Sunday, January 15, 2017

Intermediate Term Bond Ladder Strategy-Significantly Underweighted

I define intermediate term as consisting of maturities between 3 and 10 years with the weighted average maturity being in the 4 to 5 year range. 

The target range for purchases is currently 2/1/2017 to 2/1/2027.  

This is another bond ladder strategy. 

Bonds that mature after January 2020 are kept in the intermediate term basket until maturity and will not be included in the short term bond basket strategy. 

Most of the bonds bought in this ladder will be rated above BBB- with a liberal dose of higher quality junk rated bonds.  

When bonds included in this basket are sold or mature,  I may elect to use the proceeds to buy another intermediate term bond, a short term bond, or other risk asset depending on the then existing circumstances.  

Currently, I have close to $200K invested in short term bonds and CDs and am having trouble holding onto intermediate term bonds for more than a few months. My total exposure now is currently less than $20K, and I have sold most of the bonds in this basket that were bought in 2016.  

There are several reasons why I am underweight intermediate term maturities. 

(1) Inadequate Compensation for Inflation and Interest Rate Risk

One reason is that I am not compensated for interest rate risk adequately IMO. 

From the same investment grade rated issuer, I can buy a senior unsecured bond maturing in 18 months near a 1.8% YTM while a senior bond from the same issuer maturing in 2025 might have a yield near 3.5%.

For example, I bought an AT & T bond maturing maturing on 2/15/2022 last Friday. 

The YTM was a barely tolerable 3.042%, which I anticipate will produce a real YTM yield (YTM adjusted for inflation) before taxes.  The after tax real return is questionable. 

An AT & T bond maturing on 5/15/2025 was priced last Friday with a 3.665% YTM. By extending the maturity 3 years and two months, I pick up only .6235% in additional YTM.  

Last month, I bought an AT & T bond maturing on 12/1/2017 with a YTM of 1.491%: 

This bond will not produce a real rate of return before taxes, but the YTM is only 1.551% lower with a maturity in less than 11 months. CPI will likely exceed the YTM.

An AT & T bond maturing on 11/27/18 was priced to produce about a 1.84% YTM last Friday.  Extending the maturity for 1 year beyond 11/17 adds only .35% in yield.    

I view both the 1.8% and the 3.5% YTMs as unsatisfactory given the current and anticipated CPI numbers. U.S. inflation and inflation expectations remain relatively unimportant factors when setting interest rates 7+ years into an economic recovery. The prime mover continues to be a continuation of extremely abnormal CB monetary policies worldwide that are far more influential in setting interest rates than traditional criteria used by bond investors for centuries including credit risk, inflation and inflation expectations. In short, the bond markets in the U.S. and elsewhere are still being rigged by the central banks.   

The 3.5% YTM for a 2025 maturity would look better with an assumption that the next 8 years will be similar to the last 8 years, with inflation subdued at an average annual rate below 2%. The last 8 years, however, had a major event that adversely impacted GDP, jobs, and inflation for many years starting in 2008. Without a recurrence of a similar event during the next eight years, the assumption that the immediate past is prologue for the next ten years is a foolish assumption. 

For the time being and given my current financial condition and a reasonable estimate of future expenses including major expenditures, I do not view intermediate term bonds as worth the interest rate, inflation and credit risks. 

2. Short Term Rates and Increases in the Federal Funds Rate

As I noted in my last blog discussing interest rates and REIT prices, intermediate term rates can remain relatively stable during a period when the FED is increasing the FF rate. The reason has to do with the perception that those increases will bring down inflation and inflation expectations and will last for a relatively short period. 

Short term rates will go up with the federal funds rate. At some point in that short term rate increase cycle, it would pay to switch over to intermediate and/or longer term maturities before the FED starts to lower the FF rate, possibly in response to a recession.  

While a short term ladder will produce less income now compared to one with 2020-2027 maturities, more income may easily be generated by the short term ladder over a FF rate increase cycle given the narrow spreads between short term and intermediate term bonds from the same issuer. With 3 FF increases of .25% in 2017, an AT & T bond maturing in November 2018 could be priced with a YTM of near 2.25%. 

