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Fixed income has definitively been a total return blood bath since 3Q21; the math is simple - price moves conversely with duration. Some spread widening has occurred which can be partly attributed to Fed attempts to reduce balance sheet.
For a ultra short duration with a "buy and hold" approach, SPACs purchased below trust value with the intent to always redeem on a business combination, sell above trust value, or wait until liquidation date may be worth consideration. According to SPACinformer.com around 75% of SPACs have a yield to liquidation over 3% with an weighted average maturity around 1 year. Some or all of the return may be capital gains rather than ordinary income. SPACinformer.com allows you to download the 700+ SPAC database for free to get the info needed to execute.
or shamelessly, you can outsource the strategy to Crossingbridge Pre-Merger SPAC ETF under the symbol SPC. One should only execute buys and sells with limit orders and all investments have risk with no guaranty of return (read prospectus). Other similiar pre-merger SPAC ETFs are SPAX and CSH. Now enjoy the tutorial cartoon video:
Thank you @davidsherman for posting. With my narrow view and understanding of SPAC's, I would never have even thought about them as a low volatility investment option, so I appreciate your post and tutorials. I've been in RPHYX for a while so I'm comfortable investing with you. An investment worth considering in this environment.
Fixed income has definitively been a total return blood bath since 3Q21; the math is simple - price moves conversely with duration. Some spread widening has occurred which can be partly attributed to Fed attempts to reduce balance sheet.
But no bloodbath in your income fund - RSIVX. Curious what lit a fire under it last year and how it is positive YTD this year. You are certainly doing something right.
A part of me struggling to understand the handwringing for buy-and-hold investors.
If you have a say 50/50 allocation between stocks and bonds, why would you not just rebalance? Take-advantage of the cheapness?
I get it with trend-following or trading strategies, which I like, but don't long-term investors need to accept that some years will be worse than others, no matter what the asset class?
I saw DODIX mentioned.
Let's say by end of year, it's -9%. About its worst MAXDD. Don't two +9's get remembered, as in 2019 and 2020?
Here are calendar year returns going back to 1990:
Year Count: 32 Worst Year: -2.9 Best Year: 20.2 Average Year: 6.4 Sigma Year: 5.5
Granted, all during secular bond bull. But there were certainly some periods in there of rising rates, if not with concurrent inflation.
Also, if there is sufficient liquidity, and there seems to be, why is selling a bond or TBill early bad? Can't you just pick-up another with the reduced principal but higher interest for the remainder of the planned term? Don't you end up in same place, less trading fee/bid spread?
Now if liquidity is crashing, I get it (e.g., IOFIX in March 2020, I do remember and will never forget). Is that what the concern is for investors ... that there will not be enough liquidity with everybody running for the door in bond fund land, perhaps including the Fed?
Excellent analysis and summary. I understand the worry with bonds but most investors are not able to trade in and out to successfully chase the best returns. The B&H path I am following.
What @davidsherman explained about SPC (it always redeeming SPAC shares by the close of SPAC merger deals) isn't clear at all from its prospectus or its other descriptions on websites. It is mentioned in passing within the long text of "Principal Investment Strategies" on pg 2 and 9 of the Prospectus and I would have just missed it. May be that is why others have misclassified it: SC-growth by M* and Yahoo Finance; global equities by ETFdb, etc. But the explanation by @davidsherman makes it like a fixed-income play on closing the discount by the SPAC merger deal closing except for some incidental pre-closing bounces and holding restrictions.
SPC seems similar to SPAX , but very different than SPCX that genuinely aims for large speculative profits (but large losses may happen instead).
Sold most of my IRA bond funds in February 2021. Many of them were up 8% at the time I sold. That seemed good enough for me. I don't really like bonds much anyways.
I still have some bond exposure from balanced funds PRWCX, VWINX, and VWELX. I also kept my positions in FFRHX and FRIFX.
I have recently sold some large positions in muni bond funds from my taxable account to harvest some tax losses and free up some dry powder. If I need the income there are better options in equity and sector funds.
I expect that smaller positions in VWLUX and VWALX will go as soon as next week.
