Once again we see ‘soft’ economic data and substandard earnings in the tech sector and interest rates and equity prices ‘party’. Actually it is kind of nice to have days like the last few–give us all a mental rest. My accounts have bounced a little–with the emphasis on ‘little’.
New house sales came in soft this morning – down 10.9% from August and down 17% from a year ago—not exactly a crumbling market, but directionally favorable for interest rates. The 10 year treasury yield is all the way down to 4.01%–down about 10 basis points. Seems folks are hanging their hats on a ‘pause’ or less hawkish view from the Fed come 11/2–moving these markets higher kind of sets us up for potential disappoint from Fed Chair Powell.
Yesterday I did nibble on the 2 issues I mentioned – here. Now I am looking to see if I want a little more of the Customers Bancorp (CUBI) 5.375% baby bond (CUBB) with a current yield of 6.62% and a maturity in 2034–with cash positions being very low I am ‘shopping’ carefully.
Charles, Hopefully Jay helps us pick up a few more next week!
Now I know how a Yo Yo feels. My wife’s IRA was up 4-1/2% yesterday and down 3% today. After 3 up days in the market I guess investors are booking some profits. None of my buy orders hit today.
I noticed CNBC made a big deal of the Bank of Canada raising only 50 bps not 75 bps and bond market reacting. Its funny they dont mention the details though. The market loves to anticipate and then react from that I suppose.
Given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the Governing Council expects that the policy interest rate will need to rise further. Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding. Quantitative tightening is complementing increases in the policy rate. We are resolute in our commitment to restore price stability for Canadians and will continue to take action as required to achieve the 2% inflation target.
I guess it is the perceived ‘blinking’ of CA, AUS, MX, UK, Mary Daly etc.. if nothing else the flux is great for grabbing intermediate and long term bargains!
Bea, Im not not blinking, Im too busy keeping fingers crossed as my CAD preferreds are bouncing and currency gains are slowly coming my way too. But no PennYless victory lap article yet, as it could all roll over in a day as we know. I seen UBP preferred broached 8% today. I dumped some WCC-A on a quick 80 cent plus gain for a few days hold. I may look at them in a couple days if they keep sagging. I wont be able to watch much next couple days.
I truly don’t understand mass media’s obsession with non-existent Fed pivots, pauses, and signals only their delusional and I suspect anti-business left wing reporters see. I watch Bloomberg Surveillance most mornings, they can have on 5 guests that say the Fed will continue to hike rates through 2023 and as soon as the guest is off the air, the hosts immediately revert back to their phony pivot narrative.
What can possibly be behind this? Fourteen years of 0% interest rates not enough for the talking heads?
And this is across every media platform and supposed news outlet? Any thoughts on why there is this deliberate attempt to push back against the Fed and manipulate sentiment?
I just bought a 5% 5 year GIC in Canada, 4.75% US non-callable CD and a 4.125% seven year US Treasury. I love the fact that the Fed and BOC are finally returning rates to a level of normalacy.
Richard, Great post.
Richard, obviously none of us know exactly what the Fed will do or when they will do it. My best guess is that Jay does what he says he will and does NOT “pivot” until there is convincing evidence that inflation is headed down and will stay down. We can debate whether “down” is 2.0% like the Fed states or if they would settle for say 3.0%. The argument the Fed will pivot sooner is based on something(s) “blowing” up while they wait until that forces them to pause the rate increases. Lacy Hunt has what I think is an excellent solution to that which is to have the troubled entities use the Fed’s “discount window.” Long story short, Fed regional presidents have the power to lend to member institutions any amount of funds. For decades it has been frowned upon because it conveys a sense of desperation about the borrower. I.e, nobody else will lend them money except the Fed.
As for the media, I generally don’t watch or listen to any of them. The only thing I do some nights is watch Bloomberg TV from ~1am to ~3am Eastern time. They cover Europe and Far East markets and talk about news. Joe Granville used to watch the ticker on the bottom of FNN with the sound turned down. He did not want to get biased by listening to what the commentators said. The media has to have a bullish bias, hence today the great hope is for a Fed pivot. The common belief is that things will get bad, the Fed will pivot, markets will zoom back to all time highs and we will be back in Kansas. And I am guessing that most III’ers are not net short the broad market, so they also want lower rates/higher prices. Many III’ers are happy to be picking up issues they like at lower prices, but would probably be happier if the 2022 YTD downturn had NOT occurred. Other than net short investors, the main people who should be thrilled with lower prices are young investors that are accumulating commons. These lower prices are raising their long term expected returns. Unfortunately, these same young people are totally ruined in housing due to 7.1% 30YR mortgage rates. They all think they have a god given right to <=3.0% mortgages.
