Category: Bonds

Why I Will Never Invest in a Bond Fund

I think that bond funds and bond ETFs are a terrible idea for long term income investors.

by Fred Fuld III

Investors who are looking for income have several investment options, including money market funds, savings accounts, certificates of deposit, dividend-paying stocks, bonds, bond funds, bond ETFs, REITs, royalty trusts, and more.

However, I think that bond funds and bond ETFs are a terrible idea for long term income investors.

I think that all bond funds are terrible investments, even short term ones, and even government bond funds, especially during times of rising interest rates. The problem with bond funds is that there is no yield-to-maturity.

Remember, if you own a bond directly, and the bond drops in value, you will eventually get your money back at maturity.

When interest rates rise, bonds drop in value, and the net asset value drops. Many investors have a tendency to bail out when their investment drops, and when that happens, the fund managers need to sell bonds at a loss in order to handle redemptions, thereby locking in a loss on those bonds. The remaining bonds will eventually be paid off at maturity but that gain won’t cover the established losses.

Just one example of a short term government bond fund is the Vanguard Short-Term Treasury Fund Investor Shares (VFISX). The fund is down 5.4% during the last year, more than offsetting the yield on the fund, which is currently only 1.72%.. 

If yields drop or remain the same for a long period of time (I personally think that rates will continue higher), then in that case, the principal investment in the fund would be maintained. 

However, if you know that interest rates are going to drop, then you should probably be doing some interest rate speculation.

Does anyone really know what the Federal Reserve Board is going to do? Does the Fed even know what the Fed is going to do?

Interest rates have been very low for a long time, and we may see much higher rates in the future.

Are Interest Rates Due for a Rise Again?

So what is an investor to do?

There are bond unit investment trusts, also called fixed income UITs, which contain a fixed portfolio of bonds. The trust pays out income monthly. As the bonds mature, the principal is paid back to the investors. Most brokerage firms offer these investment vehicles.

Another alternative is to buy bonds directly. This way, even if interest rates keep rising, the bond will eventually be paid off at par, generally $1000 per bond.

Here is one example. An AT&T 2.45% bond maturing on March 15, 2035 is selling at 84.36. This means that the bond is selling at 84.36% of face value, or for a $1000 bond, it would be selling for $843.60. This gives a rough yield to maturity of 4.13%.

So if interest rates rise, the bond may drop in value, but you will eventually receive $1000 per bond in a dozen years.

Another option includes Series I bonds; however, they don’t pay out interest.

Stocks that pay high dividends may be an alternative, but an investor should consider the market risk and fluctuation over the years.

Here are a few stocks with a strong rising dividend history:

SymbolCompanyYield
XOMExxon Mobil Corporation3.21%
JNJJohnson & Johnson2.69%
KOThe Coca-Cola Company2.93%
MCDMcDonald’s Corporation2.26%
Yields as of 1/24/2023

Maybe some of these ideas will help you increase your investment income.

Disclosure: Author owns KO and MCD.

How Much Can You Lose by Investing in Bonds?

by Fred Fuld III

Have you considered moving out of stocks and into bonds to protect your investment portfolio? Think twice before you do.

Unless you are investing in Series I Bonds, you might want to avoid bonds at this time.

Remember, when interest rates go up, bonds drop in value. As a very simplistic example, If you have a bond paying 5%, and interest rates in general rise to 10%, a 30 year bond would drop to almost half its value.

Swift 25 Year Bond

Of course, you could sweat it out and hold on for 30 years to get your original investment back.

Even short term bonds can drop significantly, far exceeding what interest you have earned on the bond for the year.

You never know what the Federal Reserve Board will do with interest rates. Currently it looks like much higher rate hikes are in the cards due to rising inflation.

It looks like Fed Chairs are pushing for a 75 basis point (3/4%) interest rate increase for their upcoming meeting near the end of July hoping to help offset inflation.

So if rates continue to rise, how will it affect the value of your bonds?

