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Fri Dec 11, 2015, 01:20 PM

I'm a bond novice seeking help

I'm ok in equities and general financial economics but I've never followed bonds at all and find online resources like investopedia assume basic knowledge I lack.

I have a decently diversified 401k including some in income bond funds. I have a small day trading account all in equities, a likewise modest amount in long term dividend paying equities and enough cash cushion to live for 6 months if needed.

What is missing there is as near riskless as possible long term investments that pay a bit more than savings accounts as I start looking to retirement (I'm 51 but hope to be done before SSI age). In theory that cries out for 30 year treasuries with some low risk corporate bonds maybe leavened in.

I much prefer self-managed rather than funds. My questions are admittedly rather naive but maybe I can get started here.

I'd like if possible to say buy $20k of 30 year treasuries and then add perhaps $1k a month to that, accelerating as expenses allow, and keep reinvesting interest payments until I need to withdraw. Is it possible to directly buy 30 year treasuries in such low amounts and if so how?

Really stupid question but it's amazingly one not covered in reference materials I can find. My assumption is that if I buy 30 years now paying a bit under 3%, then if prevailing interest rates rise so do my yields. Is this true or do they act like fixed rate CDs?

If I have to go with funds, which I suspect as I can't easily see any easy link to retail treasury buying opportunities, what are recommendations for very low load options?

Thanks all.

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Reply I'm a bond novice seeking help (Original post)
whatthehey Dec 2015 OP
progree Dec 2015 #1
progree Dec 2015 #2
whatthehey Dec 2015 #3
goldent Dec 2015 #4
A HERETIC I AM Dec 2015 #5
SheilaT Dec 2015 #6
A HERETIC I AM Dec 2015 #7
progree Dec 2015 #8
A HERETIC I AM Dec 2015 #11
progree Dec 2015 #12
whatthehey Dec 2015 #9
A HERETIC I AM Dec 2015 #10

Response to whatthehey (Original post)

Fri Dec 11, 2015, 02:09 PM

1. 30 year treasuries are fixed rate

[font color = blue]>> My assumption is that if I buy 30 years now paying a bit under 3%, then if prevailing interest rates rise so do my yields. Is this true or do they act like fixed rate CDs? <<[/font]

Nope, they are fixed rate, at least I haven't ever heard differently. Thus those bonds will lose value as prevailing interest rates rise on new bonds. Though if you hold them to maturity, you will get your principal back, plus in the meantime you've gotten 30 years of those nearly 3% interest payments (about 1.5% paid twice a year).

[font color = blue]>>I'd like if possible to say buy $20k of 30 year treasuries and then add perhaps $1k a month to that, accelerating as expenses allow, and keep reinvesting interest payments until I need to withdraw. <<[/font]

Well, this way, as prevailing interest rates rise, you will be purchasing new bonds having those new higher interest rates.

I guess you can buy them at TreasuryDirect.gov - a place to check anyway.

[font color = red]Edited to add:[/font] https://www.treasurydirect.gov/indiv/products/prod_tbonds_glance.htm

I'm not an expert.

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Response to whatthehey (Original post)

Fri Dec 11, 2015, 02:24 PM

2. There's also the new Floating Rate Notes, but are for just 2 year terms

Floating Rate Notes (FRNs)

The U.S. Treasury began issuing Floating Rate Notes (FRNs) in January 2014. Issued for a term of two years, FRNs pay varying amounts of interest quarterly until maturity. Interest payments rise and fall based on discount rates in auctions of 13-week Treasury bills.


https://www.treasurydirect.gov/indiv/products/prod_frns_glance.htm

and no doubt their interest rates are miniscule.

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Response to progree (Reply #2)

Fri Dec 11, 2015, 02:31 PM

3. Thanks for the help. It's weird how tough I'm finding it to get basic info

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Response to whatthehey (Original post)

Fri Dec 11, 2015, 11:21 PM

4. its widely expected fed will raise interest rates next week

I'm not sure if that expectation is already figured in today's rates, but if not you'd be advised to wait.

