Thoughts on bonds from Fed decision...

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vineviz
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Re: Thoughts on bonds from Fed decision...

Post by vineviz »

TN_Boy wrote: Tue Aug 04, 2020 10:24 am My rule of thumb is that any interest paying investment with a yield that is much higher than a 10 year treasury (and 3.6 is a LOT higher) is pretty risky. There is no magic money machine. That kind of interest rate indicates substantial risk .... somewhere.

Talk me into believing that these things are not high risk ....... how can they pay so much?
There is no shortage of corporate bonds with maturities of 5 years or more that yield over 2% or even 3%.Vanguard Long-Term Investment-Grade Fund (VWETX) has a SEC yield of 2.28% right now and Vanguard High-Yield Corporate Fund (VWEAX) has a yield of 4.36% So the rates of MYGAs aren't really off-the-charts.

That said, the highest MYGA rates do come from insurance companies with the lowest credit rating. It's pretty likely that the companies offering the best rates are the ones that need short-term capital the most. You're earning premium by supplying liquidity to the market, which is smart, but you're taking on a small amount of credit risk in return. The flip side is that state guarantee associations should mitigate even the low the risk of default, the process of settling your claims may come at an inopportune time.
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TN_Boy
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Re: Thoughts on bonds from Fed decision...

Post by TN_Boy »

vineviz wrote: Wed Aug 05, 2020 8:53 am
TN_Boy wrote: Tue Aug 04, 2020 10:24 am My rule of thumb is that any interest paying investment with a yield that is much higher than a 10 year treasury (and 3.6 is a LOT higher) is pretty risky. There is no magic money machine. That kind of interest rate indicates substantial risk .... somewhere.

Talk me into believing that these things are not high risk ....... how can they pay so much?
There is no shortage of corporate bonds with maturities of 5 years or more that yield over 2% or even 3%.Vanguard Long-Term Investment-Grade Fund (VWETX) has a SEC yield of 2.28% right now and Vanguard High-Yield Corporate Fund (VWEAX) has a yield of 4.36% So the rates of MYGAs aren't really off-the-charts.

That said, the highest MYGA rates do come from insurance companies with the lowest credit rating. It's pretty likely that the companies offering the best rates are the ones that need short-term capital the most. You're earning premium by supplying liquidity to the market, which is smart, but you're taking on a small amount of credit risk in return. The flip side is that state guarantee associations should mitigate even the low the risk of default, the process of settling your claims may come at an inopportune time.
All right, let's turn the question around.

I believe these things are only available in retirement accounts.

If they pay a good yield, are backed by state governments, and liquidity is not an issue (there are restrictions on how much you can access during the life of the MYGA) why NOT buy a big chunk of them in one's IRA?

What percentage of fixed income would/should these things make up in a retirement portfolio?

Note: according to Fidelity, for corporate bonds you have to go all the way to Baa/BBB bonds for a five year yield exceeding 3%. Corporate A yields are listed as around 1.25 for five years. So to get those high yields the insurance companies would have to be holding a lot of junk.
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Re: Thoughts on bonds from Fed decision...

Post by Starfox »

Wellington (VWENX) & their active management seem to be unfazed. 8 year duration / 11 year maturity, on the bond portion of the balanced fund.

We have intermediate tax-free VWIUX fund and as the yield continues to drop, short-term tax-free VWSUX is looking more appealing from a duration versus yield POV.
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vineviz
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Re: Thoughts on bonds from Fed decision...

Post by vineviz »

TN_Boy wrote: Wed Aug 05, 2020 10:26 am I believe these things are only available in retirement accounts.
They can be purchased outside of retirement accounts (e.g. in a taxable account)
TN_Boy wrote: Wed Aug 05, 2020 10:26 amIf they pay a good yield, are backed by state governments, and liquidity is not an issue (there are restrictions on how much you can access during the life of the MYGA) why NOT buy a big chunk of them in one's IRA?
Many of the highest yielding fixed annuities DO have withdrawal restrictions, so I'd say liquidity IS a potential issue. Just make sure you know the terms of your contract.
TN_Boy wrote: Wed Aug 05, 2020 10:26 amWhat percentage of fixed income would/should these things make up in a retirement portfolio?
I'm not sure there's a general answer to that question. Less than half? I could see someone setting up a non-rolling ladder (like you might do with a CD) to complement a longer-term bond holding. I'm not a big fan of CDs either, and prefer to structure the entire portfolio as a unit rather than do it piecemeal. But a fixed annuity is more like a CD than not.
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Re: Thoughts on bonds from Fed decision...

Post by TN_Boy »

vineviz wrote: Wed Aug 05, 2020 11:52 am
TN_Boy wrote: Wed Aug 05, 2020 10:26 am I believe these things are only available in retirement accounts.
They can be purchased outside of retirement accounts (e.g. in a taxable account)
TN_Boy wrote: Wed Aug 05, 2020 10:26 amIf they pay a good yield, are backed by state governments, and liquidity is not an issue (there are restrictions on how much you can access during the life of the MYGA) why NOT buy a big chunk of them in one's IRA?
Many of the highest yielding fixed annuities DO have withdrawal restrictions, so I'd say liquidity IS a potential issue. Just make sure you know the terms of your contract.
TN_Boy wrote: Wed Aug 05, 2020 10:26 amWhat percentage of fixed income would/should these things make up in a retirement portfolio?
I'm not sure there's a general answer to that question. Less than half? I could see someone setting up a non-rolling ladder (like you might do with a CD) to complement a longer-term bond holding. I'm not a big fan of CDs either, and prefer to structure the entire portfolio as a unit rather than do it piecemeal. But a fixed annuity is more like a CD than not.
Yep, you are correct that a MYGA can be bought outside retirement accounts.

But this is still an interesting option (though still not sure I like this option). It does feel a lot like a stable value fund, and as I noted before, stable value funds are generally considered "ok" on this board.

I'm a little surprised the option hasn't been mentioned more. Maybe it is just the liquidity concern. If you buy a five year MYGA, you'll have to pay surrender charges to get at any of that money before five years. With stable value funds in a 401k, you can generally exchange out of the fund with no issues.
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Re: Thoughts on bonds from Fed decision...

Post by jeffyscott »

TN_Boy wrote: Thu Aug 06, 2020 9:36 am
vineviz wrote: Wed Aug 05, 2020 11:52 am
TN_Boy wrote: Wed Aug 05, 2020 10:26 am I believe these things are only available in retirement accounts.
They can be purchased outside of retirement accounts (e.g. in a taxable account)
TN_Boy wrote: Wed Aug 05, 2020 10:26 amIf they pay a good yield, are backed by state governments, and liquidity is not an issue (there are restrictions on how much you can access during the life of the MYGA) why NOT buy a big chunk of them in one's IRA?
Many of the highest yielding fixed annuities DO have withdrawal restrictions, so I'd say liquidity IS a potential issue. Just make sure you know the terms of your contract.
TN_Boy wrote: Wed Aug 05, 2020 10:26 amWhat percentage of fixed income would/should these things make up in a retirement portfolio?
I'm not sure there's a general answer to that question. Less than half? I could see someone setting up a non-rolling ladder (like you might do with a CD) to complement a longer-term bond holding. I'm not a big fan of CDs either, and prefer to structure the entire portfolio as a unit rather than do it piecemeal. But a fixed annuity is more like a CD than not.
Yep, you are correct that a MYGA can be bought outside retirement accounts.

But this is still an interesting option (though still not sure I like this option). It does feel a lot like a stable value fund, and as I noted before, stable value funds are generally considered "ok" on this board.

I'm a little surprised the option hasn't been mentioned more. Maybe it is just the liquidity concern. If you buy a five year MYGA, you'll have to pay surrender charges to get at any of that money before five years. With stable value funds in a 401k, you can generally exchange out of the fund with no issues.
These have been getting mentioned a lot on here lately.

A couple things that I saw yesterday implied that if you do end up having to get a bail out from the guarantee association that it might be for only the current cash value as if you were pulling the money out and paying surrender charges? These things said something like you would get "current cash value, including any surrender charges". Also it appears the the guarantee is not funded until needed, when the guarantee organization has to do a bail out they then decide what each insurance company will pay to fund the bail out.

The other thing is that what you get in a bail out is determined by the laws in your state at the time it actually occurs, not what was in effect at the time of the initial investment. While a state changing to something like CA's rule, where you get only 80% may be unlikely :?: , it is at least a small added risk.

Since the state guarantees seem to typically be limited to $300K, if a MYGA results in getting, say, 1% extra that would amount to $3000 per year as the risk premium.
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Scooter57
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Re: Thoughts on bonds from Fed decision...