The following shows what will happen to a 3% 30 Year Bond:

Value of a 30 year bond
If interest rates increase30 year bond
Interest rates3% bondDrop in value
3%$1,000.00  
4%$827.08 17%
5%$692.55 31%
6%$587.06 41%
7%$503.64 50%
8%$437.11 56%
9%$383.58 62%

The following shows what will happen to a 3% 5 Year Bond:

Value of a 5 year bond
If interest rates increase5 year bond
Interest rates3% bondDrop in value
3%$1,000.00  
4%$955.48 4%
5%$913.41 9%
6%$873.63 13%
7%$835.99 16%
8%$800.36 20%
9%$766.62 23%

The following shows what will happen to a 4% 30 Year Bond:

If interest rates increase30 year bond
Interest rates4% bondDrop in value
4%$1,000.00  
5%$846.28 15%
6%$724.70 28%
7%$627.73 37%
8%$549.69 45%
9%$486.32 51%
10%$434.39 57%

The following shows what will happen to a 4% 5 Year Bond:

If interest rates increase5 year bond
Interest rates4% bondDrop in value
4%$1,000.00  
5%$956.71 4%
6%$915.75 8%
7%$876.99 12%
8%$840.29 16%
9%$805.52 19%
10%$772.55 23%

Why Bond Mutual Funds are Bad

The worst possible bond investment during rising interest rates is a bond mutual fund. The reason?

There is no yield to maturity.

What that means is, if rates rise after you invest and never drop to that level again, then it doesn’t matter how long you hold onto the fund, even 50 years. You won’t get your principal back.

What can make it worse for the funds is if there are a lot of redemptions as interest rates rise and drop in value.

The fund is then forced to liquidate bonds at losses, thereby locking in losses for the whole portfolio.

Summary About Bonds

So if you have bonds in your portfolio, or you are consider buying bonds for your portfolio, make sure that you are aware of the downside.

Series I Bonds Now Paying Over 9%

by Fred Fuld III

How would you like to own the following investment:

  • It currently pays 9.62%
  • It is backed by the United States Government
  • It has an inflation factor
  • There is no commission
  • You can own it either electronically or in paper form
  • The interest is exempt from state and local income taxes
  • Interest earnings may be excluded from Federal income tax when used to finance education
  • The investment never drops in price
  • There is no minimum investment (well almost no minimum, you can invest less than $100)

So what kind of investment is this? No, it is not Forever Stamps. Sound too good to be true? It is called the Series I Savings Bond.

Here are the details.

What is an I Bond?

A Series I savings bond is a security issued by the United States Government that earns interest based on both a fixed rate and a rate that is set twice a year based on inflation. The bond earns interest until it reaches 30 years or you cash it, whichever comes first.

What’s the interest rate on an I Bond I buy today?

For the first six months you own it, the Series I bond is currently paying interest at an annual rate of 9.62%. A new rate will be set every six months based on the bond’s fixed rate and on inflation.

Special Benefits of Series I Bonds

You can own a bond in the name of a living trust. I know, because I’ve done it. It will be tied to you Social Security number.

For those that want to invest a lot of money in these bonds, they need to be aware that there is a $10,000 limit per calendar year per person. So a married couple could buy $20,000 now. Then next January, they could buy another $20,000, for a total of $40,000 in less than a nine month period.

In addition, there is another way they could buy more. An additional $5,000 per year can be invested in Series I bonds, using their tax refund. If you haven’t done your taxes yet (like me; I filed an extension, and yes, I’m still getting 1099s in late May), and you are expecting a refund of over $5,000, then $5,000 can be applied towards I bonds.

For next year, if you aren’t anticipating a big refund, you can always overpay your taxes by $5,000 so that you can get the maximum amount in Series I bonds for next year.

So assuming all things are in place, a married couple could theoretically invest $50,000 in I bonds in less than a year.

Who may own an I Bond?

