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I think preferreds could go on clearance sale again amid the next recession. Right now, nobody is talking about bank loan or mortgage defaults, and the word "contagion" has only so far been applied to sketchy crypto firms who borrowed dollars from each other using sketchy cryptocoins as collateral.
The narrative could change overnight, and we could again find ourselves talking about debt issues and bank solvency. The time to buy is *after* questions about the continuation of the US financial system have been percolating on mainstream financial media for at least a week.
As a note to self, today, on 6/30/2022 yields were:
BAC-K 5.93%
C-J 6.9%
GS-K 6.06%
MAA-I 7.27%
PFF 5.31%
PGF 5.56%
PFXF 7.61%
And the 5-year inflation breakeven is 2.59% and falling.
My screener shows me several long-duration bonds from BBB+ companies yielding around 7%.
For example, Disney (CUSIP: 254687AH9) and Reynolds (CUSIP: 761713BB1). There are several more plays if willing to go BBB or BBB-.
These are intriguing plays in a world where the 5 year inflation breakeven just hit 2.5% and the 10 year breakeven is 2.33%! That's quite a spread - four and a half percent for IG bonds. Are these the good ole days?
Looks like an attractive yield for corporate IG bonds. There is some risk if inflation were to get out of control, 1970s style. But in the base case where inflation slowly returns to 2% those yields are pretty nice!
Update / necropost:
I decided to start buying bonds last week. I'm staying away from financials for now, but still picking up 7.5% to 8% long-duration yields on profitable BBB to BBB- name brands like Energy Transfer, Viatris, Oneok, and Omega Health Investors.
These bonds lost 2-4% in the last 7 days as interest rates have been moving fast, but I've also only deployed about 10% of my cash portfolio so far. DCAing is the only alternative to the risk of missing these high yields altogether, so I'll have to accept the inevitability of imperfect timing. I hope to buy through the dip.
The game plan is to load up to 80% of my portfolio into bonds over the next several months. For the remaining 20%, I might then buy extra-long-duration stock index call options, or calls on TLT or ZROZ, depending on volatility.
I think the odds of "something breaking" are close to 100% at this point. When that happens, inflation will be an afterthought and we'll all be debating how quickly the FOMC will cut rates. I predict my bonds will appreciate faster than stocks at that future time, because their value is tied directly to market interest rates. Stock values are more directly tied to earnings which typically take years to recover.
If bonds recover faster than stocks, that will represent an opportunity to tilt out of fast-appreciating bonds and into slow-appreciating stocks in the early innings of a recovery. And if things don't turn out that way, maybe I've locked in all the yield I need to retire on.
Preferred stocks might be a good deal in the near future too, but for now I'm avoiding financials (bad loan / contagion risk) and finding more-senior long-duration bonds to be a better deal.
@chris-b Wow, that seems like a drastic move. I agree that bonds have gotten a bit more attractive. And yields have now come down again from Oct 24 to Oct 26. I could definitely see how some investors will benefit from shifting or at least rebalancing. But 80% seems a bit high.
@earlyretirementnowcom Well, I only deployed about 10% of my intended AA before bond yields went back down. The whole DCA-into-8%-bonds thing isn't going according to plan! At least the bonds I did buy have appreciated handsomely. I'm up 9% in one month on my longest duration bonds.
I remain hopeful I'll get another buying opportunity, but I'm also contemplating whether we've passed the peak of long-duration interest rates. I didn't back up the truck in early November because (a) more rate hikes were on the way at the short end of the curve, and (b) I didn't want to concentrate my portfolio in a relatively small number of names. Now, spreads between corporates and treasuries have narrowed, and the peak of the yield curve is in the 6-mo to 1-year range. This could be a short-term fluctuation.
So instead of long-duration corporates, I deployed cash into some 6 and 7 month treasuries yielding ~4.6%. I can sell these treasuries for a small loss if yields on long duration bonds go back up, but in the meantime my principal is safe and earning something with nearly no duration risk.
I expect these notes will mature and drop my capital into a more chaotic market this summer, ideally right into the middle of a recession. Then maybe I'll be shopping for stocks instead of bonds, OR maybe everyone will have realized that the Fed Funds Rate must exceed CPI for the CPI trend to go down and stay down. In the later case, the long-duration bond deals will be even better.
Typically during these sequences, long-duration rates hit a peak long before the Federal Funds Rate experiences its first cut, because long-term investors are looking beyond the next few months and comparing their long-duration bonds to a series of short-duration alternatives.
If investors again change their minds and their expectations for a 5% terminal rate with cuts by 4Q2023 become a 7% terminal rate with cuts sometime in 2024, then I'll take that opportunity to pick up more corporate bonds per the original plan. If that doesn't happen, I'll be awaiting the recession fire sale on stocks - perhaps 12-24 months from now.
