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I Continue Down My Calculated Path

It is tough to get away from CDs at 5.3% or 5.35% for a non callable 3 or 6 month issue. I bought a handful again today.

As I have written about many times in the last few months I want my preferreds and baby bonds to average around 7% yield at my cost and thus far that has been pretty easy to accomplish. Near 6% on the safe issues balanced with around 8% on baby bonds from many of the business development company’s (BDCs)–this gets me my 7%.

Of course, the time will likely come when I have to forgo further purchases of CDs because the yield will slip into the 4.xx% area. As I review my holdings each day I am surprised at the amount of CDs that I have out into 2025 and 2026–noncallable issues around 5.25%–I won’t have to worry about these for a while. Whether I have to worry about less than 5% on CDs this year is anyone’s guess.

For the time being I am targeting around 50/50 split between preferreds and baby bonds and CDs–it could be 60/40 or 40/60 –but in the area of an even split. Obviously when the time comes to move to a heavier weighting of securities it will be difficult to maintain a 7% average, but for now I am not going to lose sleep over it.

47 thoughts on “I Continue Down My Calculated Path”

  1. I bought a couple 5.5% CDs last year and I regret it because that money missed the bounceback in underpriced issues Don’t normally want safe 5% I shoot for higher yield. Ironically I consider myself a cautious investor focusing on preferreds rather than the volatility of common stock. Avoid default and I’m always making money.

    1. Martin, Just my opinion, but don’t be hard on yourself with those regrets. Self-described cautious investors have to understand underperforming the market while the bulls run is something that happens and will continue to happen, well…..until we aren’t cautious anymore. But then, the market will head south and we will wish ourselves to be cautious again, lol. Take solace in the fact that your portfolio would outperform during market downturns. Just how I look at it anyway.

      1. Pig, personally I never have regretted buying a CD. There really isnt a reason to. As it is one of the few investments you know what you put in, what you are getting paid, and what you are getting at maturity without risk. There is no surprises and only one outcome. The only way one can regret it is if they intentionally violated ones personal investing criteria, which maybe Martin did. One is always aware that there is opportunity cost. It is what it is, if something would have made more. That was known at purchase and I willingly accepted that trade off.

        1. BUT WAIT !!!!!!!!!!!….I had a jumbo with a texas bank purchased in secondary at a discount. Big discount must have been a street deal (secondary) When it matured in Feb…..the cash was a no show! Evidently they bank decided they didn’t need to pay. Kept the 0.85% for two weeks w/o one word as to why/how they wiggled off the hook. It was over 100K. Bank still solvent, though privately held. I couldn’t get an answer from anybody. Oh and I think they didn’t even pay the 0.85 while they ‘held’ (AKA stole) the $$$. I was told the entire P in total was over 500K.

          I wasn’t allowed to call them or CFPB or OCC to complain!! Bond desks are becoming bucket shops.

          1. If You Prefer
            CD’s are FDIC insured.
            If it was not FDIC insured, it wasn’t a CD, it was a Note.
            That’s probably why you got such a big discount.
            Bank obligations other than CD’s are no different than any other Note.

          2. What was the CUSIP on it?
            2 things come to mind.
            It actually wasn’t a CD.
            If it was, it was a structured product where the payment of interest was not guaranteed because it would only be paid if some benchmark was hit.
            Get a copy of the offering document.

            1. It was clearly a CD. It was bought in the depth of FRC SVB going bust. Hence the big discount. It was a bought through brokerage. Yes there was a cusip. Yes it was fdic insured.

              Ive traded literally over a billion dollars in cds going back to 1983. I know what a CD is, both primary and securitized. AND….

              Ive dealt with holding cds with over five hundred bank failures/mergers / takeovers. I’ve seen every which way there is to fail on delivery. THIS was a first!! Oh while I can’t say who I can tell you it has ‘national’ in its name. Which means it wasn’t state chartered, which makes it even stranger

              1. and you did not get any PRINCIPAL back? There are CD’s that won’t pay interest, but all of them pay their principal back.
                If you got stiffed on the principal and it was a CD, I would be contacting the FDIC.