Individuals Yes, if you have a Social Security Number and meet any one of these three conditions:

  • United States citizen, whether you live in the U.S. or abroad
  • United States resident
  • Civilian employee of the United States, no matter where you live

To buy and own an electronic I bond, you must first establish a TreasuryDirect account.
Children under 18 Yes, if they meet one of the conditions above for individuals.
Information concerning electronic and paper bonds:

  • Electronic bonds in TreasuryDirect. A child may not open a TreasuryDirect account, buy securities in TreasuryDirect, or conduct other transactions in TreasuryDirect. A parent or other adult custodian may open for the child a TreasuryDirect account that is linked to the adult’s TreasuryDirect account. The parent or other adult custodian can buy securities and conduct other transactions for the child, and other adults can buy savings bonds for the child as gifts.
  • Paper bonds. Adults can buy bonds in the name of a child.
Trust, estate, corporation, partnership and some other entities Electronic bonds (in TreasuryDirect): Yes
Paper bonds:

  • Trusts and estates: In some cases, Yes
  • Corporations, partnerships, other entities: No

How can I buy I Bonds?

Two options:

What determines who owns an I Bond and who can cash it?

How you register the bond at purchase determines who owns the bond and who can cash it. The registration is the name of the owner (either a person or entity), the Taxpayer Identification Number, and, if applicable, the second-named owner or beneficiary.

What do I Bonds cost?

You pay the face value of the bond. For example, you pay $50 for a $50 bond. (The bond increases in value as it earns interest.)

Electronic I bonds come in any amount to the penny for $25 or more. For example, you could buy a $50.23 bond.

Paper bonds are sold in five denominations; $50, $100, $200, $500, $1,000

How much in I Bonds can I buy for myself?

In a calendar year, you can acquire:

  • up to $10,000 in electronic I bonds in TreasuryDirect
  • up to $5,000 in paper I bonds using your federal income tax refund

Two points:

  • The limits apply separately, meaning you could acquire up to $15,000 in I bonds in a calendar year
  • Bonds you buy for yourself and bonds you receive as gifts or via transfers count toward the limit. Two exceptions:
    • If a bond is transferred to you due to the death of the original owner, the amount doesn’t count toward your limit
    • If you own a paper bond issued before 2008, you can convert it to an electronic bond in your account in TreasuryDirect regardless of the amount of the bond. (The annual limit before 2008 was greater than today’s limit of $10,000.)

Can I buy I Bonds as gifts for others?

Yes.

Electronic bonds: You can buy them as gifts for any TreasuryDirect account holder, including children.

Paper bonds: You can request bonds in the names of others and then, once the bonds are mailed to you, give the bonds as gifts.

How much in I Bonds can I buy as gifts?

The purchase amount of a gift bond counts toward the annual limit of the recipient, not the giver. So, in a calendar year, you can buy up to $10,000 in electronic bonds and up to $5,000 in paper bonds for each person you buy for.

Disadvantages

The disadvantages, although minimal are:

  • The bonds are Federally taxable
  • There is a maximum amount that you can buy
  • Minimum term of ownership is one year
  • Early redemption penalties if redeemed before 5 years, forfeit interest from the previous 3 months

So if you are looking to boost your yield on some of your cash, and getting more from a bank savings account, certificate of deposit, brokerage cash account, or treasury bond, you should seriously consider a Series I Bond.

How To Earn 7% US Government Guaranteed (No, It’s Not Forever Stamps, It’s a Real Bond)

by Fred Fuld III

How would you like to own the following investment:

  • It currently pays 7.12%
  • It is backed by the United States Government
  • It has an inflation factor
  • There is no commission
  • You can own it either electronically or in paper form
  • The interest is exempt from state and local income taxes
  • Interest earnings may be excluded from Federal income tax when used to finance education
  • The investment never drops in price
  • There is no minimum investment (well almost no minimum, you can invest less than $100)

So what kind of investment is this? No, it is not Forever Stamps. Sound too good to be true? It is called the Series I Savings Bond.

Here are the details.

What is an I Bond?

A Series I savings bond is a security issued by the United States Government that earns interest based on both a fixed rate and a rate that is set twice a year based on inflation. The bond earns interest until it reaches 30 years or you cash it, whichever comes first.

What’s the interest rate on an I Bond I buy today?

For the first six months you own it, the Series I bond sold from November 2021 through April 2022 earns interest at an annual rate of 7.12%. A new rate will be set every six months based on this bond’s fixed rate (0.00 percent) and on inflation.

Who may own an I Bond?