Post by Scooter57 »

This is just a guess, but it is possible insurance companies are investing your money in the market on the assumption that it will outperform by an amount greater than what they pay you.

Have government bonds ever paid as little as they do now? And if the answer is "No," then you should probably reconsider taking advice from dead experts who were writing at a time when the current rates were unimaginable, as was an awful lot else that is going on in the world right now.
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Re: Thoughts on bonds from Fed decision...

Post by BogleFan510 »

Should we retitle the thread, Annuity discussion?

Regarding returns, it is important to also think about risk and asset preservation during tough times as we build our portfolios. Stocks, annuities, and bonds are legal contracts, with very different residual value under failing economic circumstances. They are each greatly impacted by the legal systems, enforcement vehicles available, and political will to act to enforce rights to the hard assets (which may need to be divided up during a "stuff hits the fan" event).

Those of us who lived through the recent Puerto Rico muni bond legal battles know at least one example of how this can play out. Therefor, my feelings are that the bond has some value due to a hypothetical superior claim to assets, and a large organized group of holders willing to take legal action in an insolvancy situation. Thus does impact in their attractiveness and the returns required to make them attractive. Most insurance contracts or stocks have tail risks that are higher in these infrequent situations. For example, I recooped funds ranging from 50% of my investment to over 120% of my investment in PR bonds (my utility bonds, fully insured by solid insuror). The lowest returns were for a bond class touted as having safest revenue source, but its holders had few assets to go after. Ultimately it was a interesting learning experience what can happen when legal contracts are in default.

This is one reason I also hold bonds as a hedge against a very weak economy. Bonds can claim the assets of stockholders and then become the holders of the 'means of production' under a steep dive and recovery scenario.
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Re: Thoughts on bonds from Fed decision...

Post by Redlion »

I don't know much about the economic analysis of Bond rates,(My wife married me anyways) , all I know is the Vanguard Total Bond Fund and TSP F Fund (Total Bond Fund for Fed Government) is up 8% YTD and over 10% from a year ago. It could be headed for a bad year because of interest rates but from my experience its been very consistent and I cannot see any alternative for non equity positions.
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Re: Thoughts on bonds from Fed decision...

Post by DB2 »

Seasonal wrote: Tue Aug 04, 2020 4:49 pm Where do people think interest rates would be absent Fed action?

We have massive unemployment, just had a massive drop in GDP and there's some virus going around that's inhibiting economic activity. A lot of businesses that want to borrow seems to want funds to avoid closure rather than expansion. Most major economies have negative nominal rates on government debt.
Rates, if market based, would be much higher given the enormous risks and debt out there. Although one can argue there wouldn't be as much debt if rates were not so low for the last decade or two. The Fed has in essence encouraged extra leverage and debt with their policies.
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Re: Thoughts on bonds from Fed decision...

Post by columbia »

Earlier this week from Ben Carlson:

If the 10 year treasury had a P/E ratio (the inverse of the yield):

1970: 12.8x

1980: 9.3x

1990: 12.2x

2000: 15.0x

2010: 26.8x

Now: 192.3x

4:17 PM · Aug 5, 2020·
Robot Monster
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Re: Thoughts on bonds from Fed decision...

Post by Robot Monster »

columbia wrote: Fri Aug 07, 2020 10:13 am Earlier this week from Ben Carlson:

If the 10 year treasury had a P/E ratio (the inverse of the yield):

1970: 12.8x

1980: 9.3x

1990: 12.2x

2000: 15.0x

2010: 26.8x

Now: 192.3x

4:17 PM · Aug 5, 2020·
Unsure what the conclude from this. "Don't buy bonds because, by this metric, they're mind-blowingly expensive?"
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Re: Thoughts on bonds from Fed decision...

Post by Angst »

columbia wrote: Fri Aug 07, 2020 10:13 am Earlier this week from Ben Carlson:

If the 10 year treasury had a P/E ratio (the inverse of the yield):

1970: 12.8x

1980: 9.3x

1990: 12.2x

2000: 15.0x

2010: 26.8x

Now: 192.3x

4:17 PM · Aug 5, 2020·
Well... that's different. I never thought of bonds that way. I don't think it changes anything for me, but it's kinda interesting to note, if not really surprising. It's funny how from this perspective, people might seem to act in opposite ways with respect to equity vs. bonds: High equity PE seems to be characterized by people pouring into stocks, but perhaps this high "Bonds PE" has people running from bonds. I'm not sure. I haven't read the article.
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Re: Thoughts on bonds from Fed decision...

Post by columbia »

Robot Monster wrote: Fri Aug 07, 2020 10:57 am
columbia wrote: Fri Aug 07, 2020 10:13 am Earlier this week from Ben Carlson:

If the 10 year treasury had a P/E ratio (the inverse of the yield):

1970: 12.8x

1980: 9.3x

1990: 12.2x

2000: 15.0x

2010: 26.8x

Now: 192.3x

4:17 PM · Aug 5, 2020·
Unsure what the conclude from this. "Don't buy bonds because, by this metric, they're mind-blowingly expensive?"
I assume that's his point. I have never seen anyone view bonds in that particular way, having said.

(My personal view is that bonds are expensive.)
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Re: Thoughts on bonds from Fed decision...

Post by jeffyscott »

columbia wrote: Fri Aug 07, 2020 11:42 am
Robot Monster wrote: Fri Aug 07, 2020 10:57 am
columbia wrote: Fri Aug 07, 2020 10:13 am Earlier this week from Ben Carlson:

If the 10 year treasury had a P/E ratio (the inverse of the yield):

1970: 12.8x

1980: 9.3x

1990: 12.2x

2000: 15.0x

2010: 26.8x

Now: 192.3x

4:17 PM · Aug 5, 2020·
Unsure what the conclude from this. "Don't buy bonds because, by this metric, they're mind-blowingly expensive?"
I assume that's his point. I have never seen anyone view bonds in that particular way, having said.

(My personal view is that bonds are expensive.)
I'd want to adjust for inflation, estimate what the real treasury yield was and use that for the historical comparison. I think bonds would still be expensive compared to the past, but maybe a little less extremely so.
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Re: Thoughts on bonds from Fed decision...

Post by Robot Monster »

jeffyscott wrote: Fri Aug 07, 2020 12:14 pm
columbia wrote: Fri Aug 07, 2020 11:42 am
Robot Monster wrote: Fri Aug 07, 2020 10:57 am
columbia wrote: Fri Aug 07, 2020 10:13 am Earlier this week from Ben Carlson:

If the 10 year treasury had a P/E ratio (the inverse of the yield):

1970: 12.8x

1980: 9.3x

1990: 12.2x

2000: 15.0x

2010: 26.8x

Now: 192.3x

4:17 PM · Aug 5, 2020·
Unsure what the conclude from this. "Don't buy bonds because, by this metric, they're mind-blowingly expensive?"
I assume that's his point. I have never seen anyone view bonds in that particular way, having said.

(My personal view is that bonds are expensive.)
I'd want to adjust for inflation, estimate what the real treasury yield was and use that for the historical comparison. I think bonds would still be expensive compared to the past, but maybe a little less extremely so.
Indeed. Inflation nullifies yield.

Take 1970, when the 10yr yield was 7.79%. That is super high compared to the 0.56% the 10yr pays today, but inflation was high in the 70's:

1970 5.6%
1971 3.3%
1972 3.4%
1973 8.7%
1974 12.3%
1975 6.9%
1976 4.9%
1977 6.7%
1978 9.0%
1979 13.3%
1980 12.5%

Seems the disparity between yield and inflation should be used when calculating price, and not yield alone?
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Re: Thoughts on bonds from Fed decision...

Post by bmritz »

Valuethinker wrote: Tue Aug 04, 2020 5:30 am
TexasBorn wrote: Tue Aug 04, 2020 5:22 am Hello everyone,

I’m curious what people’s opinions are on how bonds will perform now given the Fed’s recent admission to hold rates low until inflation is “above 2%”. Before (now) and afternoon (inflation jumps above 2% for awhile causing Fed to begin raising rates.)

https://www.wsj.com/articles/fed-weighs ... 1596360600
On the face of it it is not good for bonds.

Quantitative Easing has driven yields to the lowest ever, historically - I believe. There is as yet no sign they will rise.

Given the problems the Bank of Japan has had in creating inflation, I do wonder if the Fed actually has that power? What we seem to have learned from the Japanese experience, and also from the experience in the West since 2008-09, that it's very hard to fight deflationary (or perhaps disinflationary?) forces. (Some) theories say the Central Bank creates money, causes currency depreciation, increases in nominal economic activity, and so inflation. Yet that does not seem to be happening.