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Response to whatthehey (Original post)

Sat Dec 19, 2015, 04:40 AM

5. First of all, there are NO stupid questions in this Group!

Last edited Mon Dec 21, 2015, 01:25 AM - Edit history (2)

I've been meaning to write a post similar to the one I wrote about Mutual Funds for quite a while now, titled "All About Bonds", but seeing as I am a world class procrastinator, I have yet to get to it. It would answer most of your questions.

But anyway, let me see if I can clear up a few things for you.

One thing you don't mention is if your Day Trading account is tax qualified (An IRA for example) in any way. If not then you might want to consider a portfolio of Municipal Bonds in order to reduce your tax liability. Interest income on Corporate and US Treasury bonds is taxed as ordinary income but Municipal Bond interest is tax free, provided they are bonds issued in your home state. If you live in one of the 7 states with no state income tax (AK, FL, NV, SD, TX, WA, WY.*) then it does not matter and you can buy Muni's issued anywhere.

* NH and TN don't tax wages but they do tax investment income *

For the purposes of this post I am going to assume your accounts are not qualified and therefore you receive a 1099 each year from the brokerage.

OK....allow me to break down your post;

I'm ok in equities and general financial economics but I've never followed bonds at all and find online resources like investopedia assume basic knowledge I lack.

Investopedia is an excellent resource but they do tend to lean toward the more well versed on a given subject. Don't despair though, as there are definitions available and it can be quite informative.

What is missing there is as near risk-less as possible long term investments that pay a bit more than savings accounts as I start looking to retirement (I'm 51 but hope to be done before SSI age). In theory that cries out for 30 year treasuries with some low risk corporate bonds maybe leavened in.

In theory, yes, but these days the question you have to ask yourself is whether or not you are willing to tolerate 3.0 to 3.5% interest for 3 decades. Friday's close on the 30 year according to Bloomberg was 2.92%. on a 3% coupon (Linked page will update daily, so subsequent views of that page will give current yields and prices)

I much prefer self-managed rather than funds. My questions are admittedly rather naive but maybe I can get started here.

Nothing wrong with that in the least as long as you have the capital to construct a worthwhile portfolio.

I'd like if possible to say buy $20k of 30 year treasuries and then add perhaps $1k a month to that, accelerating as expenses allow, and keep reinvesting interest payments until I need to withdraw. Is it possible to directly buy 30 year treasuries in such low amounts and if so how?

The first sentence above is a perfectly sound idea (with an exception I will expand on below**).
The answer to your question is yes, absolutely, and you can do it through any brokerage with a Bond desk or Bond trading platform, most likely including the firm that you are day trading through as well as directly from the US Treasury via Treasury Direct. I use ETrade and they have one. Keep in mind that you will owe income taxes on interest paid to you on bonds held in an unqualified investing account, excepting Municipals.

Really stupid question but it's amazingly one not covered in reference materials I can find. My assumption is that if I buy 30 years now paying a bit under 3%, then if prevailing interest rates rise so do my yields. Is this true or do they act like fixed rate CDs?

Again, not a stupid question. As Progree mentioned in his post, the 30 year Treasury Bond is a fixed income security, meaning it pays a "Coupon Rate" (so called because in the old days you got a document with perforated coupons around the edges you physically tore off and took to the broker to get your interest payment) that is currently 3%. If rates rise and future bonds are issued with a coupon of a higher rate, yours will still pay only 3%, or whatever the coupon is on the bonds you buy.

If I have to go with funds, which I suspect as I can't easily see any easy link to retail treasury buying opportunities, what are recommendations for very low load options?

