A weekly thread to discuss financial matters - from personal all the way up to global.
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Notes -
@stolen_brawnze asked me to info dump what I've learned about fixed income over the last several months. I'm on the stationary bike and I'm getting bored, so let's go.
If anything here is wrong, please correct me and I'll update the post. I'd rather somebody tell me I'm wrong than spread misinformation.
At the highest level, I've been looking at government debt and corporate debt.
Government debt, like the name suggests, is issued by government entities. At the federal level, that includes treasuries, and below that, you're mostly looking at municipal bonds. Treasuries are considered the gold standard for low risk investing. Municipal bonds usually offer lower rates, but are are tax exempt at the federal level. In most states, they're exempt from state tax as well if the bond is issued by your state if residence as well; if you're high income or high net worth, that can be a real win.
Commercial debt is a lot more varied. Unlike sovereign nations, corporations generally don't have standing armies and taxable citizens to guarantee their loans. Instead, there are a handful of private groups that rate corporate credit. Generally, riskier companies offer higher rates to entice lenders. Safer companies can get away with lower rates, because they're probably not going to go out of business before the bond matures.
Bonds are great, because if the company doesn't default, you'll always get back your face value, but they're kind of a pain in the ass to hold individually. Bond funds offer an alternative to this, but they come with their own risks. Bond funds hold rolling collections of bonds and generally returns distributions monthly as ordinary income. Bond funds that hold significant amounts of US treasuries are usually state tax exempt.
Bond funds that hold significant amounts of municipal bonds also carry a tax advantage.
Bond funds have an average duration, which is the weighted average time it takes for a bond in the fund to recover its face value. Longer durations tend to offer better returns, but this is not always a guarantee. Longer durations also carry more risk, because the interest rate is locked into the bonds that are held by the fund. When you hold a fund at X%, it's not as attractive if the same issuer offers the same bond at X+1%. Rate increases tend to make the share price of a bond fund drop. Conversely, rate drops tend to make older bonds with higher rates more attractive, which makes the share value of a bond fund rise. If you're using a bond fund for savings, you should favor shorter durations. If you're using a bond fund for income, duration matters less because the yields tend to even out. Roughly speaking, a 1% increase in rates will cause the share price of a fund to drop by a number of percentage points equal to the fund's average duration. This is why 2021-2023 were so terrible for bonds. The fed jacked up rates seven times in rapid succession and absolutely obliterated a lot of bond funds.
On the corporate side, there are also collateralized debt funds. Collateralized debt funds hold a basket of debt (mortgages are common) and divide the returns into tranches. When everything is going well, everybody gets paid, with the lower tranches getting a higher rate. When things go shit wise, the tranches might not get paid. The highest tranche is AAA, and these funds tend to be very safe by the standards of corporate debt.
Tickers
Ultra Short term treasuries: I like VBIL. SGOV is also good. Average duration is about a month, so the share value is extremely stable. You can see a clear sawtooth pattern every month as the value builds up before a distribution. I like this as an enhanced savings account that has state tax advantages.
Short term treasuries: SCHO and VGSH. I haven't found a particular use for these. Average duration is just shy of two years.
Weird outliers: Bondbloxx is doing interesting under XHLF and XONE. These offer a six month and one year duration, respectively. I'm also looking at BOXX, which is doing some sort of synthetic fund that converts returns into capital appreciation for tax efficiency. I'm still not sure how that works or how it's legal.
Collateralized debt: My go to here is JAAA. It has a short duration (about 2.5 months right now) and a decent return. Be aware that the distributions are considered ordinary income. If you want more return, there's also JBBB. If you want alternatives there's also PAAA and CLOA.
Short term corporate debt: I like VUSB and I hold it as ballast in my HSA. It has an average duration of about 1.9 years.
I want to put my balls on the table: If you're bold, there's FALN. FALN is a junk bond fund for companies that have lost their investment grade rating. The thesis for the fund is that companies that were once investment grade are more likely to get their shit together and pay you than their bond yields would suggest.
Municipal bond funds: Not every state has its own municipal bond fund. If you want a national grab bag for the federal tax advantage, there's VTEB. For particular states, California has CMF. New Jersey has FNJHX. Pennsylvania has FTPA. New York has NYF. You'll probably need to check your own state of residence. These are only usually worth it if you can find one for your own state or if you're fuckin' loaded and need to keep your tax burden down. Municipal bond funds tend to have a very long duration because they tend to fund large projects.
I don't want to think about this shit: BND or BNDW. The former is a snapshot of the whole US bond market. The latter is the whole global bond market.
I am very patient: EDV is a treasury ETF with an average duration of twenty God damned four years. The 30 day yield is 5.1% though, so if you're looking for income it's not bad.
Other notables:
Bogleheads like USFR, which is a fund that holds floating rate notes instead of fixed rate treasuries. It has a slightly better 30 day SEC yield than SGOV.
JSI was something of a fixed income darling earlier this year, but it's been having a hard time, having lost 2.68% of its share price YoY. It does have a 5.83% SEC yield, however.
VTIP is interesting. It holds Treasury inflation protected securities. TIPS have a base rate, then a second additional rate that varies based on inflation. In theory, it should help you hold on to value if inflation spikes. In practice, the government lies about inflation and even if they didn't you'd get taxed on those returns. I'm not sure how it would fit into my portfolio.
Usual disclaimers, etc., etc.
If, for some reason, you do want to hold individual Treasuries, and you are US based, you can do it through TreasuryDirect. Slightly clunky interface, but less annoying than other forms of individual bond holdings. You can also convert old paper issues there so you can ACH transfer and get a 1099 electronically. TIPS were mentioned, but individual investors also have access to a small amount of I Bonds.
If you ever do get into weird individual bond trading, be careful of bearer bonds, which can be a real PITA to deal with.
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