I would take this as evidence that one should be watchful about inflation and bond yields. The main argument for bonds in a portfolio still remains. That equities are enormously volatile, and bonds provide (nominal) certainty of returns -- when you buy a bond, you are more or less likely to get its Yield To Maturity as your return for holding it.
I believe the fed definitely has that power. Political constraints aside (and they shouldn’t be put aside because they are real), the Fed can always create more more inflation by creating more money and buying government bonds. If that weren’t true, then the Fed could buy up the stock of government bonds and retire the debt (pay the proceeds back to the treasury) without macroeconomic consequence.

So, they have the power, but for whatever reason they do not exercise it to meet their 2% inflation target.
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Re: Thoughts on bonds from Fed decision...

Post by palanzo »

7eight9 wrote: Tue Aug 04, 2020 5:25 pm
TN_Boy wrote: Tue Aug 04, 2020 4:27 pm
Valuethinker wrote: Tue Aug 04, 2020 11:58 am
7eight9 wrote: Tue Aug 04, 2020 10:47 am What is a fixed annuity?

https://www.blueprintincome.com/resourc ... annuities/

https://www.annuity.org/annuities/types/fixed/

Is this simply a return of capital, hence the high rates?
I read that that it is an annuity.

In other words, there is no return of principal? You pay your premium, and they pay you back an income for a fixed period. There is no final lump sum repaid to you?

There's no longevity insurance in that, then.
No. See links above.

Who regulates them?

https://www.naic.org/documents/topics_w ... ns_reg.pdf
The way I read the description, suppose you buy a 5 year MYGA paying 3%. You give them (for example) $10,000. Every year your investment grows by $300 (that $300 is not distributed to you). After five years, you have $11,500 which you can do anything with. No taxes due until distribution.

And again, the thing that bothers me is the very very large difference between those quoted rates and what you can get buying your basic bond, CD, etc. That said, they have a little bit of a "stable value" fund feel, investment products that are generally deemed "okay." But usually stable value funds are not so much better than other fixed income instruments.

I would definitely have to understand the product better and the issuing company pretty well before I'd buy one of these.
Your understanding is essentially correct.

New York Life offers them --- https://www.nylinvestments.com/public_f ... _04-18.pdf

Other lower rated insurance companies do too. The lower the rating the higher the interest rate. The 3.45%/5 year I mentioned initially is from Upsteam Life (B++). New York Life offers a 1.60%/5 year (A++).

There is a bit of a moral hazard issue - state guarantee funds (link - https://www.nolhga.com/policyholderinfo/main.cfm). If one was not going to buy MYGAs in excess of their state guarantee limits then it would make sense to choose the lowest rated companies with the highest rates.
Well in California it seems that present value of annuity benefits including net cash surrender and net cash withdrawal values are covered to 80% of the present value up to a maximum of $250,000.

Sounds like a good way to lose 20% of your investment in a low rated insurance company.

We still don't understand how these companies are able to "return" 3.45%.
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Re: Thoughts on bonds from Fed decision...

Post by palanzo »

7eight9 wrote: Tue Aug 04, 2020 11:47 pm
jeffyscott wrote: Tue Aug 04, 2020 10:16 pm
7eight9 wrote: Tue Aug 04, 2020 5:25 pm
TN_Boy wrote: Tue Aug 04, 2020 4:27 pm
Valuethinker wrote: Tue Aug 04, 2020 11:58 am

I read that that it is an annuity.

In other words, there is no return of principal? You pay your premium, and they pay you back an income for a fixed period. There is no final lump sum repaid to you?

There's no longevity insurance in that, then.

The way I read the description, suppose you buy a 5 year MYGA paying 3%. You give them (for example) $10,000. Every year your investment grows by $300 (that $300 is not distributed to you). After five years, you have $11,500 which you can do anything with. No taxes due until distribution.

And again, the thing that bothers me is the very very large difference between those quoted rates and what you can get buying your basic bond, CD, etc. That said, they have a little bit of a "stable value" fund feel, investment products that are generally deemed "okay." But usually stable value funds are not so much better than other fixed income instruments.

I would definitely have to understand the product better and the issuing company pretty well before I'd buy one of these.
Your understanding is essentially correct.

New York Life offers them --- https://www.nylinvestments.com/public_f ... _04-18.pdf

Other lower rated insurance companies do too. The lower the rating the higher the interest rate. The 3.45%/5 year I mentioned initially is from Upsteam Life (B++). New York Life offers a 1.60%/5 year (A++).

There is a bit of a moral hazard issue - state guarantee funds (link - https://www.nolhga.com/policyholderinfo/main.cfm). If one was not going to buy MYGAs in excess of their state guarantee limits then it would make sense to choose the lowest rated companies with the highest rates.
Do you know if all insurers pay at the same rate toward the guarantee funds, or do the lower rated ones pay more than the higher rated?
I don't know the answer to your question.

As a buyer of MYGAs I'm inclined to buy the highest yield (from likely the lowest rated insurer) as I get the same backing from the guarantee fund either way.
Are you sure your state provides 100% recovery? Remember also that States are not in great financial shape so who knows what they would do if a number of these insurance companies failed.
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Re: Thoughts on bonds from Fed decision...

Post by palanzo »

midareff wrote: Wed Aug 05, 2020 7:31 am
Valuethinker wrote: Tue Aug 04, 2020 9:24 am
midareff wrote: Tue Aug 04, 2020 8:34 am It makes for difficult decisions when the SEC of a ten year treasury is .556% and the SEC of the S&P500 is 1.81%. Deduct the CPI-U and your IRS rate and what have you got? How much of your portfolio are you willing to have in a negative real yield before tax on the dividends?

What are the solutions? Even the conservative retiree might hold a little less in bonds and more in equities.... The intermediate term corporate index still has an SEC of 1.72%, some money might go there.... the short term version has an SEC of .97% and the Total Bond Market is 1.16%... and unfortunately all three seem to be dropping rapidly.

It was a bit different IMHO when bonds would get you 1% real..... makes you rethink your AA as far as how much negative real money you wish to have before tax on the distributions.... and then if the Fed starts raising it will be welcome to the barber shop time, making high yield savings look good..
In actual outcomes I think one would still be better off than in the 1970s - in real terms? Investing in bonds then v now.

I'd have to think this through but I suspect the tax drag in the 1970s on bondholders was much larger:

- few opportunities to save in tax protected accounts
- marginal tax rates were generally much higher (and bracket creep tended to thrust one into higher brackets)
- I'd have to think about the math, but I suspect if bonds yield 8% and inflation is 10% and tax rates are say 25% (same in both periods), that I pay more tax then (get a lower post tax real return) than if bonds yield 2% say and inflation is 4%? Trivially true if bonds yield 0% and inflation is 2%?

I think we are in for an extended Japan-like period. Hopefully not that bad. But where, as a deliberate policy tool of Central Bankers, bond yields lag inflation rates.

For secular reasons - aftermath of the GFC, demographics, Covid-19 etc - we seem to be stuck in a low inflationary not-quite-recovery economy, and the ability of companies to pass on cost increases to their customers is limited. Thus, inflation is low. Despite what some of the theories in our economics textbooks taught us, increasing the money supply just does not seem to create inflation, in and of itself.
I was just a tiny bit in the market then so recollection is there.. just not much first hand. I do remember my dad dumped all his market holdings then in favor of 5 year 17% CDs at our local bank. When they were done he bought utilities.. electric, gas, phone and so forth. If it didn't pay a solid dividend he wouldn't own it. It's the old story.. when you are 15 you can't believe how stupid your folks are, by the time you are 21 you are just amazed how much they have learned in that short a time.
My dad did the same. However, I'm not sure I would want to buy PG&E bonds. PG&E was the biggest bankruptcy in US history.
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Re: Thoughts on bonds from Fed decision...

Post by palanzo »

vineviz wrote: Wed Aug 05, 2020 8:53 am
TN_Boy wrote: Tue Aug 04, 2020 10:24 am My rule of thumb is that any interest paying investment with a yield that is much higher than a 10 year treasury (and 3.6 is a LOT higher) is pretty risky. There is no magic money machine. That kind of interest rate indicates substantial risk .... somewhere.

Talk me into believing that these things are not high risk ....... how can they pay so much?
There is no shortage of corporate bonds with maturities of 5 years or more that yield over 2% or even 3%.Vanguard Long-Term Investment-Grade Fund (VWETX) has a SEC yield of 2.28% right now and Vanguard High-Yield Corporate Fund (VWEAX) has a yield of 4.36% So the rates of MYGAs aren't really off-the-charts.