Fidelity and Vanguard are the two most well known, low cost Mutual Fund Companies. There are dozens of other Mutual Fund companies out there, offering literally thousands of Bond and blended (Bond and stock) funds, but Fidelity and Vanguard are among the largest and have numerous Bond funds to offer. However, there is no real problem buying individual bonds yourself. None at all. BTW, This post of mine in a thread below gives a little more insight on Bond Funds

**To expand on your purchasing idea, keep in mind that interest rates are going to rise in the coming months, and even though the recent move by the Federal Reserve doesn't directly affect Treasury Bond prices, coupons or yields as those rates are set by regularly held auctions, not by the Federal Reserve, it is just like a rising tide - it lifts ALL the boats so the Treasury coupons and yields will most certainly be affected. What that means is if you go out and buy twenty grand worth of long Treasuries, you are going to be stuck with bonds that will fall in value as new issues are auctioned with higher coupons. If you are OK with 3% as I mentioned above and are willing to hold them until they mature, then this is no big deal. You'll just have to stomach watching the value of the bonds dip on your monthly statements as time moves forward.

A couple strategies that may serve you better, and that bear consideration are a "Ladder" approach and a "Barbell" approach.

A Bond Ladder

This is the idea of staggering maturities over the course of either months, years or even decades. This allows for a bond or group of them to mature on a regular basis, freeing up cash to re-invest in newer issue securities. This is particularly effective in a rising rate environment. Sticking with your $20,000 initial investment, a very reasonable ladder that will allow for regular redemption could look like this;

Amount Maturity

$2000 90 days
$2000 180 days
$2000 1 year
$2000 18 months
$2000 2 years
$2000 30 months

Etc., etc, for ten total positions, spreading out so that maturities become a year or perhaps two apart at the long end.

This way you have bonds maturing at regular intervals and can buy at the long end with each subsequent infusion of cash as yields and coupons improve. (Edited to remove redundant sentence)


The US Treasury offers maturities as short as 30 days.
Treasury bills are issued for terms of 4, 13, 26, and 52 weeks.
Treasury notes are issued in terms of 2, 3, 5, 7, and 10 years.
Treasury Bonds are issued in 30 year terms.
Even though the US Treasury calls them "Bills", "Notes" and "Bonds" they are all still BONDS!

I should mention at this point that all US Treasury Securities with maturities shorter than 2 years are "Zero Coupon" bonds. What that means is that they are sold at a discount to par and mature at par, paying no periodic interest coupon payments. The difference between what you pay for them and their redemption value is your Yield.

This is shown on this page from Bloomberg.com

Note under the column titled "Coupon" it is "0.000" for the 3 month, 6 month and 12 month. The 2 year is quoted at 0.875.

("Hey Heretic! How the hell am I supposed to buy an 18 month bond when the Treasury doesn't issue one?!?".......Simple. Get your broker to buy a 2 year that has been held for 6 months already)


A Barbell

A Barbell allocation is one that has weighting in the near term, weighting in the long term and nothing in the middle.
This allows the flexibility to move money from one end of the barbell to the other as conditions warrant. If the yield on the long bonds begin to fall and the shorts begin to rise, one can sell off the long and buy the near term maturities. Conversely, if the opposite happens, you will have regular redemption of the short term securities to allocate as needed.


Since you admit you are a novice, allow me to give a bit of a "Bond Basics" tutorial here.

In the United States, the overwhelming number of bonds issued, be they Corporate, Municipal or US Treasury have a "Par Value" of $1,000.00, that is to say, when they mature, the issuer gives you one thousand dollars back for each individual bond REGARDLESS of what you paid for it. You can buy a bond for less than par, (A Discount) at Par or for more than Par (a Premium). Also, the vast majority of bonds issued carry a coupon rate as mentioned above. Typically the coupon is paid in two installments, 6 months apart. They make these payments on the day of the year that the bond will mature in the future and 6 months later. In other words, if the bond matures on January 1st, 2020, it will pay half the coupon payment on June 1st and half on January 1st, every year till maturity. On the day it matures you will get the second interest payment for the year and your grand back. The coupon rate is ALWAYS calculated against that $1,000 par, so a 3% coupon will pay $30/year.

To illustrate your interest reinvestment plan a little deeper, you would need to have 33 bonds paying 3% in order to buy a single one at par at the end of the year. Well...you would have to come up with $10 !