T2 the permabear
Richard, it is to obvious, the media are shills for big money. We are watching market manipulation at work.
Here is the latest “free” update from ECRI
https://www.forexanalytix.com/webinars/?v=wvGoduxL3ks
It is very informative – you can jump ahead to 32:40 to get their take on the fed and recession.
Cheers!
36 Cubb nibbled by somebody -so far today … right now my appt is with Cubi-E, but Cubb is nice too.
Tim –
I still disagree with your emphasis on mentioning current yield without mentioning yield to maturity on a a term issue like CUBB. I’m assuming you’re using 20.30 as the dollar price generating a 6.62% current, but along with that 6.62% current you’re also getting a reasonably tasty 7.77% YTM….. I think earnings come out after the bell today, so let’s see if CUBI once again proves the stock doubters wrong… as a stock, CUBI always seems to be the Rodney Dangerfield of banks.
2WR – I don’t know. To me YTM is irrelevant on an issue not maturing until 2034. I don’t think most people hold issues that long (even if they go in with the intention of doing so).
I can see your point on something maturing in 2 or 3 years but beyond that , well . . .
Mav – It’s not a matter of whether or not most people hold to maturity or not. It’s a matter of what should move the market price more – current yield or YTM. IMHO if an issue has a maturity date, it should be YTM broadly speaking. I think perhaps because we’ve been living for so long in a world where all these vehicles have been trading at premiums to “par,” maybe that concept has become buried… However, now that we are not, I think it will become more recognized… The concept becomes more obvious the greater the difference is on a price to par basis, or in other words, on a theoretical 4% 7/1/2034 bond in a 7% 7/1/34 @ par world. Try matching up current yields on a 4% 7/1/2034 maturity issue where the issuer also has a 7% issue trading around par outstanding. We’ll even assuming a noncallable 7% for the sake of argument.. If you match up current yields on that 4% issue, it would be trading at $14.29. Should that 4% issue only be worth 57% of par and only a 10.29% YTM? I sure don’t think so, do you? if it did trade there, I’d have to take my old 1981 Ford truck out of the barn and see if I could fire it up.
2 wr,
Mav is correct – but you are too.
Not current yield v YTM…what you’re looking for is the IRR.
IRR incorporates both your correct emphasis on YTM and Mav’s correct emphasis on the time value adjustment related to receiving funds today v periodic payments over the term v 12 years from now.
On some of the issues being discussed here yesterday the IRR, which is correct tool for discounting future cash flows, was close to a full percentage point (6ish% v 7+%) less then perceived.
A – See what you think about this investopedia article on YTM and IRR…. It’s easy for me to readily admit I don’t have the math skills to argue the difference or relative importance of IRR vs YTM, but I do know what’s always been convention in the bond world… Does this article make any headway in determining what’s more important or when? I suppose either way, we’re not determining what’s more important, YTM or current yield, in deciding on what’s a better buy, but here’s the article – https://www.investopedia.com/terms/y/yieldtomaturity.asp
It starts with this: “Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. Yield to maturity is considered a long-term bond yield but is expressed as an annual rate. In other words, it is the internal rate of return (IRR) of an investment in a bond if the investor holds the bond until maturity, with all payments made as scheduled and reinvested at the same rate….”
Also this article https://askanydifference.com/difference-between-ytm-and-irr/ “The main difference between YTM and IRR is that Yield To Maturity is required in bond analysis to decide the final(relative) value of bond investments. At the same time, the Internal Rate Of Return is used in reviewing the relative value of projects. These are two crucial terms that every investor must be aware of….”
Just one more – Here’s Zack’s saying, “The yield to maturity of a bond is the interest rate that equates the price of the bond with the cash flows you receive from that bond — the rate you are getting if you assume that “what you get back” is equal to “what you put in” when you bought the bond. That also happens to be the exact definition of the internal rate of return of an investment. YTM, therefore, is simply another term for the IRR of a bond.”
https://finance.zacks.com/calculate-multiple-year-holding-period-returns-dividends-1464.html
What’s all this mean??? I haven’t a clue…. but I will continue to believe (and not know know the impact of IRR) YTM is or should be the dominant calc on an issue with a maturity… I think now for the moment, I’ll just go back to listening to Taj Mahal and Ry Cooder………https://www.youtube.com/watch?v=RxvORYMCppw&ab_channel=NonesuchRecords Hooray hooray!