                  1. It just said this:
                    “When it matured in Feb…..the cash was a no show! ”
                    Which I took to mean the entire deposit disappeared.
                    It should have said.

                    “When it matured in Feb…..the interest was a no show!”

                    Your best bet is probably your local small claims court for the compensatory interest at the Federal Funds Rate, which is the standard for late paid interest.
                    It is going to cost that bank a lot more to send a lawyer to the hearing than it will to pay the 2 weeks of interest.

                    1. So, if I now understand this correctly, everything got paid, just delayed. Hell that happens to me in a lot of issues, ha. Justin is it possible the monies got “hung up” somewhere and wasnt even banks fault?
                      While I have never had an issue with CD payments, I have had late payments where companies in past verified to me they sent the money to DTC on time, and ones that forgot to also.

                    2. No my ‘friends’ got stiffed for the interest. Still at 0.85% on that principal wasn’t a lot of money. My complaint was

                      A. The principal not coming back on due date
                      B. Going past maturity and not paying the interest while they did hold it.
                      C. The real Q…HOW they could hold the money past maturity date. I dont have the original verbiage from deep in DTC but they said nothing to me prior to maturity date. And somehow slipped in notice it’d come back a month later!! I was livid. The bond desk was chagrined. Nobody knew nothing. Just my first time to have that in almost half a century….And yes I’ve dealt with FDIC OCC FSLIC NCUA in all matters revolving around takeovers/failures/shotgun weddings/partial mergers/etc…This was the bank itself!!!!

                1. And also why this:

                  >I wasn’t allowed to call them or CFPB or OCC to complain!!

                  What could stop you from calling to complain? I wasn’t aware that CDs came with NDAs attached.

    2. Martin.
      Could’ve been a worse mistake, and we all make them..
      Plus, some names are still kinda cheap. I know you are one of the few on this board to wade into MREIT prefs. NYMTM, MFA-C , MITT-C, CIM-C, and RITM-D all still have some “juice” to dial up your risk/return.

      I’ve had a good run, so a lot of new purchases have been the SJIJ note and locking in 6-8% returns in the fixed income area, including the BBDC bond. Did you see half their team left? Yikes.. but I still sleep well at night with that bond.

      1. Not a mistake just a bias against beig heavy nto CDs.
        MREIT preferreds are good for arb trades and the larger ones have a low default rate I don’t l know why they’re not more popular. Unless expecting defaults to happen in waves in which case we have bigger problems. RITM-D my largest holding and CIM-C in the running. I have MFA MITT NYMT issues but not those near term floaters you mentioned I think they are topped out unless rates stay high for several more years.
        Regional bank issues were a good purchase after last year’s panic, nice gains though the risks might not be over. Maybe it’s profit taking time.

        1. Unless spreads increase significantly OR rates drop significantly, I believe there is a 80% chance these all gravitate towards $25 as the float approaches.

          That’s a bet I am willing to take for 10%-25% capital appreciation over a year.

          Investors won’t be able to pass up 5.5%+ spreads.

          And from a fundamental view, no signs in sight of house prices cratering.

  2. Many of us are loaded with same play Tim. When we can get all the yield with fully liquid investments, its a no brainer. …With principal protected 5.0 to 5.6% I try to remember that if I’m reaching for yield what’s at risk.

    Fifth Third corporates, currently floating, are 8.5+% and at a discount. Callable anytime….In other words I’ve put P at risk to earn 3. AND they most likely aren’t going to last a long time. Making 3-4% for a few months? Thats like risking 100 to earn 2. Yes I’m doing the trade but still….