That said, the highest MYGA rates do come from insurance companies with the lowest credit rating. It's pretty likely that the companies offering the best rates are the ones that need short-term capital the most. You're earning premium by supplying liquidity to the market, which is smart, but you're taking on a small amount of credit risk in return. The flip side is that state guarantee associations should mitigate even the low the risk of default, the process of settling your claims may come at an inopportune time.
Yes and depending on your state you may lose 20%+. Great investment.
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Re: Thoughts on bonds from Fed decision...

Post by vineviz »

palanzo wrote: Fri Aug 07, 2020 3:55 pm
vineviz wrote: Wed Aug 05, 2020 8:53 am
TN_Boy wrote: Tue Aug 04, 2020 10:24 am My rule of thumb is that any interest paying investment with a yield that is much higher than a 10 year treasury (and 3.6 is a LOT higher) is pretty risky. There is no magic money machine. That kind of interest rate indicates substantial risk .... somewhere.

Talk me into believing that these things are not high risk ....... how can they pay so much?
There is no shortage of corporate bonds with maturities of 5 years or more that yield over 2% or even 3%.Vanguard Long-Term Investment-Grade Fund (VWETX) has a SEC yield of 2.28% right now and Vanguard High-Yield Corporate Fund (VWEAX) has a yield of 4.36% So the rates of MYGAs aren't really off-the-charts.

That said, the highest MYGA rates do come from insurance companies with the lowest credit rating. It's pretty likely that the companies offering the best rates are the ones that need short-term capital the most. You're earning premium by supplying liquidity to the market, which is smart, but you're taking on a small amount of credit risk in return. The flip side is that state guarantee associations should mitigate even the low the risk of default, the process of settling your claims may come at an inopportune time.
Yes and depending on your state you may lose 20%+. Great investment.
Investments typically carry risk of some sort. No one is lining up at my house to give me free money.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
palanzo
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Re: Thoughts on bonds from Fed decision...

Post by palanzo »

vineviz wrote: Fri Aug 07, 2020 4:14 pm
palanzo wrote: Fri Aug 07, 2020 3:55 pm
vineviz wrote: Wed Aug 05, 2020 8:53 am
TN_Boy wrote: Tue Aug 04, 2020 10:24 am My rule of thumb is that any interest paying investment with a yield that is much higher than a 10 year treasury (and 3.6 is a LOT higher) is pretty risky. There is no magic money machine. That kind of interest rate indicates substantial risk .... somewhere.

Talk me into believing that these things are not high risk ....... how can they pay so much?
There is no shortage of corporate bonds with maturities of 5 years or more that yield over 2% or even 3%.Vanguard Long-Term Investment-Grade Fund (VWETX) has a SEC yield of 2.28% right now and Vanguard High-Yield Corporate Fund (VWEAX) has a yield of 4.36% So the rates of MYGAs aren't really off-the-charts.

That said, the highest MYGA rates do come from insurance companies with the lowest credit rating. It's pretty likely that the companies offering the best rates are the ones that need short-term capital the most. You're earning premium by supplying liquidity to the market, which is smart, but you're taking on a small amount of credit risk in return. The flip side is that state guarantee associations should mitigate even the low the risk of default, the process of settling your claims may come at an inopportune time.
Yes and depending on your state you may lose 20%+. Great investment.
Investments typically carry risk of some sort. No one is lining up at my house to give me free money.
People on the thread are looking at these as a replacement for bonds. A would say a lot more risk. I just want to highlight the risks depending on the state of residence.
7eight9
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Re: Thoughts on bonds from Fed decision...

Post by 7eight9 »

palanzo wrote: Fri Aug 07, 2020 3:52 pm
7eight9 wrote: Tue Aug 04, 2020 11:47 pm
jeffyscott wrote: Tue Aug 04, 2020 10:16 pm
7eight9 wrote: Tue Aug 04, 2020 5:25 pm
TN_Boy wrote: Tue Aug 04, 2020 4:27 pm

The way I read the description, suppose you buy a 5 year MYGA paying 3%. You give them (for example) $10,000. Every year your investment grows by $300 (that $300 is not distributed to you). After five years, you have $11,500 which you can do anything with. No taxes due until distribution.

And again, the thing that bothers me is the very very large difference between those quoted rates and what you can get buying your basic bond, CD, etc. That said, they have a little bit of a "stable value" fund feel, investment products that are generally deemed "okay." But usually stable value funds are not so much better than other fixed income instruments.

I would definitely have to understand the product better and the issuing company pretty well before I'd buy one of these.
Your understanding is essentially correct.

New York Life offers them --- https://www.nylinvestments.com/public_f ... _04-18.pdf

Other lower rated insurance companies do too. The lower the rating the higher the interest rate. The 3.45%/5 year I mentioned initially is from Upsteam Life (B++). New York Life offers a 1.60%/5 year (A++).

There is a bit of a moral hazard issue - state guarantee funds (link - https://www.nolhga.com/policyholderinfo/main.cfm). If one was not going to buy MYGAs in excess of their state guarantee limits then it would make sense to choose the lowest rated companies with the highest rates.
Do you know if all insurers pay at the same rate toward the guarantee funds, or do the lower rated ones pay more than the higher rated?
I don't know the answer to your question.

As a buyer of MYGAs I'm inclined to buy the highest yield (from likely the lowest rated insurer) as I get the same backing from the guarantee fund either way.
Are you sure your state provides 100% recovery? Remember also that States are not in great financial shape so who knows what they would do if a number of these insurance companies failed.
The fiscal health of states doesn't come into play ...

A state guaranty association is not a government agency, but states usually require insurance companies to belong to it as a condition of being licensed to do business. The guaranty associations of the fifty states are members of a national umbrella association, the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA). The NOLHGA website provides a description of the organization, links to websites for the individual state organizations, and links to the actual text of the governing state laws.

A difference between guaranty association protection and the protection e.g. of bank accounts by FDIC, credit union accounts by NCUA, and brokerage accounts by SIPC, is that it is difficult for consumers to learn about this protection. Usually, state law prohibits insurance agents and companies from using the guaranty association in any advertising and agents are prohibited by statute from using this Web site or the existence of the guaranty association as an inducement to purchase insurance. Presumably this is a response to concerns by stronger insurance companies about moral hazard.
https://en.wikipedia.org/wiki/Guaranty_ ... 20business.

NOLHGA --- https://www.nolhga.com/policyholderinfo ... lifega.org
I guess it all could be much worse. | They could be warming up my hearse.
palanzo
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Re: Thoughts on bonds from Fed decision...

Post by palanzo »

7eight9 wrote: Fri Aug 07, 2020 4:54 pm
palanzo wrote: Fri Aug 07, 2020 3:52 pm
7eight9 wrote: Tue Aug 04, 2020 11:47 pm
jeffyscott wrote: Tue Aug 04, 2020 10:16 pm
7eight9 wrote: Tue Aug 04, 2020 5:25 pm

Your understanding is essentially correct.

New York Life offers them --- https://www.nylinvestments.com/public_f ... _04-18.pdf

Other lower rated insurance companies do too. The lower the rating the higher the interest rate. The 3.45%/5 year I mentioned initially is from Upsteam Life (B++). New York Life offers a 1.60%/5 year (A++).

There is a bit of a moral hazard issue - state guarantee funds (link - https://www.nolhga.com/policyholderinfo/main.cfm). If one was not going to buy MYGAs in excess of their state guarantee limits then it would make sense to choose the lowest rated companies with the highest rates.
Do you know if all insurers pay at the same rate toward the guarantee funds, or do the lower rated ones pay more than the higher rated?
I don't know the answer to your question.

As a buyer of MYGAs I'm inclined to buy the highest yield (from likely the lowest rated insurer) as I get the same backing from the guarantee fund either way.
Are you sure your state provides 100% recovery? Remember also that States are not in great financial shape so who knows what they would do if a number of these insurance companies failed.
The fiscal health of states doesn't come into play ...

A state guaranty association is not a government agency, but states usually require insurance companies to belong to it as a condition of being licensed to do business. The guaranty associations of the fifty states are members of a national umbrella association, the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA). The NOLHGA website provides a description of the organization, links to websites for the individual state organizations, and links to the actual text of the governing state laws.