Individuals Yes, if you have a Social Security Number and meet any one of these three conditions:

  • United States citizen, whether you live in the U.S. or abroad
  • United States resident
  • Civilian employee of the United States, no matter where you live

To buy and own an electronic I bond, you must first establish a TreasuryDirect account.
Children under 18 Yes, if they meet one of the conditions above for individuals.
Information concerning electronic and paper bonds:

  • Electronic bonds in TreasuryDirect. A child may not open a TreasuryDirect account, buy securities in TreasuryDirect, or conduct other transactions in TreasuryDirect. A parent or other adult custodian may open for the child a TreasuryDirect account that is linked to the adult’s TreasuryDirect account. The parent or other adult custodian can buy securities and conduct other transactions for the child, and other adults can buy savings bonds for the child as gifts.
  • Paper bonds. Adults can buy bonds in the name of a child.
Trust, estate, corporation, partnership and some other entities Electronic bonds (in TreasuryDirect): Yes
Paper bonds:

  • Trusts and estates: In some cases, Yes
  • Corporations, partnerships, other entities: No

How can I buy I Bonds?

Two options:

What determines who owns an I Bond and who can cash it?

How you register the bond at purchase determines who owns the bond and who can cash it. The registration is the name of the owner (either a person or entity), the Taxpayer Identification Number, and, if applicable, the second-named owner or beneficiary.

What do I Bonds cost?

You pay the face value of the bond. For example, you pay $50 for a $50 bond. (The bond increases in value as it earns interest.)

Electronic I bonds come in any amount to the penny for $25 or more. For example, you could buy a $50.23 bond.

Paper bonds are sold in five denominations; $50, $100, $200, $500, $1,000

How much in I Bonds can I buy for myself?

In a calendar year, you can acquire:

  • up to $10,000 in electronic I bonds in TreasuryDirect
  • up to $5,000 in paper I bonds using your federal income tax refund

Two points:

  • The limits apply separately, meaning you could acquire up to $15,000 in I bonds in a calendar year
  • Bonds you buy for yourself and bonds you receive as gifts or via transfers count toward the limit. Two exceptions:
    • If a bond is transferred to you due to the death of the original owner, the amount doesn’t count toward your limit
    • If you own a paper bond issued before 2008, you can convert it to an electronic bond in your account in TreasuryDirect regardless of the amount of the bond. (The annual limit before 2008 was greater than today’s limit of $10,000.)

Can I buy I Bonds as gifts for others?

Yes.

Electronic bonds: You can buy them as gifts for any TreasuryDirect account holder, including children.

Paper bonds: You can request bonds in the names of others and then, once the bonds are mailed to you, give the bonds as gifts.

How much in I Bonds can I buy as gifts?

The purchase amount of a gift bond counts toward the annual limit of the recipient, not the giver. So, in a calendar year, you can buy up to $10,000 in electronic bonds and up to $5,000 in paper bonds for each person you buy for.

Disadvantages

The disadvantages, although minimal are:

  • The bonds are Federally taxable
  • There is a maximum amount that you can buy
  • Minimum term of ownership is one year
  • Early redemption penalties if redeemed before 5 years, forfeit interest from the previous 3 months

So if you are looking to boost your yield on some of your cash, and getting more from a bank savings account, certificate of deposit, brokerage cash account, or treasury bond, you should seriously consider a Series I Bond.

PINES and QUIBS and PD’s Oh My! How About Minibonds for Income Investors?

by Fred Fuld III

Have you ever considered Minibonds™ for an income portfolio or your retirement plan? (Not muni bonds, mini bonds.) These are bonds that are traded just like stocks on the New York Stock Exchange, American Stock Exchange, or NASDAQ for around $25 per share.

They are almost like preferred stocks except that they pay interest instead of dividends and they generally have a specific maturity date. In addition, they usually pay interest quarterly instead of semi-annually. Sometimes they are referred to as PINES (Public Income Notes) or QUIBS (Quarterly Interest Bonds) or QUICS (Quarterly Income Capital Securities) or QUIDS (Quarterly Income Debt Securities). There are even a few that are issued as Perpetual Debt, which means that there is no maturity date.