  3. Please don’t kick me out of the III club.

    I own only 1 preferred issue. SLMNP, 10 shares
    I, like many of you, could not resist the 5.30% to 5.35% CD’s
    I’m 99% in CD’s…And I like it! 🤑
    I sleep better than ever, and at night too.
    Being in the 70’s changes ones risk assessment.
    The CD never sleeps, but Newman doze

  4. I also proceed down the road, Mailed my taxes Friday was satisfied with the 2023 results with all the Rate changes etc the past year. I follow closely what everyone is doing here get some great ideas and guidance, I wish there was more discussion of taxes and asset placement for tax efficentcies. various yield differ greatly by where they go in taxable or deferred accounts. any thought on this topic Thanks

    1. Mike, dont bring taxes up. I am winding up my taxes and it isnt going to be pretty for me. I owe Uncle Sam a lot. Is what it is I guess from a very good investing year, with not the best of tax efficiencies utilized last year.
      For me, tax efficiency is only of secondary importance. For example, anything I perceive as risky I am doing it in taxable as I dont ever want needless damage to my Roth or HSA as that tax free money for my bracket is too precious to blow as eventually it will be a tax free income spout. Or something being owned long term with dubious ability to ever sell down the road such as my old SJIJ bought on bond desk at 11% interest. Yes that would accumulate a lot better in the Roth without govt clipping 30% of it each quarterly payment, but it isnt going in there. And then I have tax inefficiencies of having QDI inside tax free accounts. That is partially a brokerage issue with one of my brokerages not allowing OTC trades anymore. And I am unwilling to fix that problem.

      1. Gridbird,

        What is the latest information from the investment group that bought South Jersey on the quarterly payments on SJIJ. Might consider the addition of SJIJ (as an annuity type) to my IRA account.

        1. Just received close to $1000 in quarterly interest payments a few days ago and I noticed they are recently donating to local charities so they aint broke yet anyways, ha. I really havent seen anything since last summers Fitch credit report which was positive. IIF sure isnt going to provide any public info. Maybe at some point some info may be gleaned from New Jersey Public Commission at some point as they generally have to report financials to commission at some point. But if so, it largely would be about the regulated subsidiaries below it though. Maybe in a year or so they will want a credit rating. Its largely hope and poke though. If they treat SJI like they have El Paso Electric which they have owned for 4 years, they should be good stewards. I will find out in time I guess.

    2. As a retired investor i take a contrarian position in that I consider my social security as my fixed income portion of my portfolio, multiplying my expected IRS lifespan remaining times my yearly SS income counts as my total fixed income investment….which allows me to be more aggressive in my actual retirement portfolio, around 70% in equities …..
      Prior to age 73 did yearly IRA to Roth transfers….so now my RMD about equals my yearly expense withdrawal needed….Roth contains mostly growth equities with my large IRA holding preferred and ETfs……minuscule taxable account used to transfer money to checking etc….am in 10% tax bracket due to still itemizing

    3. Mike,
      I use the following steps to keep taxes to a minimum:
      – Convert as much as you can afford from an IRA to a Roth. Tax rates will be going up in 2026 if Trump tax cuts expire at end of 2025.
      – If you are employed contribute to a Roth. If your income is too high, contribute to a non-deductible IRA and flip tax free to a Roth, often referred to as a back-door Roth conversion. If you have IRA’s that consist of deductible IRA contributions, this can cause problems.
      – Try to keep your interest and non-QDI investments to a minimum in a taxable account. They are best placed in an IRA.
      – Harvest losses to take advantage of offsetting capital gains and/or to take advantage of $3,000 offset against ordinary income.
      – I donate to charity using appreciated stock. Due to large standard deduction this may not be as advantageous as it once was, but again if tax cut expires at end of 2025, the standard deduction will be reduced and personal exemption re-instated.

      1. Steve N, you seemed to have been looking over my shoulder for the past 15 years. I also use high quality in state munis in taxable accounts an treasuries in taxable rather than Cds. glad you mentioned “2026” that a whole new can of worms any and all comments how every body is preparing is appreciated Thanks All, Mike

        1. It will be a bummer for me, Mike. My pension already puts me in todays 24% fed bracket, so that would go to 28%. Big increase and that would ensnare all interest income too, in addition to state income taxes. So if it reverts, my only option is to be patriotic and pay up, lol. I will forced to be more aware of slotting QDI issues in taxable, and likely when CDs mature, be more cognizant of treasury purchases instead of CDs with the ones that mature next year.