“ Multi-Year Guaranteed Annuities.These are the equivalents of bank certificates of deposits, except that they’re sold by insurers. As of Friday morning, you could get a a 5-year MYGA from an A-rated insurer yielding as much as 3.15%”
“ Interval Funds. For those willing to own riskier assets, consider interval funds that invest in credit instruments. Many are paying 7% to 10% yields—equity-like returns with less volatility than stocks.”
“ The $2.9 billion Pimco Flexible Credit Income Fund (PFLEX) can buy any sort of debt, including residential loans and emerging-market debt. In terms of risk, “I would say it fits between bonds and equity,” says Christian Clayton, a Pimco executive vice president.
The fund has averaged a 6.3% return since its inception in 2017. But that included a roughly 20% decline in March 2020 as the pandemic shriveled the economy. ”
“ Multi-Year Guaranteed Annuities.These are the equivalents of bank certificates of deposits, except that they’re sold by insurers. As of Friday morning, you could get a a 5-year MYGA from an A-rated insurer yielding as much as 3.15%”
I think that annuities can be good investments for some (in limited cases) so don't take this the wrong way, but the assertion that SPDAs, esp. multi-year ones, are equivalent to CDs overstates their safety and misses some tax differences.
In terms of taxes, they are more like IRAs - withdrawals prior to age 59½ are subject to penalties.
In terms of risk, the column states that "Even if the insurer that sold you the MYGA goes broke, which is a rare event, you will get your principal back though you may get reduced interest." Well, sort of.
Executive Life of NY (ELNY) is a good case study of what could go wrong. This insurer was solvent when the state put it into receivership. (Its parent company was bankrupt and investors, not understanding the distinction, began a "run on the bank".) Bad things can happen even without the insurer going broke.
SPDA owners had a choice of: 1. Taking the cash value of their policies, which meant forfeiting possibly several percent of principal in penalties if they were not past the multi-year penalty period, or 2. Getting a new policy (with MetLife, a solid insurer) at a lower rate and with a new seven year penalty period (regardless of the term of the original contract) https://www.nylb.org/Documents/ELNY_VerifiedPetition_ExB.pdf
Sure, if you waited another seven years, you'd get your principal back with interest, but if you took the money and ran, you could wind up with less than the principal you started with. Likely to happen? Definitely not. Possible? Yes.
Thing to remember is that insurance co workouts take YEARS. The state insurance system doesn't have any pool of funds and does the workout by first seeking merger with a healthy co, and failing that, by running the failed insurer itself. I had experience with this when Mutual Benefit Life (MBL, an old, well-respected and highly-rated co until the run), a guaranteed-rate option within our 403b, failed due to a run. We were offered immediate withdrawals at 40% haircut, or the option to stick with the workout at prevailing m-mkt rates (that were about half of the guaranteed-rate by MBL) and that took several years to sort out. While money wasn't lost, there was opportunity cost due to frozen accounts. So, don't buy an insurance product from a low-rates co thinking that state insurance will you bail out quickly.
The insurance co workout is nothing like the FDIC workout for failed banks - close on Friday, reopen on Monday under a new owner/management. Main difference is that FDIC system is funded (or, very underfunded now). I have had that experience too, but that is for another time.
Failed banks are definitely handled differently. I worked with someone who in the 1980s sought out the highest yielding banks in Texas he could find. They were dropping like flies on a daily basis. But as you described, they closed on Fridays and he had access to his money the next Monday.
pdf shows all of ibond MUNIS redeemed at or above starting NAV. Two of ibond corporates redeemed at a loss from initial NAV but only 1.5% or so. I can't find any data for the Bullet shares on redemption NAV
Ibonds are far more diversified with thousands of individual bonds, vs hundreds in Bullet shares.
I ran a comparison of a five year Muni ibond ladder with VMLUX.
Duration is 2.49 vs 2.3 for VMLUX SEC 30 day yield is 1.22 vs 1.23.