The advantages of Minibonds to the corporate issuers are that the interest is deductible to the corporation (unlike dividends which are not deductible).

The advantages to the investor are as follows:

  • The bonds are ‘safer’ than preferred stocks (in other words, if the corporation goes out of business, the bonds are generally paid off first before the preferred or common stock).
  • The Minibonds (with the exception of the perpetual debt bonds) have some limited protection against inflation versus preferred stocks in that if interest rates go up, their value will drop, yet the par value (usually $25) will be still paid back at maturity. Whereas, preferred stocks have no maturity.
  • The small denomination is a benefit, especially when looking at an annual IRA investment.
  • A fourth benefit is that since they are traded like stocks, there is more liquidity than buying or selling a $5,000 bond. However, these are still very illiquid investments. Most have a very low daily volume.

Here are a few worth reviewing in no particular order. Keep in mind that the stock ticker symbol shown may differ depending on which financial website you are looking and and which brokerage firm you are using. When you enter a quote on these with your broker and it doesn’t look right, you may need to call them to make sure you are using the correct symbol. For example, I found three different symbols for the Ford note, depending on the web site and broker.

Ford Motor Company 6.20% Notes due 6/1/2059 (F-B) (F-PB) (FpB)

Duke Energy Corp., 5.625% Junior Subordinated Debentures due 9/15/2078 (DUKH)

Chicken Soup for the Soul Entertainment, Inc. 9.50% Notes Due 07/31/2025 (CSSEN)

Bank of America Corp, 6.45% Income Capital Obligation Notes ICONS due 12/15/2066 (MER-K) (MER-PK)

AT&T Inc., 5.625% Global Notes due 8/1/2067 (TBC)

Pitney Bowes, Inc., 6.70% Notes due 3/7/2043 (PBI-B) (PBI-PB)

QVC Inc., 6.375% Senior Secured Notes due 9/13/2067 (QVCD)

Just remember, even though these muni bonds are exchange traded, they are not anywhere as liquid as the stocks of the companies that issued them.

Happy investing!

 

Disclosure; Author didn’t own any of the above at the time the article was written. 

Exclusive Interview with Dr. Henry Kaufman about the Economy, Interest Rates, Cryptocurrency, Inflation, & the Loss of Capitalism

by Fred Fuld III

The following informative interview was provided by Dr. Henry Kaufman, former economist at the Federal Reserve Bank of New York who later became a senior partner, managing director, chief economist, and director of research at Salomon Brothers, the most profitable investment bank in the world at the time. He was a frequent guest on Wall Street Week with Louis Rukeyser.

Dr. Kaufman’s Latest Book

His latest book, The Day the Markets Roared: How a 1982 Forecast Sparked a Global Bull Market provides the reader with the background of how the author predicted and sparked one of the biggest bull markets in history, and how the past can give insight into the future. It will be released on April 6, but can be preordered now. You can find more details about the book on a previous post.

We cover a lot in this concise interview, including:

  • The Economy
  • Interest Rates
  • Cryptocurrency
  • Gold
  • Inflation
  • National Debt and Deficit
  • Credit Quality
  • The Movement of the US Away from Capitalism and towards Statism

The Dr. Kaufman Interview

Enjoy listening to the great insights and information that Dr. Kaufman provides.

To stream the interview, click:

HERE

You can also download the interview as an mp3 by right-clicking here and choosing “save as.”

Other Books by Dr. Henry Kaufman

On Money and Markets

Tectonic Shifts in Financial Markets

The Road to Financial Reformation

Interest Rates, the Markets, and the New Financial World

Enjoy the interview, enjoy his latest book, and Happy Investing!

 

All opinions are those of Dr. Henry Kaufman, and do not represent the opinions of this site or the interviewer. Neither this site, nor the interviewer, nor the interviewee are rendering tax, legal, or investment advice in this interview.

 

 

 

 

 

 

Earnings may be generated from qualifying purchases of books from Amazon Associate affiliate links on this page.

