Fixed Income Investing

Investing / Portfolios
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Preamble

    As the topic title says, this is a topic for discussing Fixed Income (FI) investing.
    It is not a topic for discussing FI investing versus investing in other asset classes.
    Feel free to discuss currency risk exposure, but please don’t make it the main topic.

      Topic is probably mostly geared towards people who want to see (relatively) stable cash flows from their investments.

      Cash flow is money these people – like myself* – want to live off on a monthly basis and therefore want it to be stable income.
      They do not want to be exposed to asset price fluctuations when they need sell because they need cash.
      Nor do they want dividends that might be cut because of a bad year.

      Thus, if you’re not interested in FI aka Bonds and/or feel equities are a better investment vehicle long term: I agree with you.
      But please consider moving on, as this is not what I would like us to discuss here.

      I’d like to discuss within the FI universe for people interested in fixed income what might be interesting.
      And what we should perhaps avoid.

With that out of the way …

I recently came across BINC, an actively managed bond ETF by Blackrock, currently yielding above 6%, and aiming to yield 6% to 6.5% (in USD).

Video description here: https://youtu.be/PMzETiuLItA?si=u9CNuNo7FzC9ecVo&t=3205

Bloomberg profile here:

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Things I found interesting:

  • according to the (apparently) legendary bond (fund) manager Rick Rieder it’s relatively easy to outperform a bond index (as compared to outperforming an equity index)
  • about USD 7 billion in AUM even though only launched in May 2023
  • they’re aiming to create 6% to 6.5% yield (bond selection will target the yield range: the holdings will flow from that)

I just bought my first tranche and I’m considering moving at least my BNDX allocation to BINC. BNDX invests alongside the Bloomberg Global Aggregate Index* ex US but “only” yields a little over 4% with an at least similar if not higher risk than BINC.*** And, despite (or because of?) being passive, it trails the bond index performance …

* Goofy is going to live off his portfolio starting next year. This scary outlook has turned Goofy into a temporary Chicken Little, wanting to generate income above all else. Goofy will likely return to equity investing (including stockpicking) once he has live experience and can stomach his approach working under the conditions his portfolio weathers next year.

** Think global universe and “Gold Standard” for bond investors.

*** As I am writing this up, I am seriously wondering why BNDX doesn’t yield significantly more than US treasuries. Pretty sure if US treasuries default, BNDX will be a dead fish belly up in a stinking sea of global bond investments … maybe other forum members have better informed views on this.
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Now that from 1Y onwards, the treasury yield curve has un-inverted, you could also build out a bond ladder. This is unfortunately complicated by risk of inflation and also FX.

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How do you measure yield here? (You’d have to take into account USD hedging, right?)

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Ah, denominated in the fund/ETF’s main currency. USD.

:slight_smile:

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What would be the tax drag in CH? I suppose you get this in IBKR, have filed the W8-BEN form there and will try to reclaim the CH tax via the DA-1 form?

Why would someone get this rather than build a bond ladder? I can see the following pros: guaranteeing both their principal and the coupon, and cons: inflation and that future bonds may have lower coupon rates.

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I, for one, do not know how to build a bond ladder.

Chat GPT will teach me about this, probably.

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You can do it using individual bonds or the newish fixed maturity bond ETFs. In Switzerland, medium term notes, if not bonds, would be the perfect tool for that as their duration is easy to match and they are not likely to go into negative yield territory, which bonds, when assessed in CHF, could very well do.

What you want is to have enough fixed income interest + bonds maturing at fixed periods of time to cover your expenses during those periods. It could theoretically be done during the accumulative phase but it makes more sense to use them to cover liabilities during the decumulative one. Liabilities matching isn’t a complete necessity to execute the strategy but it is where it makes the most sense.

To get started, choose an interval at which you want to get inputs of money. Let’s say 6 months.

You can build it in increments (choose your favourite starting duration for the rungs, say 10 years if you’re using medium term notes and building it early-ish in anticipation of retirement), in which case you’ll simply buy them at your chosen interval (here, 6 months), or all at once by mixing and matching maturities.

Example:

  • Let’s say I have 48k expenses per year.

  • I want to get money to cover them every 6 months.

  • My rungs will be, roughly, 24k of fixed income each (48k/2 - I can reduce it by the amount of interest I expect to receive during that period but that makes rolling it over more complicated).

  • Let’s say I want to have a 10 years ladder that I’ll roll over (I’m buying a new rung each time one gets to maturity).

  • I’ll buy:
    24k of bonds maturing in 6 months ;
    24k of bonds maturing in 1 year ;
    24k of bonds maturing in 1.5 years ;
    24k of medium term notes maturing in 2 years ;
    24k of medium term notes maturing in 3 years ;
    …
    24k of medium term notes maturing in 10 years.

  • In 6 months, I’ll buy the missing rungs with medium term notes maturing in 2, 3, 4, …, 10 years.

  • Each time a rung matures, I can either use it or reinvest it at the end of the ladder (buy a new 10 years rung, in this case).

  • If I’m using the rungs, I need to replace them. I can do it immediately (sell stocks to buy a new rung each time it becomes necessary) or later on (if I consider market conditions aren’t favourable and I don’t want to sell stocks right now). At a minimum, I’ll need to buy them back before the full length of my ladder gets depleted and I loose some interest by shortening the duration of the rungs if I don’t replace them immediately so waiting too long to replace them isn’t advised.

Et voilà, you’ve got yourself a fixed income ladder that will fuel your needs and mean you don’t have to sell no matter the market conditions for as long as your ladder can last, provided your expenses stay in check. As your expenses are fully covered by the maturing rungs, you don’t need to sell any early so the price fluctuations of your rungs on the way (if you use marketable securities like bonds) don’t matter and you are agnostic to interest rate changes during the length of your ladder (they still affect the amount of interests you can get but won’t touch your principal).