3. Risk Increases Generally with Time For a Variety of Reasons: This is not accepted by most investors 

Bad things happen to publicly traded companies in a dynamic and cyclical economy that turns many major firms into dust and historical footnotes over time. 

An investor can quickly come to that conclusion simply by looking at the DJIA components during that average's history: Dow_Jones_Industrial_Average_Historical_Components.pdf

Excessive debt loads and a Depression or Near Depression do not mix well either. 

For both bonds and stocks the issue of situational risks comes into play when formulating asset allocations. 

4. Situational Risks As an Example of Risks Increasing with Time:  It is important first to recognize that asset classes have long term and short term cycles. The last long term bear market in bonds last 32 years and the current bull market is really old having started in 1982. Long term bull and bear stock cycles can last 10 to 15 years. 

The Great Depression and the bull market between 1982-2000 were exceptions on the length by a few years. 

The second point to keep in mind is that humans have a limited life span and an even more narrower time period to grow assets after meeting expenses. 

Most investors will have to spend the funds tied up in risk assets for one reason or another over their life spans. Retirement expenses would generally be both the longest and potentially most devastating drawdown of assets. Many events do occur prior to retirement that require significant drawdowns of assets including the expenses related to children or buying/maintaining a home. 

It is easy to draw the wrong conclusion about long term bond or stock investing when the focus is on 1982 to date rather the full historical record. 

What if we are now on the cusp of a 32 year bear market in bonds and the investor has an abundance of long term bonds that will have to be sold over the next two decades to meet living and other retirement expenses? 

Or, what if stocks have to be sold on a monthly basis during a 10+ year bear market that includes one catastrophic phase where stocks fall 45%+ fairly quickly? 

Depending on other assets and the level of situational risks, the short term bond ladder may be preferable to a longer one now for many retired investors who are no longer in an asset accumulation phase with a number of caveats. (e.g. are assets providing the cash flow to pay current expenses). There is only so much income that a 1.5% yield on a $200K investment will produce before taxes. The larger picture issue is always whether the investment allocation plan is likely to produce the necessary results. 

Currently, I am able to pick up more yield with an array of exchange traded bonds and preferred stocks than with individual intermediate term bonds, though that part of the portfolio requires internal interest rate hedges since many of those securities have potentially long durations. That basket's value is currently near $170K.   

With more attractive yields in the intermediate term range, however, I may use the proceeds from maturing short term bonds/CD to buy more intermediate term bonds. I am flexible on that kind of nip and tuck change in portfolio weightings within the bond and preferred stocks sectors. 


I will include in this post snapshots of round-trip trades, where the purchase was made in 2016, of intermediate term bonds and of any bond held to maturity. I am still in a hyper trading mode for them, hoping for more appealing yields soon. I will link the purchase discussions only where available. 

2016 Round-Trips Where The Purchase Was Made in 2016-All Senior Unsecured Bonds

I am buying mostly  2 bond lots with an occasional 1 bond purchase that may end up being the first of two bonds. 


2022 Ashland 4.75% +$81.61

Item # 4. Bought 2 Ashland 4.75% Senior Unsecured Notes Maturing on 8/15/22 at All-In Price of 100.58: Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 6/29/16 - South Gent | Seeking Alpha


2023 CBL 5.25% +$71.52
Item # 1. Bought 2 CBL Senior Unsecured bonds ($1,000 par value) at 98.13Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 5/16/16 - South Gent | Seeking Alpha

Commercial Metals 

2023 Commercial Metals 4.875% +$37
5. Bought 2 Commerical Metals 4.875% Senior Unsecured Bonds Maturing on 5/15/23 at Total Cost of 98.05 ($2 Commission, Bought at 97.950): Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 7/22/16 - South Gent | Seeking Alpha


2023 Enbridge 4% +$62.62
2024 Enbridge 3.5% +$67.81 
Item # 2. Bought 2 Enbridge 3.5% Senior Unsecured Bonds Maturing on 6/10/2024 at 93.658-Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 5/10/16 - South Gent | Seeking Alpha

Item # 2 Bought 2 Enbridge 4% Senior Unsecured Bonds Maturing in 2023Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 6/17/16 - South Gent | Seeking Alpha