To compare with VWIUX ( Dur 4.3) need to use Bullet shares for 7 year ladder ( ibonds only go to 2028 now)
Bullet dur 4.08 SEC 30 day yield 1.59%
Bullet 8 year ladder Dur 5.37 yield 1.77
VWIUX dur 4.9 SEC yield 1.77
These are equal amounts in each ladder. You could tweak it to adjust duration if you wanted.
With ETFs, like an individual bond, you know when and what $ you will get back for known future expenses. You also do not have to deal with amortization issues with premium bonds, and can deduct capital losses like any other ETF.
If current income is the goal, there is a slight advantage to OEFs, but you should ignore the current market price.
If you want laddering, DRSK maintains 90-95% in an investment grade corporate bond ladder and invests the remainder in equity call options. Up 7% annual since inception in August 2018. Held up extremely well during the 1st quarter 2020. I own only a small bit which is part of a 9-10% hedge position against unexpected (expected) declines in equities. / ER .60%
Not a replacement for a pure fixed income fund. Just tossing it out for consideration.
RSIVX Riverpark Strategic Income Fund is a unique fund in that it invests in various debt securities (some less liquid and many non-rated), distressed debt, with a decent allocation to foreign, some convertibles, and a 15% slug to equities.
Some holdings are duplicated from RPHYX, which is Riverpark's short-term HY fund. That's probably the more conservative sleeve.
As @Junkster had mentioned earlier, its held up quite well recently. I think that it's energy and utility investments might have helped there. Its up +0.44% YTD, and over 6% for the past year.
RSIVX is kind of a "go anywhere bond fund", but with a small allocation to stocks added on. Its been working pretty well in this environment.
Can’t help noting. Bloomberg this evening is showing the U.S. 10 year treasury at 2.47% and the 30 year just slightly higher at 2.58%. Makes no sense at all!
EDIT - Worse than I thought. At 10 PM Sunday: U.S. 30 year 2.61% / U.S. 5 year 2.59%
Essentially, the 30 year isn’t paying anything more than the 5 year (albeit 0.02%) How can that be?
The dreaded Inverted Yield Curve. Lead indicator of a potential recession.
This is often the case. However, the Fed purchased more than $4T in Treasuries and mortgage-backed securities (MBS) since March 2020. The 10 Yr. Treasury yield has been distorted and artificially surpressed.
This short post by Edward Yardeni discusses how the Fed is utilizing the yield curve as it searches for the neutral rate....
What about the narrowing yield spread between the 10-year and 2-year Treasuries? During the Q&A session, Powell countered that the yield spread between the 18-month forward 3-month Treasury and the current 3-month Treasury has actually steepened signaling economic growth.
Comments
Good to see you on the board @davidsherman.
SPC seems similar to SPAX , but very different than SPCX that genuinely aims for large speculative profits (but large losses may happen instead).
https://www.crossingbridgefunds.com/assets/spac-etf/crossingbridge-spac-etf-prospectus.pdf
https://www.morningstar.com/etfs/xnas/spc/quote
https://finance.yahoo.com/quote/SPC/profile?p=SPC
https://etfdb.com/etf/SPC/#etf-ticker-profile
I still have some bond exposure from balanced funds PRWCX, VWINX, and VWELX. I also kept my positions in FFRHX and FRIFX.
I have recently sold some large positions in muni bond funds from my taxable account to harvest some tax losses and free up some dry powder. If I need the income there are better options in equity and sector funds.
I expect that smaller positions in VWLUX and VWALX will go as soon as next week.
I Savings Bonds? I mean… it’s only 10K. Please…
“ Multi-Year Guaranteed Annuities.These are the equivalents of bank certificates of deposits, except that they’re sold by insurers. As of Friday morning, you could get a a 5-year MYGA from an A-rated insurer yielding as much as 3.15%”
“ Interval Funds. For those willing to own riskier assets, consider interval funds that invest in credit instruments. Many are paying 7% to 10% yields—equity-like returns with less volatility than stocks.”
“ The $2.9 billion Pimco Flexible Credit Income Fund (PFLEX) can buy any sort of debt, including residential loans and emerging-market debt. In terms of risk, “I would say it fits between bonds and equity,” says Christian Clayton, a Pimco executive vice president.