The Day the Markets Roared: How a 1982 Forecast Sparked a Global Bull Market

by Fred Fuld III

The book, The Day the Markets Roared: How a 1982 Forecast Sparked a Global Bull Market, by Dr. Henry Kaufman, provides the reader with the background of how the author predicted and sparked one of the biggest bull markets in history, and how the past can give insight into the future. The book was released this week.

If you are not familiar with Kaufman, he was a former economist at the Federal Reserve Bank of New York who later became a senior partner, managing director, chief economist, and director of research at Salomon Brothers, the most profitable investment bank in the world at the time.

The older generation should remember him as a frequent guest on Wall Street Week with Louis Rukeyser.

The book goes into great detail about the events leading up to the beginning of the 1982 bull market and what happened afterwards. The Day the Markets Roared discusses the background of how Kaufman went from bearish to bullish.

At times, he received much criticism and threats for his opinions. These included physical threats, which even involved the FBI. My favorite chapter was Chapter 6 – Critics, Threats, and Humor, where he covers the extensive criticism he received from the press and even a death threat.

Probably the most important chapter is Chapter 10 – New Realities, which is a fascinating and unique analysis of the present day economy. Kaufman goes into detail about how COVID-19 has affected businesses, individuals, and state and local governments in the United States.

He also emphasizes how overall credit quality has been affected. Did you know that today, only two business corporations have a triple-A rating versus 61 in the 1980s?

Plus, there is extensive information on the past and present moves by the Federal Reserve Board.

Kaufman has a strong track record, and he has intriguing opinions about where the American economy stands now and where it is headed.

Therefore, I highly recommend that you get  The Day the Markets Roared as it was released this week. It just might save your portfolio.

 

 

 

 

This page includes Amazon Associate links

Want to Invest in Tesla Convertible Bonds? Good Luck!

by Fred Fuld III

A convertible bond is a bond that can be converted into a fixed number of shares of stock in the company that issued the bond.

The advantages of convertible bonds

  1. It pays a fixed income, unlike a stock which can lower or eliminate a dividend.
  2. If the company goes out of business, the bondholders get paid off before the stockholders.
  3. The bond has growth potential because of the conversion factor into shares of stock.

The disadvantages of convertible bonds

  1. They are illiquid, with most not traded on any exchange.
  2. They are hard to find and not all brokers carry them.

Companies that issue convertible bonds

  • Tesla (TSLA)
  • Nio (NIO)
  • Zillow Group (Z)
  • Square (SQ)
  • Snap (SNAP)
  • Microchip Technology (MCHP)

Now try going to your broker’s website or try calling them and ask what the quote is on the Tesla 2% convertible bond. Good luck.

Convertible Bond ETFs

The easier way to invest in convertibles is through an an exchange traded fund that specializes in convertible bonds, such as the SPDR Bloomberg Barclays Convertible Securities ETF (CWB), which actually owns bonds from such companies as Tesla and Nio. It is up over 50% for the last twelve months. This ETF pays a yield of 2.34%.

Another convertible bond ETF is iShares Convertible Bond ETF (ICVT), which in addition to owning Tesla bonds, owns convertible bonds in Southwest Airlines (LUV), DISH Network (DISH), and Snap. For the last twelve months, it has increased by 58%.

First Trust SSI Strategic Convertible Securities ETF (FCVT) is a third option. The ETF owns Tesla, Zillow and Square convertible bonds, among others. This ETF is up over 52% over the last twelve months.

If you decide to get into convertibles, let’s hope they can convert your portfolio into profits.

Disclosure: Author owns Tesla.

Who Owns the Treasury Securities that Make Up the National Debt?

If you ever wondered who owns the U.S. Treasury bonds, notes and bills that are loans to the United States Government, here is a list with a rough estimate of the amounts that the U.S. owes.

  • US Investors $6,890 billion
  • US Government $5,730 billion
  • Federal Reserve $2,380 billion
  • Japan $1,261 billion
  • China $1074 billion
  • United Kingdom $446 billion
  • Ireland $330 billion
  • Luxembourg $267 billion
  • Hong Kong $266 billion
  • Brazil $264 billion

The rest includes many other countries, such as Switzerland, Cayman Islands, Belgium, India, France, Saudi Arabia, etc.