Icahn Enterprises 

2020 Icahn Enterprises 6% +$73.44
Item # 3. Bought 2 Icahn Enterprises 6% Senior Unsecured Bonds Maturing on 8/1/2020 at 96.728-ALL IN:Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 5/26/2016 - South Gent | Seeking Alpha


2025 Kohl's 4.25% +$103.62
Item # 1. Bough 2 Kohl's 4.25% Senior Unsecured Bonds Maturing 7/17/2025 at 94.719-ALL IN: Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 5/26/2016 - South Gent | Seeking Alpha


2023 Macy's 2.875% +$58.82
Item # 5. Bought 2 MACY'S 2.875% Senior Unsecured Bond Maturing on 2/15/2023 at 92.959 All In (i.e.-commission included in price)Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As 6/3/16 - South Gent | Seeking Alpha


2020 Marathon Oil 2.7% +$53.84

Micron Technology

2022 Micron Technology 5.875% +$173.8
Motorola Solutions 

2024 Motorola Solutions +$26.1
Item # 2. Bought 2 Motorola Solutions 4% Senior Unsecured Bonds Maturing in 2024 at 97.598Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 5/16/16 - South Gent | Seeking Alpha

Plains All-American Pipeline

2022 Plains All-American Pipeline 3.65% +$109.3
Item # 2. Bought 2 Plains All American Pipeline L.P. 3.65% Senior Unsecured Note Maturing in 2022 at 93.955: Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 5/20/16 - South Gent | Seeking Alpha

Seagate Technology

2025 Seagate 4.75% +$245.39
2023 Seagate 4.75% +$45.59

Item # 5 Bought 2 Seagate Technology 4.75% Senior Unsecured Bonds Maturing on 1/1/25 at $79.125 Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 6/17/16 - South Gent | Seeking Alpha

Item # 5. Bought 2 Seagate Technology 4.75% Senior Unsecured Bonds Maturing in 2024 at $80.99Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 5/16/16 - South Gent | Seeking Alpha

Select Income

2025 Select Income REIT 4.5% +$46.12
Item # 1. Bought 2 Select Income REIT 4.5% Senior Unsecured Notes Maturing on 2/1/2025 at $97.939Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 6/24/16 - South Gent | Seeking Alpha

Targa Resources

2023 Targa Resource Partners 4.25% +$112


2024 Xerox 3.8% +$109.78
Item # 3. Bought 2 Xerox 3.8% Senior Unsecured Bonds Maturing in 2024 at 91.911 Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 5/16/16 - South Gent | Seeking Alpha

Total as of 1/13/17 = $1,623.32 plus interest


Some current positions will be repurchases of previously sold bonds. 

Current Positions (Links to Post Discussion Where Available, Principal Amount in (), and FINRA Data).  

AT & T ($2K)

2022 AT & T 3% Bond Detail

Brunswick ($1K)

Item # 1 Bought 1 Brunswick 7.375% Senior Bond Maturing 9/1/2023 at 94.2 Bond Detail


2023 CBL 5.25% Bond Detail

Compass Bank (now part of BBVA) ($1K)

Item # 2 BOUGHT 1 Compass Bank 5.9% Subordinated Note Maturing in 2026 at 76.75  Bond Detail

Mastec  ($2K)

Item # 3. Bought 2 Mastec 4.875% Senior Unsecured Bonds Maturing on 3/15/23 at 97.1 with $2 CommissionUpdate For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 7/22/16 - South Gent | Seeking Alpha
Omega Healthcare REIT ($4K)
Item # 5. Bought in Roth IRA 2 Omega Healthcare 4.375% Senior Unsecured Bonds Maturing on 8/1/2023 at 100.995 (101.195 with commission): Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 7/19/16 - South Gent | Seeking Alpha
Item # 2. Bought 2 Omega Healtcare 4.5% Senior Unsecured Bonds Maturing on 1/15/2025Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 6/24/16 - South Gent | Seeking Alpha

Select Income REIT ($2K)

2025 Select Income REIT  4.5%  Bond Detail

W.P. Carey REIT ($2K)

2024 W.P. Carey 4.6% Bond Detail

Xerox ($2K)

2020 Xerox 2.75% Bond Detail

Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics:ERROR CREEP and the INVESTING PROCESS. Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.