A difference between guaranty association protection and the protection e.g. of bank accounts by FDIC, credit union accounts by NCUA, and brokerage accounts by SIPC, is that it is difficult for consumers to learn about this protection. Usually, state law prohibits insurance agents and companies from using the guaranty association in any advertising and agents are prohibited by statute from using this Web site or the existence of the guaranty association as an inducement to purchase insurance. Presumably this is a response to concerns by stronger insurance companies about moral hazard.
https://en.wikipedia.org/wiki/Guaranty_ ... 20business.

NOLHGA --- https://www.nolhga.com/policyholderinfo ... lifega.org
This is all governed by state law. In CA you would only recover 80%.
7eight9
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Re: Thoughts on bonds from Fed decision...

Post by 7eight9 »

palanzo wrote: Fri Aug 07, 2020 5:00 pm
7eight9 wrote: Fri Aug 07, 2020 4:54 pm
palanzo wrote: Fri Aug 07, 2020 3:52 pm
7eight9 wrote: Tue Aug 04, 2020 11:47 pm
jeffyscott wrote: Tue Aug 04, 2020 10:16 pm

Do you know if all insurers pay at the same rate toward the guarantee funds, or do the lower rated ones pay more than the higher rated?
I don't know the answer to your question.

As a buyer of MYGAs I'm inclined to buy the highest yield (from likely the lowest rated insurer) as I get the same backing from the guarantee fund either way.
Are you sure your state provides 100% recovery? Remember also that States are not in great financial shape so who knows what they would do if a number of these insurance companies failed.
The fiscal health of states doesn't come into play ...

A state guaranty association is not a government agency, but states usually require insurance companies to belong to it as a condition of being licensed to do business. The guaranty associations of the fifty states are members of a national umbrella association, the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA). The NOLHGA website provides a description of the organization, links to websites for the individual state organizations, and links to the actual text of the governing state laws.

A difference between guaranty association protection and the protection e.g. of bank accounts by FDIC, credit union accounts by NCUA, and brokerage accounts by SIPC, is that it is difficult for consumers to learn about this protection. Usually, state law prohibits insurance agents and companies from using the guaranty association in any advertising and agents are prohibited by statute from using this Web site or the existence of the guaranty association as an inducement to purchase insurance. Presumably this is a response to concerns by stronger insurance companies about moral hazard.
https://en.wikipedia.org/wiki/Guaranty_ ... 20business.

NOLHGA --- https://www.nolhga.com/policyholderinfo ... lifega.org
This is all governed by state law. In CA you would only recover 80%.
Correct. They are governed by state law.

Maybe I misunderstood what you were trying to say with the comment in red above. I thought you were implying that the solvency of the particular state determined the recovery amount. I just wanted to clarify that they are not depending in any way shape or form on the solvency of a state.
I guess it all could be much worse. | They could be warming up my hearse.
palanzo
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Re: Thoughts on bonds from Fed decision...

Post by palanzo »

7eight9 wrote: Fri Aug 07, 2020 5:26 pm
palanzo wrote: Fri Aug 07, 2020 5:00 pm
7eight9 wrote: Fri Aug 07, 2020 4:54 pm
palanzo wrote: Fri Aug 07, 2020 3:52 pm
7eight9 wrote: Tue Aug 04, 2020 11:47 pm

I don't know the answer to your question.

As a buyer of MYGAs I'm inclined to buy the highest yield (from likely the lowest rated insurer) as I get the same backing from the guarantee fund either way.
Are you sure your state provides 100% recovery? Remember also that States are not in great financial shape so who knows what they would do if a number of these insurance companies failed.
The fiscal health of states doesn't come into play ...

A state guaranty association is not a government agency, but states usually require insurance companies to belong to it as a condition of being licensed to do business. The guaranty associations of the fifty states are members of a national umbrella association, the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA). The NOLHGA website provides a description of the organization, links to websites for the individual state organizations, and links to the actual text of the governing state laws.

A difference between guaranty association protection and the protection e.g. of bank accounts by FDIC, credit union accounts by NCUA, and brokerage accounts by SIPC, is that it is difficult for consumers to learn about this protection. Usually, state law prohibits insurance agents and companies from using the guaranty association in any advertising and agents are prohibited by statute from using this Web site or the existence of the guaranty association as an inducement to purchase insurance. Presumably this is a response to concerns by stronger insurance companies about moral hazard.
https://en.wikipedia.org/wiki/Guaranty_ ... 20business.

NOLHGA --- https://www.nolhga.com/policyholderinfo ... lifega.org
This is all governed by state law. In CA you would only recover 80%.
Correct. They are governed by state law.

Maybe I misunderstood what you were trying to say with the comment in red above. I thought you were implying that the solvency of the particular state determined the recovery amount. I just wanted to clarify that they are not depending in any way shape or form on the solvency of a state.
It's worse. They are depending on the solvency of the other insurance companies that are allowed to operate in your state. And if several of those became insolvent what do you think would happen?
7eight9
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Re: Thoughts on bonds from Fed decision...

Post by 7eight9 »

palanzo wrote: Fri Aug 07, 2020 5:38 pm
7eight9 wrote: Fri Aug 07, 2020 5:26 pm
palanzo wrote: Fri Aug 07, 2020 5:00 pm
7eight9 wrote: Fri Aug 07, 2020 4:54 pm
palanzo wrote: Fri Aug 07, 2020 3:52 pm

Are you sure your state provides 100% recovery? Remember also that States are not in great financial shape so who knows what they would do if a number of these insurance companies failed.
The fiscal health of states doesn't come into play ...

A state guaranty association is not a government agency, but states usually require insurance companies to belong to it as a condition of being licensed to do business. The guaranty associations of the fifty states are members of a national umbrella association, the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA). The NOLHGA website provides a description of the organization, links to websites for the individual state organizations, and links to the actual text of the governing state laws.

A difference between guaranty association protection and the protection e.g. of bank accounts by FDIC, credit union accounts by NCUA, and brokerage accounts by SIPC, is that it is difficult for consumers to learn about this protection. Usually, state law prohibits insurance agents and companies from using the guaranty association in any advertising and agents are prohibited by statute from using this Web site or the existence of the guaranty association as an inducement to purchase insurance. Presumably this is a response to concerns by stronger insurance companies about moral hazard.
https://en.wikipedia.org/wiki/Guaranty_ ... 20business.

NOLHGA --- https://www.nolhga.com/policyholderinfo ... lifega.org
This is all governed by state law. In CA you would only recover 80%.
Correct. They are governed by state law.

Maybe I misunderstood what you were trying to say with the comment in red above. I thought you were implying that the solvency of the particular state determined the recovery amount. I just wanted to clarify that they are not depending in any way shape or form on the solvency of a state.
It's worse. They are depending on the solvency of the other insurance companies that are allowed to operate in your state. And if several of those became insolvent what do you think would happen?
I'm buying MYGAs and don't share your concerns. To me they represent an excellent choice for conservative investors who don't mind their illiquidity.
I guess it all could be much worse. | They could be warming up my hearse.
palanzo
Posts: 1417
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Re: Thoughts on bonds from Fed decision...

Post by palanzo »

7eight9 wrote: Fri Aug 07, 2020 5:43 pm
palanzo wrote: Fri Aug 07, 2020 5:38 pm
7eight9 wrote: Fri Aug 07, 2020 5:26 pm
palanzo wrote: Fri Aug 07, 2020 5:00 pm
7eight9 wrote: Fri Aug 07, 2020 4:54 pm

The fiscal health of states doesn't come into play ...

A state guaranty association is not a government agency, but states usually require insurance companies to belong to it as a condition of being licensed to do business. The guaranty associations of the fifty states are members of a national umbrella association, the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA). The NOLHGA website provides a description of the organization, links to websites for the individual state organizations, and links to the actual text of the governing state laws.

A difference between guaranty association protection and the protection e.g. of bank accounts by FDIC, credit union accounts by NCUA, and brokerage accounts by SIPC, is that it is difficult for consumers to learn about this protection. Usually, state law prohibits insurance agents and companies from using the guaranty association in any advertising and agents are prohibited by statute from using this Web site or the existence of the guaranty association as an inducement to purchase insurance. Presumably this is a response to concerns by stronger insurance companies about moral hazard.
https://en.wikipedia.org/wiki/Guaranty_ ... 20business.

NOLHGA --- https://www.nolhga.com/policyholderinfo ... lifega.org
This is all governed by state law. In CA you would only recover 80%.
Correct. They are governed by state law.

Maybe I misunderstood what you were trying to say with the comment in red above. I thought you were implying that the solvency of the particular state determined the recovery amount. I just wanted to clarify that they are not depending in any way shape or form on the solvency of a state.
It's worse. They are depending on the solvency of the other insurance companies that are allowed to operate in your state. And if several of those became insolvent what do you think would happen?
I'm buying MYGAs and don't share your concerns. To me they represent an excellent choice for conservative investors who don't mind their illiquidity.
Good luck :sharebeer
TN_Boy
Posts: 1890
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Re: Thoughts on bonds from Fed decision...