          1. My biggest issue, and I lost money on the Trump tax “cuts” is the mortgage interest/property tax cap at $10,000 when mine are more. Back then they were like $19K so cost me 24% on $9K. I live in Maryland so it was one impacted for us upper middle classers.

            I refi-ed at a fixed 3.000% for 30 years for cash flow reasons in 2021. Now, I am only over about $1.5-2K and my bracket is lower now recently retired. Even with the new standard deduction though, I still file itemized so that didn’t help either. I should be ok no as the $10K cap becomes less an impact.

    4. Mike, I am quite cognizant of the sunsetting of Trump taxes. Estate planning was first consideration, anyone with assets should take advantage now. Secondly, after the impact of the Obama taxes my qualified dividend rate went to almost 24%. As efficient as I can, I try to monitor the dividends. That being said, I did buy LNC common at almost 8%. LNC has increased in value almost 30%. I rarely buy dividend stocks unless under extraordinary pricing Convert the maximum of IRA amount to ROTH. Continue to increase my holdings of MLP (and monitor the basis with new purchase if required). Converted most of my cash to BOXX for long term gains vs ordinary interest income. My home is TN and we have no income tax. Have a few municipals but find I can get better returns on Berkshire, Apple, Microsoft, NVIDA, etc. Some pay no dividends (yeah) but others are minimal. In the meantime, the portfolio grows and upon death my heirs receive step up basis. I also develop with partners real estate which is a good tax efficient method. (We live very nicely on our real estate cash which with depreciation is tax advantaged.) I rarely sell real estate but use 1031 exchanges. I have suggested to a few that becoming a professional real estate status is like getting thru the back door for the IRS. I do have foreign assets that have wills filed with the courts in each country. Differing opinions from estate attorneys. My instructions are to disclose, disclose, disclose. I do so every year to the IRS.
      These are some of what I try to accomplish. I have been working and investing for 30 years so it take time to accumulate. My family has a culture of hard work, risk taking and financial accumulation. My biggest regret was hiring a financial advisor. Looking back I was turning around distressed companies and had two babies, like most mothers, I was simply overwhelmed. But through the years, I can only blame myself for not pulling my portfolio. My sons and every young person I meet I share my mistake. When I look at the cumulative cost of 1.5%-1%, I get upset. My trust administrator was chosen in part because it does not offer financial advisor services. (Try getting a bank or such to offer that.)
      I could go on and on. The point being one needs to devote time to understanding taxes and evaluating your portfolio for tax improvements.

      1. Do you have any concerns about putting your cash into BOXX? I’ve been doing it as well, because of the tax advantages. But I wonder how it’ll react if rates start falling?

        1. Interest rates are baked into option prices. The higher interest rates are, the higher option prices are. If rates drop, option premiums drop and Box Spread profit declines.

          Per Fidelity, the effective interest rate from a short box spread is about 0.3% – 0.5% above the Treasury yield of a comparable term.

          1. If rates drop and the option premiums of BOXX drop, do you think the price of BOXX will decline or just the amount it goes up every month? Thanks

            1. For the most part, a box spread cancels out the price risk of the underlying issue and therefore, it earns the rate of risk-free rate interest which is priced into the options. Therefore, if rates drop, the yield on BOXX will drop, not the principal value. Secondary benefits are that this is tax free until sold and the gains are LTCG if held for a year.

    5. Issues that pay Qualified Dividends are taxed at a lower rate which could swing the balance in favor of them over CDs. Many REIT preferreds pay Section 199A dividends of which 20% is taxfree. Every little bit changes your net yield after taxes. But if you’re too overweight in Qualified Dividends you won’t get the full benefit of 199A.
      My best tax secret is have most of your money in IRAs and especially Roth IRAs and grow them while spending taxable accounts. Takes years to accomplish.

      1. Martin, the 199A benefit ends with Trump tax cuts at end of 2025. It is a part of the qualified business income” (QBI) deduction which allows certain business owners to deduct up to 20% of their QBI, so it might be renewed.