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I know that you don’t want to discuss currency. But the issue is that for fixed income investing currency is the main point

If interest parity holds, then you would end up paying higher taxes for USD denominated bonds/bond ETFs because coupon payment would outweigh the effective yield. I am wondering if you should consider hedged ETFs if the main reason is to have steady cash flow in CHF.

However if you would never sell the ETF and just use the coupons, then perhaps it wouldn’t matter much to you because capital loss is not of interest to you. You care about coupons.

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I agree with the above statemen that currency matters a lot for fixed income investing.

I guess the question is, in which currency you plan to spend the money, if you plan to use the nominal and when…

if you expect CHF expenses, it doesnt make sense to use other currency denominated fixed income.
If this is for your vacation in the eurozone, why not EU bonds?
If for international spending and you need to convert to whatever currency, USD is probably your choice.

If you need to access the nominal at some point, you could match the duration of the asset with the liability.

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That’s the answer. I’d have typed out the same (less clearly probably) but thought it improbable that @Your_Full_Name doesn’t know it already!

I have a friend who’s afraid of equities and came up with the idea of a bond ladder by themselves, buying 3-month Greek govt notes yielding around 3.5%/year. He’s done this for over a year now and…

…is hitting the obvious weak point of DIY bond ladders which is that he’s running out of rungs with good coupon yield as rates go down. Edit: key point, he’s doing this as an investment, doesn’t need the money as he has a job, which is different and much less stressful than doing it to live off.

A fund can pick and choose from hundreds/thousands of govt and corporate bonds from multiple countries to maintain a trickle of steady yield.

My chief issue with bond funds is that they too can be volatile, some swinging 30%, that’s unacceptable in all scenarios other than them being something you literally never plan to sell.

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Yeah, that non-investment grade exposure caught my eye, too. I suppose if your goal is to generate 6% to 6.5% yield you need to expose yourself to lower credit ratings. I hope that’s where the active management fairy dust kicks in to limit risk … :wink:

I’ve anyhow only put in a small amount of money and will watch it over the next year or so, now with a little skin in the game. This approach tends to work best for me to get a feeling for my hand-picked investments.

Thanks for the explanation!

As for the other comments (FX etc): thanks for your comments/concerns. But … maybe I should have clarified that I personally don’t plan to make any material change to my previous investment approach – generating income with a stock picked mix of dividend payers and dividend growth stocks plus a few bond indices and an international stock index, with the majority of the assets in USD – but just want to turn the dial a tiny bit towards generating “safe” (but still somewhat high) income while I get comfortable over the next couple of months or quarters with living off that income.
I expect myself to feel comfortable once those bills indeed get paid reliably and the dividends grow as they have in the past. I know this will happen, I just want to experience it happening to overcome a mostly psychological barrier with practical experience.
Once I feel ready I will likely again direct “excess” money mainly into those dividend growers/payers.

I understand this approach is not for everyone. Luckily, everyone can implement their own way they best feel comfortable with.

Back to discussing fixed income investments!

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Very interesting topic, I didn’t know anything about this.

I see Vanguard also has similar products, VCRB with a yield to maturity of 4.9% and VPLS with 5.1%. VCRB has a TER of 0.10% and less junk, which is interesting.

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U.S. 1 year treasury is at 4.2%.

The Vanguard products have a more attractive yield and they sport the Vanguard typical great (low) TER. Maybe a better alternative to BINC (which is obviously tailored for more greedy goofs like me … :wink: ).

Thanks for providing those pointers!

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  1. Goofy, if living in Switzerland, can’t escape currency fluctuations and tax. You’re cornered there.

  2. As an individual investor investing in bonds per se, you’re on the losing end. Specially with Swiss bonds. You’re losing money all the time.

  3. if you don’t want/don’t have the time/don’t care/ don’t have a large amount of money, building a bond ladder is NOT for you.

So I’d suggest looking into almost any PIMCO funds (ie PAXS, PDI, PDO, etc). They’re all bonds and debt based.

They offer Drips and pay monthly but in US dollars.

I’ve been living off them since 7 years. They’re still worth my money ( plus CH inflation and FX). I’m 55, so not yet retired.

As far as FIXED INCOME , you can’t work with the banks. You’re basically screwed. Let other people do the work (and get paid) for you. It is highly specialised.

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How do you manage risk of these income generating active funds from PIMCO? I had a quick look and they include risky assets such as junk bonds, mortgages etc. Furthermore for example the PAXS fund started initially at 20$ and is now trading around 16$.

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True, but … I feel I’m plenty buffered in that corner by a fat goose sitting in front of me laying golden dividend/coupon eggs that I pick up as we speak, not really worrying too much about FX or tax.

Just to re-state the purpose of this topic as I initially meant it: this isn’t a scientific rigorous analysis about how one in Switzerland should invest in equity or bonds and country X vs Y, it’s just about what what FI investments regardless of those considerations might be interesting.*

* Probably better suited for a different topic like “equity vs bonds vs jurisdiction X vs jurisdiction Y” (which may be half of the investing topics discussed here, but I digress):

  • I really feel fine with the currency fluctuations and my US over-allocation. Does anyone here seriously think that the CHF returns (equity or bonds denominated in CHF) will seriously outperform the US returns over the next decade or two when converted back to purchase power in CHF’s very own purchase currency?
    Maybe that will actually materialize index wise – S&P 500 vs SMI – because of the top heavy concentration in S&P 500, but I certainly do not expect this at all for an actively managed portfolio. Anyway, we’re way off on a tangent now … :slight_smile:
  • Tax as a cornered thing and losing as an individual investor in bonds per se. Maybe true, didn’t really understand your argument, though.