Bond prices are quoted as a percentage of par. You may see a bond quote that looks like this; 98.64. That means the bond is selling for ninety eight point six four percent of one thousand dollars. In this case it is a simple enough exercise to move the decimal point over one spot to the right and you have the price in dollars and cents. A bond quoted at 98.64 will cost you $986.40

Treasury Bonds however, are quoted a little differently. Still as a percent of par, but the digits to the right of the decimal are usually (I say usually because some quote platforms do not do this) in 32'nds of a percentage point. So you might see a 10 year or a 30 year quoted like this; 103-19. That is one hundred three and nineteen thirty seconds percent of one thousand. The easiest way to get to the actual dollar amount then is to divide one by 32;

1 / 32 = 0.03125. Multiply that by the number to the right of the dash (19) and you get 0.59375. Stick that next to the 103, move the decimal over and you get $1035.94 as the cost of the bond, rounded up, of course.

It is important to remember that the holder of a bond is due ALL interest up to the day of settlement of a sale. So if you buy a bond 45 days after the last coupon payment as an example, YOU must pay the holder the 45 days worth of interest and this is added to the cost of the bond. You get it all back and more when the next coupon payment hits though. A typical bond trading platform/program does all this automatically.

About Yield

Yield is a calculation based on price versus coupon or price versus redemption value (Par). Example;

If you buy a 5% coupon bond at par, your yield is 5%. If that bond has been bid down to say...95, your yield will be higher than 5% because you stand to gain fifty dollars if you hold it to maturity PLUS you gain the interest along the way. Remember, ALL bonds mature at par. Conversely if the bond has been bid into premium territory, say 105 then you stand to LOSE fifty bucks when it matures but you will still have gotten that interest. Clear? Calculating actual yield in the examples I give above requires knowing time to maturity, but we'll let that go for the purposes of this simple illustration.

When you hear Kai Ryssdal of NPR's "Marketplace" program say "Bonds rallied today, the 10 year Treasury fell to 2.35%" (or whatever) he is saying that bond prices were bid UP so therefore the yield fell. If he says "Bonds took a hit today and the ten year rose to 2.6%" then he means the prices were bid DOWN and the yield therefore went up. The yield YOU realize is set by the price you pay on the day of settlement and does not change. The Treasury does offer variable yield bonds called "TIPS" for "Treasury Inflation Protected Securities" but they tend to be a little complex and not worth the money, in my opinion.

It bears mentioning that Treasury securities settle "Same Day" , unlike all other bonds and almost every other traded security which settle "Trade plus Three". This makes Treasuries INCREDIBLY liquid investment securities and they are also just about the deepest and most liquid market on the planet. You can get a quote on just about any quantity of any series in seconds on a decent bond trading platform. The only thing that could be considered to beat them in liquidity is Federal Reserve Notes (Dollar bills).

One last thing -

How to find bonds and bond quotes;

One of the most extensive resources is the Finra Bond website
Go to; http://finra-markets.morningstar.com/MarketData/Default.jsp

To do a search, look to the left of the page under "Market Data" and click on "Bonds"

When that page opens, locate the "Search" tab next to "Market at a glance" and click it.
Make sure the "Corporate" radio button is dark and the "Bonds" Button is dark under "Show Results as" then, to get an idea of the number of issues they list, just click "Show Results".

It lists 2038 PAGES with 40 results per page! (As of this writing)

Go back and enter in "Caterpillar" for instance, then hit Show Results.
That will show 6 pages of 40 entries each. You can sort by each of the column headers at the top by simply clicking on them. Clicking on "Coupon" for example will sort by coupon amount, low to high. Click again and it will sort high to low.
Click on the "Symbol" for any single issue and another window will open with more information on that particular bond. That new window also has a link to the Prospectus for the bond which will give you all pertinent information such as date of issue, issue size, callable information, etc.

I hope that answers at least some of your questions. If there is anything else you would like to know, just respond to this post and I'll be happy to answer as best I can.

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Response to A HERETIC I AM (Reply #5)

Sun Dec 20, 2015, 01:09 AM

6. Wow. Thank you for this tutorial.

 

I already sort of knew much of what you posted, but it was fabulous to see it all here in one lovely post.

