Investing in Bonds
- Thread starter Don87109
- Start date
Don:
No gotchas..., Fed farm Credit and Fed Home Loan Bank are two good choices for agency bonds. Yes, they are state and local tax exempt (unlike freddie and fannie).
The only item you need to possibly evaluate are "call features". Is this a callable bond? Wouldn't think so at one year till maturity. 4.7% state tax free for one year sounds good today.
Only difference in quality is Treasuries: backed by full faith and credit of US government.
Agency Bond: backed by the full faith and credit of that agency, not US government. BUT, implied backing by feds because they are US government sponsored agency.
Lastly Don, since you appear to be looking at buying bonds with a short maturity (as opposed to selling a 5-10 year bond in one or two years), then just compare the "yield to maturity" to find the best deal. Most quotes will give you YTM. Coupon, price of bond and time till maturity all factor in to determine exact yield (YTM). Then just calculate your after tax yield from this figure. So TIPS bond may or may not be your best answer. Please don't forget high quality Munis. (some are insured. most (all general obligation G.O.) are backed by the taxes collected by that particular municipality (i.e. school district)).
One free quote service I saw was at www.zionsbank.com.
craigatelite,
Thanks for a very clear answer and for the zionsbank link.
I tend to buy bonds with short term maturities because interest rates seem more likely to go up than down. Also, I am worried that selling in the secondary market may have some gotcha's especially for less liquid bonds.
I actually bought a new issue slightly lower yield agency bond(4.6%) because it was not callable. Although the call feature did not seem too bad since there are no commissions on new issues at my broker. However, I heard that callable bonds may trade at a big discount in the secondary market so I avoided it.
TIPS still seem to me to be the best deal as long as inflation stays above say 3%. With the fixed component yielding about 2% that gives a minimum 5% total yield that is state tax free. And by buying them on the secondary market with 1 year maturity the drawback of paying taxes on the accrued inflation component is eliminated. The only significant drawback that I can see with secondary market TIPS is if inflation falls you will lose some of the accrued inflation that you paid for. However, I cannot see net inflation falling over the next one year period so this seems like a very unlikely risk. Am I missing anything?
I'm looking at muni's, but TIPS look better to me and they are my main focus at the moment.
Don
I think I know what you are talking about, but I don't know what you mean by a "B label bond". Perhaps you are talking about a credit rating. Anyway it might be a good deal, but I'm more comfortable with listed and secured bonds.
For example, Ford motor CR CO bonds maturing in about 1 yr yield about 9.2% in the secondary market. They are rated Baa3/BB+ (on watch for a downgrade), but It's hard to imagine that there is a big risk within the next year.
Anybody have anything to add about either investment?
Don
I don't think there is much difference between the two in a rising interest rate environment. Of course TIPS are tradable in the secondary market and I bonds are not. So while TIPS pricing in the secondary market will fall if rates rise and vice versa, I bonds are not tradable at all.
I think the big difference is the tax implications. With TIPS you must pay the tax on the inflation component every year even though you don't receive the cash until maturity. So it might be better to hold TIPS in an IRA if that drawback concerns you. BTW, the TIPS fixed rate component has been a little better than the I-Bond, roughly 1% better as I recall.
Don