The IRR and YTM should be the same, because they are pretty much the same thing for the purpose of calculating yield. The YIELD function (courtesy of mbg) in Excel or Google Sheets should also get you the same answer.
2WR, I have to admit I don’t have other peoples life skills and experiences, but I just want to know current yield. I think in the time I have followed Tim and this website this is what he has mostly given us is yield on the current price of the investment. I admit I just found out yesterday talking to a nice lady named Morgan at T Rowe what yield to worse is.
I understand the concepts talked about here of IRR & YTM are important, but it seems more like a philosophical discussion of how many angels can dance on the head of a pin.
I want current yield to build up a income we can live off. The YTW is a consideration if the investment gets called and I am aware of that risk. The questions of what the yield is if dividends are re-invested or the stock or bond is held to maturity are the dessert or icing on the cake that I may not live long enough to enjoy. Right now I just want to enjoy the smorgasbord. At this point in life I may not do more then deposit dividends into a interest bearing sweep account to pull income out of or have a few holdings directed to reinvest dividends into more shares.
Anyone have a link to a yield calculator that saves me manually figuring out current yield? Trial and error I came come up on a 6.7% bond at 93 is about 7.2% current and the site I was using shows a 8.667% YTM
The 8.667% is mis-leading if I want my current yield.
Charles – There’s a place and time for each, but 100% reliance on current yield implies you’re looking for baby bonds and preferreds being offered at premiums to “par” only because those will give you the highest current yields. That’s not the case for you, is it? You must REALLY be loaded up on WCC-A given your reliance solely on current, Charles… That’s WAY cheaper than anything else comparable on a current yield basis only, especially for near IG. BTW, I just woke up from my YTM v IRR induced coma and had one additional comment…. The more I think about it, the more I think that perhaps the concept of “duration” might enter into understanding where these two meet….. Alpha’s example as I think he agrees, was of extreme cases such as a par bond vs a zero coupon bond and that sort of obscures the premise. But when you think of duration, that might better illustrate his point… In other words, a 4% bond will have a noticeably longer duration than a 7% par bond of the same maturity…. That means that one should/could consider the 4% bond to require the equivalent of a longer implied maturity than the 7% bond and, therefore is worthy of an adjusted higher YTM relative to the 7% bond……. is that what IRR does, A? Uh oh!!! Here comes that coma again..
2WR Want to apologize on that comment of mine. Waking up at 4:30 in the morning was part of it and been having a bit of a brain fog for a while. Need to go into hibernation again. You can find anything on the internet if you Google it so found the simple formula for current yield.
No, I regret passing on WCC but if it gets close to 2 qtrs of payments I may break the rule of not paying more than par.
I am in CUBB below par right now seems like a safe place and reasonable risk. In my higher risk bucket I have NYCB-PU Things change, but Grid pointed out to me several years ago that the dividend was paid on it all through the Great Recession. I bought some during the Covid drop but sold to take the profits for flipping. I regret I didn’t have more funds or I would of kept. Told myself if it went back below 42.00 I would buy it back and now back in at 41.70
Thanks – I have my Master’s in Electrical Engineering which required me to take nearly every math course and level known to man. That said, these financial calcs are befuddling to me nonetheless!
2wr, Choose one:
Pay Me Now
Mav buys a $25 par, 6% coupon issue for $25. Six years of dividends ($9) are PAID AT THE END OF QUARTER 1. It is then redeemed for $25 at the end of 6 years. The issue pays out $9. Basic YTM=6%, IRR=7.553%
Pay Me Later
Mav buys a $25 par, 6% coupon issue for $25. Six years of dividends are PAID AT THE END OF THE 6TH YEAR. It is then redeemed for $25 at the end of 6 years. The issue pays out $9. Basic YTM=6%, IRR=5.253%
YTM is the same, but with IRR, Mav correctly identifies the first option as vastly superior.
IRR is especially important when looking at low coupon preferreds/bonds whose total return relies heavily on a cap gain from redemption years into the future. This matters in issues like recently referenced TVE, also CNLHP, CNHO, CNTHO, NMPWP, NMK-B, NSARO, CNLTP and many more. In each of these cases, YTM is not what it appears to be due to long wait times to cap gain in final disbursement.