Post by TN_Boy »

7eight9 wrote: Fri Aug 07, 2020 5:43 pm
palanzo wrote: Fri Aug 07, 2020 5:38 pm
7eight9 wrote: Fri Aug 07, 2020 5:26 pm
palanzo wrote: Fri Aug 07, 2020 5:00 pm
7eight9 wrote: Fri Aug 07, 2020 4:54 pm

The fiscal health of states doesn't come into play ...

A state guaranty association is not a government agency, but states usually require insurance companies to belong to it as a condition of being licensed to do business. The guaranty associations of the fifty states are members of a national umbrella association, the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA). The NOLHGA website provides a description of the organization, links to websites for the individual state organizations, and links to the actual text of the governing state laws.

A difference between guaranty association protection and the protection e.g. of bank accounts by FDIC, credit union accounts by NCUA, and brokerage accounts by SIPC, is that it is difficult for consumers to learn about this protection. Usually, state law prohibits insurance agents and companies from using the guaranty association in any advertising and agents are prohibited by statute from using this Web site or the existence of the guaranty association as an inducement to purchase insurance. Presumably this is a response to concerns by stronger insurance companies about moral hazard.
https://en.wikipedia.org/wiki/Guaranty_ ... 20business.

NOLHGA --- https://www.nolhga.com/policyholderinfo ... lifega.org
This is all governed by state law. In CA you would only recover 80%.
Correct. They are governed by state law.

Maybe I misunderstood what you were trying to say with the comment in red above. I thought you were implying that the solvency of the particular state determined the recovery amount. I just wanted to clarify that they are not depending in any way shape or form on the solvency of a state.
It's worse. They are depending on the solvency of the other insurance companies that are allowed to operate in your state. And if several of those became insolvent what do you think would happen?
I'm buying MYGAs and don't share your concerns. To me they represent an excellent choice for conservative investors who don't mind their illiquidity.
I've found this discussion fruitful, since I hadn't heard about MYGAs before.

But I think calling them a good choice for "conservative" investors is a bit of stretch. To get interest rates meaningfully higher than a corporate bond fund, you'll have to invest your money with a lower-rated insurance company which has to be investing in BBB and worse bonds.

Trusting that if things go awry, a state agency will fix things for you (meaning at the least, the investor needs to be very clear on what the state guarantees are AND monitor the situation to ensure that regulations are not changed).

To me, an MYGA is an interesting option for an investor willing to take some risks with their fixed income. But conservative? Don't see that.
BogleFan510
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Re: Thoughts on bonds from Fed decision...

Post by BogleFan510 »

jeffyscott wrote: Fri Aug 07, 2020 12:14 pm
columbia wrote: Fri Aug 07, 2020 11:42 am
Robot Monster wrote: Fri Aug 07, 2020 10:57 am
columbia wrote: Fri Aug 07, 2020 10:13 am Earlier this week from Ben Carlson:

If the 10 year treasury had a P/E ratio (the inverse of the yield):

1970: 12.8x

1980: 9.3x

1990: 12.2x

2000: 15.0x

2010: 26.8x

Now: 192.3x

4:17 PM · Aug 5, 2020·
Unsure what the conclude from this. "Don't buy bonds because, by this metric, they're mind-blowingly expensive?"
I assume that's his point. I have never seen anyone view bonds in that particular way, having said.

(My personal view is that bonds are expensive.)
I'd want to adjust for inflation, estimate what the real treasury yield was and use that for the historical comparison. I think bonds would still be expensive compared to the past, but maybe a little less extremely so.
Exactly. PE for bonds doesnt really make sense. A simple counter point is that if one expects deflation, these bond coupons become a good risk/return investment. Under deflation, real corporate earnings shrink, while bonds pay increasingly valuable coupons that don't decline. We have very few recent examples of deflationary economies, but they do happen, especially if companies are running scared and afraid to borrow. The fed increasing money supply only asserts inflationary pressure if people, govt agencies and companies are willing to borrow to invest in perceived good opportuntities at a micro economic level. This is the type analysis I posted the economist video link about, with post 90s Japan as the lead example.

I am hopeful, but I think the market is pricing in a non zero probability of extended deflationary economies into bond prices. A restaurant owner is not going to borrow money to expand, no matter how attractive the rates, if there are no customers ready to spend and a big company may buy back stock instead of developing new products if they perceive limited profitable markets available and margin pressures from global competition. This is the micro-economic pressures that can counter Fed action to increase economic activity via money supply strategies.
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jeffyscott
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Re: Thoughts on bonds from Fed decision...

Post by jeffyscott »

TN_Boy wrote: Sat Aug 08, 2020 9:54 am
7eight9 wrote: Fri Aug 07, 2020 5:43 pm
palanzo wrote: Fri Aug 07, 2020 5:38 pm
7eight9 wrote: Fri Aug 07, 2020 5:26 pm
palanzo wrote: Fri Aug 07, 2020 5:00 pm

This is all governed by state law. In CA you would only recover 80%.
Correct. They are governed by state law.

Maybe I misunderstood what you were trying to say with the comment in red above. I thought you were implying that the solvency of the particular state determined the recovery amount. I just wanted to clarify that they are not depending in any way shape or form on the solvency of a state.
It's worse. They are depending on the solvency of the other insurance companies that are allowed to operate in your state. And if several of those became insolvent what do you think would happen?
I'm buying MYGAs and don't share your concerns. To me they represent an excellent choice for conservative investors who don't mind their illiquidity.
I've found this discussion fruitful, since I hadn't heard about MYGAs before.

But I think calling them a good choice for "conservative" investors is a bit of stretch. To get interest rates meaningfully higher than a corporate bond fund, you'll have to invest your money with a lower-rated insurance company which has to be investing in BBB and worse bonds.

Trusting that if things go awry, a state agency will fix things for you (meaning at the least, the investor needs to be very clear on what the state guarantees are AND monitor the situation to ensure that regulations are not changed).

To me, an MYGA is an interesting option for an investor willing to take some risks with their fixed income. But conservative? Don't see that.
While I too would question this supposed free lunch, to be clear, it is not a state agency that fixes things in the case of insolvency. As I understand it, it is a state authorized private entity that is funded by all the insurance companies in the state. And there are state laws that say that this private entity must collect money from all those other insurance companies to pay the claims of the insolvent one (at least up to some limit). Aside from CA, this requirement appears to be, in the case of MYGAs, that they must pay 100% of the present value of first $300K. So, in effect, your first $300K is backed by all the insurance companies in the state.

I, and I assume most, had never heard of this guarantee before reading about it recently here on this forum. I'd have assumed any annuity is only as safe as the insurance company behind it. Perhaps as it becomes general knowledge due to all this posting about it :D , leading to moral hazard issues, the stronger insurance companies will decide to lobby more state's to adopt a rule like CA's. If that were to happen the guarantee that you thought you had is now gone, perhaps reduced to 80%.
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
TN_Boy
Posts: 1890
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Re: Thoughts on bonds from Fed decision...

Post by TN_Boy »

jeffyscott wrote: Sat Aug 08, 2020 10:36 am
TN_Boy wrote: Sat Aug 08, 2020 9:54 am
7eight9 wrote: Fri Aug 07, 2020 5:43 pm
palanzo wrote: Fri Aug 07, 2020 5:38 pm
7eight9 wrote: Fri Aug 07, 2020 5:26 pm

Correct. They are governed by state law.

Maybe I misunderstood what you were trying to say with the comment in red above. I thought you were implying that the solvency of the particular state determined the recovery amount. I just wanted to clarify that they are not depending in any way shape or form on the solvency of a state.
It's worse. They are depending on the solvency of the other insurance companies that are allowed to operate in your state. And if several of those became insolvent what do you think would happen?
I'm buying MYGAs and don't share your concerns. To me they represent an excellent choice for conservative investors who don't mind their illiquidity.
I've found this discussion fruitful, since I hadn't heard about MYGAs before.

But I think calling them a good choice for "conservative" investors is a bit of stretch. To get interest rates meaningfully higher than a corporate bond fund, you'll have to invest your money with a lower-rated insurance company which has to be investing in BBB and worse bonds.

Trusting that if things go awry, a state agency will fix things for you (meaning at the least, the investor needs to be very clear on what the state guarantees are AND monitor the situation to ensure that regulations are not changed).