  1. South Gent,

    Thank you for the insightful perspective. For the intermediate Term Bond Ladder strategy is it better to use exchange traded bonds/baby bonds as they are not subject to broker's inventory and offer more opportunities when there is a panic selling? FINAR does not seem to carry much information about the exchange traded bonds/baby bonds. DividendYieldHunter has a list of baby bonds., but "....Exchange Traded Debt mostly carries maturies of 30 years or more (although some are just 5-10 years). ..." so the offers are slim.

  2. Y: There are only a few exchange traded bonds ("ETC") with intermediate term maturities and most of those are issued by BDCs or Mortgage REITs.

    I added to my HTGZ position recently, which is a senior bond issued by the BDC HTGC, that matures in 2019. I also own 100 HTGX which matures in 2024. I discussed those bonds here recently:

    1. Exchange Traded Senior Bonds HTGZ and HTGX:

    At best, senior debt of a BDC will be rated BBB-. For any pass through entity, money is flying out the door to common shareholders (lack of a capital cushion), the firms are highly leveraged, and the securities owned by a BDC would be rated as junk if a rating agency rated them.

    Most of a BDC's owned securities would probably be rated at CCC+ or lower. So, I will go easy in that ETB sector.

    Some of the other choices are not any better as to credit risk. That would include, for example, RFT which matures in 2024 issued by RAIT Financial.

    Right off hand, I can think of only one ETB maturing prior to 2025 that was issued by a non-pass through entity and that would be JMPC:

    3. Bought 50 JMPC at $21.06:

    And, I own only 50 shares of that one.

    I own RFT and some similar type junk in my exchange traded bond and preferred stock basket to pick up some yield, but will severly limit my exposure to them and will hopefully exit the positions at some point profitably.

    I do use the DividendYieldHunter as a research aid, primarily for their list of new issues.

    The ING hybrids in their ETB list are properly classified as bonds, but are potentially perpetual securities with no maturity dates and currently pay "qualified dividends" since the EU currently allows them to be treated as equity for regulatory purposes. The Aegon hybrids are not included in their ETB list, though their classification is the same.

  3. Hi SG,

    I have found you again on your new blog and leaving a short note to say hello. Currently researching prefs and bonds.

    1. Brian: I am still alive.

      The odds of a .25% FF increase at the FED's March meeting has doubled to 44% over the past two weeks according to Bloomberg.

      If the FED is going to be on a glide path for 3 hikes this year, the first will need to occur in March.

      If they skip March, then my working assumption is for two increases, one in June and the other in December.

      Those hikes will flow into short term bond and CD yields which is why I have built maturity clusters around June and December. I hope to be able to invest the redemption proceeds into slightly higher yielding securities.

      The impact on high quality bonds maturing in 2020-2026 is less predicable. The Bond Ghouls may react to a tightening cycle by taking intermediate rates down some but that would probably be for maturities in the 2025-2030 range. The 3 to 5 year maturities may go up some in yield.

      The Bond Bookies are not buying into the same economic scenario as the Stock Jocks who see an acceleration of job growth in an economy at full employment and a surge in real GDP growth.

  4. With bond yields rising, do you have a strategy or target to begin buying bonds again?

    1. Brian: I am buying short to intermediate bonds every day. I explain what I am doing in twice weekly posts. You need to review the more recent blogs.

      I first loaded up on bonds maturing in an 18 month period ending 6/30/18. I have clustered maturities around expected dates for FF rate increases.

      An example of a cluster that surrounds the FED's December meeting is shown here:

      1. Short Term Bond/CD Ladder Basket Strategy
      F. Current Maturity Cluster 11/1/17 to 1/31/17:

      I have added to that cluster since that post was published.

      Another cluster is surrounds the June meeting:

      2. Short Term Bond/CD Ladder Basket Strategy

      H. Cluster of Maturities 5/1/2017 through 8/31/17

      I am buying 1 or 2 bond lots. I can hold to maturity and buy more as prices fall and yields rise.

      I will invest the proceeds from maturing securities. The first security matured today in my short term bond/CD basket. I will have securities maturing constantly.

      I can buy U.S. treasuries without a commission in my Vanguard, Schwab and Fidelity accounts. The yields are trending up.

      For the first time in a long time, I am able to pick up a 4% YTM in high quality bonds maturing in about 7-8 years.