In comparing yield of issues for buy/hold/sell, not using current yield, might reference YTC/YTM, but ultimately rely 100% on IRR and QDI status.
Alpha – thanks. I was out most of afternoon / evening and your post explains my thoughts better than I did in my initial post.
There is a time value to money that one needs to be cognizant of – so on a longer dated issue, if most of your projected return is due from the capital gain getting back to par by the redemption date, that should impact one’s decision making.
I know Martin mentioned that “In an efficient market the price would creep up a little each year to account for YTM” but we know the markets are not always efficient, especially the longer out a maturity date is from today
Sorry alpha, your calculations are a bit incorrect here. Your “pay me later” example–as you describe it–is essentially a $34 six-year zero coupon bond that was issued for $25. Stick that in the old financial calculator and you’ll see that the YTM is 5.26%… exactly the same as its IRR.
I’m not sure how you’re getting a YTM of 6% on the first bond, either. Your number’s too low.
O.C,
Thank you for your note. I have no argument with your contentions and am generally supportive of them, but don’t want to get lost in the weeds here.
Please help remain illustrative for some here that are trying to understand how time value affects return. As presented, the above thread correctly identifies the “Basic” YTM calcs and IRRs for the respective investments. IRR clearly and correctly identifies the superior option.
Now for the weeds…(for anyone needing sleep please read on)
I would argue in support of your contention we could view the Pay Me Later option as a zero coupon $34/$25. But what if the $9 lump sum distribution was in the 23rd quarter, 17th quarter or 15th quarter…that quick blend of distribution $ + redemption $ is no longer so easy. (also can apply to FTF over a defined period) This is where IRR separates the wheat from the chaff by identifying the time value of the distribution compared to other options.
This discussion became relevant when recent posts discussed low coupon issues with big cap gains at redemption. Your observation serves to exactly underscore the shortcomings of “Basic” YTM calculations we’ve seen here in recent weeks.
The problem Basic YTM calculation to which I’m referring that has been evidenced here recently and surprisingly seen in a number of SA articles is:
YTM = ((Distributions +Redemption)/Investment)/Maturity
That’s wrong and what was used in the examples above. I’m guessing you see where I’m headed and that we are now aligned. There are many here much smarter that could probably have explained it better.
For those not yet asleep in the here in the weeds and wanting more info, the correct YTM formula is quite simple and easily can be dropped into an excel spreadsheet:
Yield to Maturity = (Annual Interest + ((FV-Price)/Maturity))/((FV+Price)/2), where:
Annual Interest = Annual Interest Payout by the Bond in $$.$$
FV = Face Value of the Bond (Redemption Amount)
Price = Current Market Price of the Bond
Maturity = Time to Maturity expressed in years ((e.g. Maturity Date-Today)/365)
Without splitting the hairs of YTM v YTM calc, IRR seemed a safer “go-to” to explain the differences – notably of time value.
My own use of IRR in lieu of YTM also focuses on two key factors:
1) We are not taking distributions. All dividends/interest are promptly reinvested. IRR accounts for this. (this is material to some investors)
2) On ex-date, IRR instantly (literally at midnight) calculates the new “YTM” by subtracting one of the remaining distributions and reconciling with the new ex-date price* at market open. (this is material to all investors). No YTM calculator I’m aware of does this accurately.
*Prices auto-populate to our spreadsheet at least every 15 minutes
Another benefit of IRR, beats the heck out of Ambien.
YTM matters even if it’s 12 years out. If you dont hold to maturity the person you’re selling to has a closer YTM. In an efficient market the price would creep up a little each year to account for YTM. In the real world it might not rise the full projected amount in the early years but it should rise some. If it doesn’t I’ll buy it in 5 or 6 years at a bargain price.
2wr–I’ll try to remember to mention that in the future–certainly that is why I like this one and a number of others. Yes the ytm is tasty on a decent quality issue.
Tim,
My 2 cents, and maybe for others who follow this site. Keep up with mentioning current yield. I want the bird in hand, not what I would get with having both bird in hand and the one in the bush. If I get both great, but things change and I want to rely on the current yield I am getting off my investments to live off of.
Charles, “Current-yield-only” carries more risk when buy price is greater than redemption price, but now with near all prices < redemption; party-on.
alpha, recent buy with limit orders floating out there ONBPP at 24.80 just 250 shares. See what next week brings. I put orders out I want to own it at and hope it doesn’t go lower but can always buy another lot if I have confidence in the stock