To me, an MYGA is an interesting option for an investor willing to take some risks with their fixed income. But conservative? Don't see that.
While I too would question this supposed free lunch, to be clear, it is not a state agency that fixes things in the case of insolvency. As I understand it, it is a state authorized private entity that is funded by all the insurance companies in the state. And there are state laws that say that this private entity must collect money from all those other insurance companies to pay the claims of the insolvent one (at least up to some limit). Aside from CA, this requirement appears to be, in the case of MYGAs, that they must pay 100% of the present value of first $300K. So, in effect, your first $300K is backed by all the insurance companies in the state.

I, and I assume most, had never heard of this guarantee before reading about it recently here on this forum. I'd have assumed any annuity is only as safe as the insurance company behind it. Perhaps as it becomes general knowledge due to all this posting about it :D , leading to moral hazard issues, the stronger insurance companies will decide to lobby more state's to adopt a rule like CA's. If that were to happen the guarantee that you thought you had is now gone, perhaps reduced to 80%.
Okay, thanks for the clarification on the guaranty agency.

I'm still struggling with how much I'd be willing to sink into one of these things. Suppose I went with 20% of my fixed income, a relatively modest portion. Then I'm into wondering whether the extra yield on 20% of that part of the portfolio is worth the extra risk, risk which I find difficult to quantify.

Are these things new? Or have they been around forever and I just never heard of them?
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vineviz
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Re: Thoughts on bonds from Fed decision...

Post by vineviz »

TN_Boy wrote: Sat Aug 08, 2020 11:44 am I'm still struggling with how much I'd be willing to sink into one of these things. Suppose I went with 20% of my fixed income, a relatively modest portion. Then I'm into wondering whether the extra yield on 20% of that part of the portfolio is worth the extra risk, risk which I find difficult to quantify.

Are these things new? Or have they been around forever and I just never heard of them?
They’re definitely not new.

My advice, as always, to allocate to instruments like this based NOT on a percentage of your portfolio but instead based on how many dollars you need to spend in the near future and when.

A 5-year MYGA should not be purchased in excess of money you expect to SPEND in the year 2025 or 2026, for instance.

Build a ladder of these according to need, use a variety of insurance companies to diversify the default risk, and stick with higher rates companies if you’re in a state with weaker guarantees.

Money you will spend in more than 5-10 years should be in long-term bonds or stocks anyway.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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jeffyscott
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Re: Thoughts on bonds from Fed decision...

Post by jeffyscott »

vineviz wrote: Sat Aug 08, 2020 11:54 am
TN_Boy wrote: Sat Aug 08, 2020 11:44 am I'm still struggling with how much I'd be willing to sink into one of these things. Suppose I went with 20% of my fixed income, a relatively modest portion. Then I'm into wondering whether the extra yield on 20% of that part of the portfolio is worth the extra risk, risk which I find difficult to quantify.

Are these things new? Or have they been around forever and I just never heard of them?
They’re definitely not new.

My advice, as always, to allocate to instruments like this based NOT on a percentage of your portfolio but instead based on how many dollars you need to spend in the near future and when.

A 5-year MYGA should not be purchased in excess of money you expect to SPEND in the year 2025 or 2026, for instance.

Build a ladder of these according to need, use a variety of insurance companies to diversify the default risk, and stick with higher rates companies if you’re in a state with weaker guarantees.

Money you will spend in more than 5-10 years should be in long-term bonds or stocks anyway.
I think maybe calling them MYGAs is new or at least being newly heard by some of us. I think they used to just be called "annuities". Never used them or new anything much about them, but remember seeing criticisms that 403Bs often included (expensive) annuities within them, and this made no sense since they (annuities) are already tax deferred there was no reason to put them inside a tax-deferred account. When my wife was a teacher, employees could choose from 5 different administrators for their 403b money and 3 of these were insurance companies (that I assume offered annuities as on option).

The current rate situation may be unusual. I found this:
https://www.annuityratewatch.com/rates/ ... draw+Chart
which has historical rates. I only looked at 2018, because I happen to have invested in a lot of brokered 2-3 year or so CDs at around 3% or so that year, after a rollover. It appears that at that time, the best MYGA rates were about the same. The difference is that they have stayed there.
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Re: Thoughts on bonds from Fed decision...

Post by palanzo »

Johnathan has some interesting thought on annuities. Note he recommends insurers rated A+.

https://humbledollar.com/2020/08/risking-my-life/
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Re: Thoughts on bonds from Fed decision...

Post by TN_Boy »

palanzo wrote: Sat Aug 08, 2020 4:01 pm Johnathan has some interesting thought on annuities. Note he recommends insurers rated A+.

https://humbledollar.com/2020/08/risking-my-life/
Though those are traditional annuities, right, not these entertaining MYGAs?

I'm not sure I like Clement comparing annuity returns to bond fund returns. I would compare annuity returns to the returns of the entire portfolio, which is a mix of stocks and bonds. Though perhaps people who buy annuities sell only bonds to buy the annuities, i.e. going with a more aggressive portfolio since they have the annuity.
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Re: Thoughts on bonds from Fed decision...

Post by jeffyscott »

TN_Boy wrote: Sat Aug 08, 2020 4:25 pm
palanzo wrote: Sat Aug 08, 2020 4:01 pm Johnathan has some interesting thought on annuities. Note he recommends insurers rated A+.

https://humbledollar.com/2020/08/risking-my-life/
Though those are traditional annuities, right, not these entertaining MYGAs?

I'm not sure I like Clement comparing annuity returns to bond fund returns. I would compare annuity returns to the returns of the entire portfolio, which is a mix of stocks and bonds. Though perhaps people who buy annuities sell only bonds to buy the annuities, i.e. going with a more aggressive portfolio since they have the annuity.
Yeah, maybe the insurance industry should stop calling everything "annuities".

That link mentions immediate fixed annuity, a tax-deferred variable annuity, and an equity-indexed annuity. The MYGA is a tax-deferred fixed rate annuity, but completely different from the "immediate fixed annuity", which is a thing that pays a guaranteed lifetime income not a fixed rate of interest for X years.
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Re: Thoughts on bonds from Fed decision...

Post by palanzo »

jeffyscott wrote: Sat Aug 08, 2020 4:44 pm
TN_Boy wrote: Sat Aug 08, 2020 4:25 pm
palanzo wrote: Sat Aug 08, 2020 4:01 pm Johnathan has some interesting thought on annuities. Note he recommends insurers rated A+.

https://humbledollar.com/2020/08/risking-my-life/
Though those are traditional annuities, right, not these entertaining MYGAs?

I'm not sure I like Clement comparing annuity returns to bond fund returns. I would compare annuity returns to the returns of the entire portfolio, which is a mix of stocks and bonds. Though perhaps people who buy annuities sell only bonds to buy the annuities, i.e. going with a more aggressive portfolio since they have the annuity.
Yeah, maybe the insurance industry should stop calling everything "annuities".

That link mentions immediate fixed annuity, a tax-deferred variable annuity, and an equity-indexed annuity. The MYGA is a tax-deferred fixed rate annuity, but completely different from the "immediate fixed annuity", which is a thing that pays a guaranteed lifetime income not a fixed rate of interest for X years.
True but many of the points Johnathan makes apply equally to MYGAs. They are all products from insurance companies.
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Re: Thoughts on bonds from Fed decision...

Post by vineviz »

TN_Boy wrote: Sat Aug 08, 2020 4:25 pm Though perhaps people who buy annuities sell only bonds to buy the annuities, i.e. going with a more aggressive portfolio since they have the annuity.
If we're talking about "true" annuities or income annuities (e.g. SPIA or deferred income annuity) that's USUALLY true and typically what planners would recommend.

An economist would say a MYGA is an investment product more than a "true" annuity, since the effect of "risk pooling" in a MYGA is de minimus. For sure a MYGA is a type of fixed income investment, and is fundamentally different than an equity investment.
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Re: Thoughts on bonds from Fed decision...

Post by Mel Lindauer »

One thing I haven't seen mentioned in all the talk about State Guarantees on annuity products, and that's the time that it may take to recover your money when/if your insurer goes belly up.

It just might be years before the dust settles and you're able to recover whatever you're entitled to (that's only 80% in CA and may end up being less if more states follow CA's actions). Just don't bet on the recovery being painless.
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Re: Thoughts on bonds from Fed decision...

