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Started By
Message
In Schwab see some government bonds 10-20y yielding 6.09 and 6.12% respectively
Posted on 8/8/23 at 3:07 pm
Posted on 8/8/23 at 3:07 pm
They are callable FFCB and FHLB
Why so high? Is their risk? Seems like they are quasi government bonds. Seems like and awesome place for someone with 20y to go for their fixed income portion of retirement.
What am I missing?
Why so high? Is their risk? Seems like they are quasi government bonds. Seems like and awesome place for someone with 20y to go for their fixed income portion of retirement.
What am I missing?
3
Posted on 8/8/23 at 3:13 pm to thelawnwranglers
Both are government sponsored entities not agencies
Posted on 8/8/23 at 3:29 pm to thelawnwranglers
I haven't checked on these but the shorter maturities I've looked at are all callable. I've been checking 1-5 years. Pretty quick continuous calls. So if rates go down they call them and if rates go up they let them ride. Heads I win tails you lose. I won't touch them. I used to like to buy FFCB, FHLB, CoBank but no more.
Posted on 8/8/23 at 3:50 pm to thelawnwranglers
There's going to be additional risk premium but I'd take a guess that they have to entice investors with higher yield because of the negative convexity when yield drop. Same with MBS but MBS prices are way more complex than that.
Posted on 8/8/23 at 4:11 pm to wutangfinancial
quote:
There's going to be additional risk premium
I feel like you are telling me to diversify my bonds? Lol
Posted on 8/8/23 at 5:37 pm to thelawnwranglers
Callable bonds don’t typically appreciate like other long term bonds when rates ultimately fall.
If rates go up, you’re stuck. If they go down, the issuer will bail.
Most of these have coupons of 5.5-5.75%, so if rates fall 1.5-2% they’ll likely get called as soon as possible. Keep in mind the coupon is the cost to the issuer - the YTW is largely irrelevant to them even though it’s important to you.
A callable bond with a coupon of 2% isn’t getting called for a long time.
If rates go up, you’re stuck. If they go down, the issuer will bail.
Most of these have coupons of 5.5-5.75%, so if rates fall 1.5-2% they’ll likely get called as soon as possible. Keep in mind the coupon is the cost to the issuer - the YTW is largely irrelevant to them even though it’s important to you.
A callable bond with a coupon of 2% isn’t getting called for a long time.
Posted on 8/8/23 at 5:51 pm to slackster
quote:
Callable bonds don’t typically appreciate like other long term bonds when rates ultimately fall.
I don’t understand appreciate? Do they not pay out yearly or not until they mature? Why are we assuming rates ultimately fall? For a 10y I’m not sure they aren’t a good deal, historically rates are not really high
Posted on 8/8/23 at 7:16 pm to bovine1
quote:
Heads I win tails you lose.
Well put callable bigger deal breaker for me then I thought
Posted on 8/8/23 at 7:16 pm to baldona
quote:
I don’t understand appreciate? Do they not pay out yearly or not until they mature? Why are we assuming rates ultimately fall? For a 10y I’m not sure they aren’t a good deal, historically rates are not really high
Almost all bonds that we discuss on this board have a market value between purchase and maturity. Most retail investors think of bonds as buy and hold to maturity instruments, which is great, but bonds are traded all the damn time. If you think long term rates have peaked, buying a long duration bond (15+ years) could be a lucrative bet. Your bond will appreciate in price if rates fall, just as bond prices were destroyed in 2022 in a rapidly rising rate environment.
Part of buying a bond is at least understanding the price fluctuation of the bond until maturity. It will mature at par, but the price can swing wildly until then.
Posted on 8/8/23 at 7:19 pm to bovine1
quote:
I haven't checked on these but the shorter maturities I've looked at are all callable. I've been checking 1-5 years. Pretty quick continuous calls. So if rates go down they call them and if rates go up they let them ride. Heads I win tails you lose. I won't touch them. I used to like to buy FFCB, FHLB, CoBank but no more.
It’s an intriguing bet or they wouldn’t exist. Even if it’s called it’s markedly better than CDs with essentially the same risk.
However, if you’re buying them as a way to insulate yourself from rates falling, they won’t work.
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