far as the risks, I diversify a lot of it away and recognize that my weighted average YTM is what I expect from my portfolio over time. Good luck.
For First Time Since 2007, 10-Year U.S. Yield Reaches 4.5% Long-Term Average
Treasury Buyback Plan Will Boost Market Resilience, US Debt Official Says
The resilience of the world’s biggest bond market is top priority as US debt officials prepare to start buying back government debt, according to Josh Frost, the Treasury Department’s assistant secretary for financial markets.
“Buybacks can play an important role in helping to make the Treasury market more liquid and resilient,” Frost said Thursday in a prepared speech during a forum on the Treasury market in New York. Our goal is to “ensure that the Treasury market remains the deepest and most liquid market in the world.”
The Treasury is expected in 2024 to start regularly purchasing its bonds for the first time in more than two decades, a move that comes after years of increasing scrutiny on Wall Street about the $25 trillion market’s underlying fragility. The programs have two separate objectives: to bolster liquidity in some pockets of the market and to smooth the volatility of bill issuance as it manages its cash balance.
https://www.advisorperspectives.com/articles/2023/09/23/treasury-buyback-plan-boost-market-resilience-us-debt-official-says?hsid=28216572&utm_campaign=AP Newsletters&utm_medium=email&_hsmi=276372331&_hsenc=p2ANqtz-8sBWCPnqOagzzByZDPALDyEEEHAoY_l9W0BFSHxiBFS8tWUmExZ8sFh6uVpwIIEosdllJhPWrOBXo2AoiSTI3SRJWCtw&utm_content=276372331&utm_source=hs_email
20 year US Treasury hits 5%, yield curve is flattening.