The fund has averaged a 6.3% return since its inception in 2017. But that included a roughly 20% decline in March 2020 as the pandemic shriveled the economy. ”
In terms of taxes, they are more like IRAs - withdrawals prior to age 59½ are subject to penalties.
In terms of risk, the column states that "Even if the insurer that sold you the MYGA goes broke, which is a rare event, you will get your principal back though you may get reduced interest." Well, sort of.
Executive Life of NY (ELNY) is a good case study of what could go wrong. This insurer was solvent when the state put it into receivership. (Its parent company was bankrupt and investors, not understanding the distinction, began a "run on the bank".) Bad things can happen even without the insurer going broke.
SPDA owners had a choice of:
1. Taking the cash value of their policies, which meant forfeiting possibly several percent of principal in penalties if they were not past the multi-year penalty period, or
2. Getting a new policy (with MetLife, a solid insurer) at a lower rate and with a new seven year penalty period (regardless of the term of the original contract)
https://www.nylb.org/Documents/ELNY_VerifiedPetition_ExB.pdf
Sure, if you waited another seven years, you'd get your principal back with interest, but if you took the money and ran, you could wind up with less than the principal you started with. Likely to happen? Definitely not. Possible? Yes.
The insurance co workout is nothing like the FDIC workout for failed banks - close on Friday, reopen on Monday under a new owner/management. Main difference is that FDIC system is funded (or, very underfunded now). I have had that experience too, but that is for another time.
More info on ETF bond ladders here
https://www.invesco.com/us/en/insights/how-to-build-a-bond-ladder.html
https://www.ishares.com/us/resources/tools/ibonds
Detailed analysis of redemptions and returns of ishares ibonds going back to 2012
https://www.ishares.com/us/literature/investor-education/ibonds-series-case-study-en-us.pdf
pdf shows all of ibond MUNIS redeemed at or above starting NAV. Two of ibond corporates redeemed at a loss from initial NAV but only 1.5% or so. I can't find any data for the Bullet shares on redemption NAV
Ibonds are far more diversified with thousands of individual bonds, vs hundreds in Bullet shares.
I ran a comparison of a five year Muni ibond ladder with VMLUX.
Duration is 2.49 vs 2.3 for VMLUX SEC 30 day yield is 1.22 vs 1.23.
To compare with VWIUX ( Dur 4.3) need to use Bullet shares for 7 year ladder ( ibonds only go to 2028 now)
Bullet dur 4.08 SEC 30 day yield 1.59%
Bullet 8 year ladder Dur 5.37 yield 1.77
VWIUX dur 4.9 SEC yield 1.77
These are equal amounts in each ladder. You could tweak it to adjust duration if you wanted.
With ETFs, like an individual bond, you know when and what $ you will get back for known future expenses.
You also do not have to deal with amortization issues with premium bonds, and can deduct capital losses like any other ETF.
If current income is the goal, there is a slight advantage to OEFs, but you should ignore the current market price.
Not a replacement for a pure fixed income fund. Just tossing it out for consideration.
Some holdings are duplicated from RPHYX, which is Riverpark's short-term HY fund. That's probably the more conservative sleeve.
As @Junkster had mentioned earlier, its held up quite well recently. I think that it's energy and utility investments might have helped there. Its up +0.44% YTD, and over 6% for the past year.
RSIVX is kind of a "go anywhere bond fund", but with a small allocation to stocks added on. Its been working pretty well in this environment.
EDIT - Worse than I thought. At 10 PM Sunday: U.S. 30 year 2.61% / U.S. 5 year 2.59%
Essentially, the 30 year isn’t paying anything more than the 5 year (albeit 0.02%) How can that be?
I think it reflects the "market's view" that the fed is way behind inflation which will continue to soar, so people want much higher short term rates
but it is likely that a recession will start and long term rates will come down
Apparently 30 year - 5 year inverted this morning.
However, the Fed purchased more than $4T in Treasuries and mortgage-backed securities (MBS) since March 2020. The 10 Yr. Treasury yield has been distorted and artificially surpressed.
I wish I knew the answer...