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Response to SheilaT (Reply #6)

Sun Dec 20, 2015, 01:55 AM

7. Well thanks!

I've actually started writing what will become a thread as I mentioned, that will go into a lot more detail, like I did for the Mutual Fund thread, but this subject is frankly MUCH deeper than Mutual Funds and since fixed income securities encompass numerous individual types, it is going to be a LOOOOONG OP!

I've just been putting it off for so long, partly because I am really busy these days and partly because I see it as a daunting task and I have yet to just simply get my nose to the grindstone, so to speak. Of all the things I learned about when I was a broker, bonds fascinated me the most. If I could go back 30 years, I would have studied and sought out a position as a bond trader - that's how much I love the subject.

It is deep and complex and there are forms of debt securities the average investor has no idea about. These are the kind of things I want to illustrate and clarify for the audience of this forum.

It might not be until Spring before I get it done, but I'll make a commitment to work on it a little every week.

Again, thanks very much for the compliment.

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Response to A HERETIC I AM (Reply #7)

Sun Dec 20, 2015, 03:23 AM

8. Yes, an excellent tutorial. Very much appreciated. nm

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Response to progree (Reply #8)

Tue Dec 22, 2015, 04:57 PM

11. Thank you for the compliment.

I appreciate it.

Regarding our exchange the other week on the Vanguard thread, let me apologize for being so pithy.

We are all entitled to our opinions but yours did not deserve the type of response I gave it.

I'm sorry.

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Response to A HERETIC I AM (Reply #11)

Tue Dec 22, 2015, 07:18 PM

12. Likewise pls accept my apology :-), Thanks. Actually I never saw your response --

you had self-deleted it before I saw it! So no harm done. As you probably noticed, I self-deleted mine too, so that it's all now in the bit bucket.

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Response to A HERETIC I AM (Reply #5)

Mon Dec 21, 2015, 10:24 AM

9. Wondrous thank you very much

Yep my main concern for this part of my investments is safety with return above bank interest but having some flexibility may be a good idea. After all it wasn't that long ago that banks paid more than the current 30 year yield on a straight savings account. I may have to investigate Munis somewhat as I assume they are relatively safe. My day trading (through trademonster) is non-qualified and I'm in NC (just moved here). Any hints on good municpal bond sources appreciated, but I'll be googling too so don't need to impose too much if you have nothing handy.


Thanks much again,

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Response to whatthehey (Reply #9)

Mon Dec 21, 2015, 08:38 PM

10. You are very welcome!

As far as Muni's go, the FINRA website I linked allows you to search for them and has a state specific feature. Just click the link;

http://finra-markets.morningstar.com/BondCenter/Default.jsp

Click the Search tab, then look to the far right for Municipals.

When you click that, a new drop down appears for "State"
Drop the arrow and click North Carolina.

Then you can narrow your search down to specific counties or cities.

Enter "Charlotte" or Asheville" or anything else and see what comes up. Again, search by yield but be sure to not get carried away when you see a 7%! Look at the price as well. If the yield is out of whack, the price has probably been bid down. That's a red flag! Look for the ones quoted at or very near Par. A discount is best provided it hasn't been bid too low. I would shy away from anything below...say...95 with ten years to go ie: a 2025/26 maturity date

Stay with the single or double A ratings or higher and when you find a few you think look good, make a note of pertinent info (Issuer, coupon, Maturity etc.) as well as their "CUSIP"

You can then take that to your broker and ask him to search his bond trader platform and see if any are available.

I noticed that "TradeMonster.com" is now called "OptionsHouse" and they do not appear to offer bonds. You're going to have to open another account somewhere else then (if you don't have one already), at a firm that offers bonds.

If you have any more questions about Muni's, feel free to ask. I may be a bit getting back to you, as it is pretty busy this time of year for me (but I had today off!! WOOHOO!!), but I'll respond as quick as I can.

Best of luck and good hunting!



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