        1. Steve, I have stopped buying 199A’s. I think the trump tax cuts are a toss up as far as renewal or sunset. If I see a 199A I think worthwhile I put in into a tax advantaged account.
          On the BOXX questions, it works for me perfectly. However I read an article that criticizes BOXX. It stated that for investors in income tax states the state tax will not be waived. I don’t live in a taxable state so I didn’t worry about it. For others that pay state income tax, might be worth investigation.
          I received after tax same rates as if my funds were in CDs, etc. but if needed I can access my funds with no penalties (other than losing LT gains). As I haven’t sold BOXX, I cannot definitively say BOXX was treated as LT gains.

  5. Tim;
    I have been doing something similar. I made a couple buys today, 3134H1YA5
    FHLMC 5.875%29 DUE 03/28/29 (callable quarterly starting 6/28/2024 and a few more shares of BIZD (BDC index ETF with a 10.8% yield paid quarterly). I am 62% bonds/CD’s and 38% Preferred/BB’s. Being 75 and no chance to make the money back I am on the conservative side when I invest. Most of my bonds are government agencies. I do have a small wild thing bucket that presently holds PBI-B and FATBP 🙂

    1. I was lookin at those Freddie Mac notes myself. I have a ladder rung expiring on 4/1 and I am finding agencies to be the best things out there.

      Yes there is call risk, but I do think that one is getting paid for it.

    2. Speaking of taxes and agency bonds, one wrinkle I did not expect is that Turbotax is pretty spotty as far as handling the state tax exemption. Works for some states, requires awkward workarounds or just doesn’t work for others. Is any other tax software better at this?

      1. TurboTax also requires manually adjusting for having paid accrued interest on secondary bond purchases, and doesn’t ever ask you to do it. I learned about this quite by accident, and overpaid a little last year because I didn’t know. I’m less and less impressed with it every year.

        1. Hmmm. So by default – am I to understand that Turbo Tax assumes that this accrued interest goes to cost basis and that the entire first coupon payment is income? Please clarify

          In any event this is a good catch – and thanks for passing it on.

          If you only keep munis in taxable accounts could this “mistake’ actually work to the investors advantage.

          1. No, the cost basis reported by the broker (and seen by TurboTax) is the bond price plus commission, not including that accrued. The accrued is reported on the 1099 in a separate section not reported to the irs, and not seen by TurboTax at all as far as I can tell. They just count all the income received as taxable interest, and I had to adjust it via a special box in the 1099-div “uncommon situations” page that I had to hunt down. At least this is my understanding from what I have seen so far and read about on their help page.

            1. Irish said: “They just count all the income received as taxable interest, and I had to adjust it via a special box in the 1099-div “uncommon situations” page that I had to hunt down.”

              Irish, this is NOT correct. Look at form 1099-INT under the “Adjustments to Interest” section at the bottom of the page. There is a specific box, A, titled “Accrued Interest” where you enter the number.

              Yes, TT does not do a good job asking/forcing you to enter this number. And your brokerage probably does not do a great job helping you figure out the correct number to enter. This CAN be a really big deal if you buy bonds/CD’s in the secondary market since all of them other than zero coupon ones trade with accrued interest being paid. We have many, many cases where the reported interest is reduced by close to 50% due to accrued. Say you buy a one year secondary market CD that pays interest “At maturity.” If you buy it with less than 6 months to maturity, you will pay over 50% accrued interest.

              Recall that this is NOT an issue for dividends since they do not trade with accrued payments, other than the preferreds where the brokerage incorrectly makes you pay it. Jason is our resident expert on this.

              1. Thanks, yes I think that’s what I meant to say, that the broker does report it in the special section in the 1099, but TurboTax doesn’t see it, or ask me to enter it, I had to know to go find where to put it in. And yes, it was significant this year so it scares me that it was so obscured.

                1. Thanks for the dialog folks! Looks like something for me to check tomorrow. I do have a small amount of accured interest payment in a taxable account in 2023.

        2. FWIW, I report accrued interest paid as a negative sum identified as “Nominee Distribution” on line 1 of schedule B as per IRS instructions.

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