Post by hoops777 »

Well I have to say an MYGA is not perfect and has a very small amount of risk.
Stocks have a wide range of risks.
Bonds have risks.
Over the next 5 years is it riskier to put 100K into total stock,total bond or a MYGA from from an insurer with a good rating but not the highest to get a 3 pct interest rate?
I vote for the MYGA as having less risk if you need that 3 pct return.
K.I.S.S........so easy to say so difficult to do.
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Re: Thoughts on bonds from Fed decision...

Post by 000 »

hoops777 wrote: Sun Aug 09, 2020 4:14 pm Well I have to say an MYGA is not perfect and has a very small amount of risk.
Stocks have a wide range of risks.
Bonds have risks.
Over the next 5 years is it riskier to put 100K into total stock,total bond or a MYGA from from an insurer with a good rating but not the highest to get a 3 pct interest rate?
I vote for the MYGA as having less risk if you need that 3 pct return.
As interest rates lower, people live longer, and governments are less fiscally healthy, insurance products become more and more risky.
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Re: Thoughts on bonds from Fed decision...

Post by hoops777 »

000 wrote: Sun Aug 09, 2020 4:21 pm
hoops777 wrote: Sun Aug 09, 2020 4:14 pm Well I have to say an MYGA is not perfect and has a very small amount of risk.
Stocks have a wide range of risks.
Bonds have risks.
Over the next 5 years is it riskier to put 100K into total stock,total bond or a MYGA from from an insurer with a good rating but not the highest to get a 3 pct interest rate?
I vote for the MYGA as having less risk if you need that 3 pct return.
As interest rates lower, people live longer, and governments are less fiscally healthy, insurance products become more and more risky.
It appears everything is becoming more and more risky, so I guess pick your poison.
K.I.S.S........so easy to say so difficult to do.
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Re: Thoughts on bonds from Fed decision...

Post by TN_Boy »

hoops777 wrote: Sun Aug 09, 2020 4:14 pm Well I have to say an MYGA is not perfect and has a very small amount of risk.
Stocks have a wide range of risks.
Bonds have risks.
Over the next 5 years is it riskier to put 100K into total stock,total bond or a MYGA from from an insurer with a good rating but not the highest to get a 3 pct interest rate?
I vote for the MYGA as having less risk if you need that 3 pct return.
I don't understand the posters here who keep saying these things have a very small amount of risk. How do you know that?? I guess if you contact an agent they will send you detailed information and maybe you can see more about how they work. Or you are just certain the guaranteeing entities will have no issues if there is a problem (what evidence is there that this is the case?).

I glanced at Upstreams Life (found via this posted link upthread: https://www.blueprintincome.com/fixed-annuities) 5 year MYGA. Pays 3.45%.

As I noted before, looking at Fidelity, they list five year corporate bonds as yielding 4.88%. Anything relatively safe is far lower. Single A five year corporates yield 1.22 now, 5 year treasuries are at .23. So obviously the insurance company can't be investing in anything remotely safe and paying you out of those investments.

Another wrinkle (other than the fact your money is mostly tied up for the duration of the annuity) is that you may want to pay a little extra so that if you die, your heirs will get more than the cash surrender value (at least for the Upstreams Life one I mention paying 3.45).

So these things are relatively illiquid and, you should read the fine print to ensure that if you die before the term is up, your beneficiaries get the full value back.

I'll mention again, stable value funds (also issued by insurance companies) are generally regarded as "okay" (Swedroe approves of them in his book on Alternative Investments) but I can't tell how similar MYGAs are to stable value funds in risk and underlying investments.

Nothing posted in this thread about MYGAs gives me a warm feeling. I'd be happy to read more about them, if someone could point me to a detailed analysis of these things, not written by the insurance company selling them.
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Re: Thoughts on bonds from Fed decision...

Post by palanzo »

TN_Boy wrote: Sun Aug 09, 2020 10:40 pm
hoops777 wrote: Sun Aug 09, 2020 4:14 pm Well I have to say an MYGA is not perfect and has a very small amount of risk.
Stocks have a wide range of risks.
Bonds have risks.
Over the next 5 years is it riskier to put 100K into total stock,total bond or a MYGA from from an insurer with a good rating but not the highest to get a 3 pct interest rate?
I vote for the MYGA as having less risk if you need that 3 pct return.
I don't understand the posters here who keep saying these things have a very small amount of risk. How do you know that?? I guess if you contact an agent they will send you detailed information and maybe you can see more about how they work. Or you are just certain the guaranteeing entities will have no issues if there is a problem (what evidence is there that this is the case?).

I glanced at Upstreams Life (found via this posted link upthread: https://www.blueprintincome.com/fixed-annuities) 5 year MYGA. Pays 3.45%.

As I noted before, looking at Fidelity, they list five year corporate bonds as yielding 4.88%. Anything relatively safe is far lower. Single A five year corporates yield 1.22 now, 5 year treasuries are at .23. So obviously the insurance company can't be investing in anything remotely safe and paying you out of those investments.

Another wrinkle (other than the fact your money is mostly tied up for the duration of the annuity) is that you may want to pay a little extra so that if you die, your heirs will get more than the cash surrender value (at least for the Upstreams Life one I mention paying 3.45).

So these things are relatively illiquid and, you should read the fine print to ensure that if you die before the term is up, your beneficiaries get the full value back.

I'll mention again, stable value funds (also issued by insurance companies) are generally regarded as "okay" (Swedroe approves of them in his book on Alternative Investments) but I can't tell how similar MYGAs are to stable value funds in risk and underlying investments.

Nothing posted in this thread about MYGAs gives me a warm feeling. I'd be happy to read more about them, if someone could point me to a detailed analysis of these things, not written by the insurance company selling them.
+1 Some posters here are doing a real disservice to others by saying that MYGAs have a very small amount of risk. Not just a small risk but a very small risk, and all without any evidence. Swedroe from memory did not talk about these in his book so they must be a more recent insurance product.
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Re: Thoughts on bonds from Fed decision...

Post by vineviz »

TN_Boy wrote: Sun Aug 09, 2020 10:40 pm I don't understand the posters here who keep saying these things have a very small amount of risk. How do you know that?? I guess if you contact an agent they will send you detailed information and maybe you can see more about how they work. Or you are just certain the guaranteeing entities will have no issues if there is a problem (what evidence is there that this is the case?).
Insurance isn't a new industry, so people familiar with the way that insurance companies are structured and operate are generally familiar with the relative risks. As a type of investment , MYGAs are very safe.

However, and I think this has been pointed out before, not all insurance companies are equally safe. This is where the ratings, like those provided by AM Best, come in. I mean, your normal TANSTAFL instincts should kick in at some point anyway (if you see that some MYGAs are paying 1% and others are paying 3.5%, you can infer those products are not equally risky) but you don't need to rely on intuition.

Image

If you buy insurance from a company rated "B+", you are in the third tier ("Good") on financial strength. The long-term annual average failure rate of such companies is about 2%: in a financial crisis it would likely be higher, and in "normal" years it will likely be lower.

I, personally, would NOT buy a MYGA from a company with a rating that didn't start with an "A". And definitely not in a state like California where the "guarantee" is only 80% of the value of the annuity.

But if I did, I'd spread the risk: in my state there are 8 different insurance companies with B+ or B++ rates offering 5-year MYGAs with relatively low minimums. Spread a $50k purchase across 5 or 6 different insurance companies if you want to reach for the highest yields. Or else be content with the 1.5% to 2.5% you can get from A or better rated companies.
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Re: Thoughts on bonds from Fed decision...

Post by jeffyscott »

palanzo wrote: Sun Aug 09, 2020 10:47 pm Swedroe from memory did not talk about these in his book so they must be a more recent insurance product.
They are not that recent, one site had historical rates back to 2000. So they have been around for 20 years or more, apparently.

It seems to be difficult to find any independent analysis of these from anyone. If you look for it, all that seems to come up is about annuities that pay a lifetime income. These are more like a form of a "guaranteed investment contract" for individuals.
https://www.investopedia.com/terms/g/gu ... ntract.asp
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Re: Thoughts on bonds from Fed decision...

Post by TN_Boy »

vineviz wrote: Mon Aug 10, 2020 6:44 am
TN_Boy wrote: Sun Aug 09, 2020 10:40 pm I don't understand the posters here who keep saying these things have a very small amount of risk. How do you know that?? I guess if you contact an agent they will send you detailed information and maybe you can see more about how they work. Or you are just certain the guaranteeing entities will have no issues if there is a problem (what evidence is there that this is the case?).
Insurance isn't a new industry, so people familiar with the way that insurance companies are structured and operate are generally familiar with the relative risks. As a type of investment , MYGAs are very safe.

However, and I think this has been pointed out before, not all insurance companies are equally safe. This is where the ratings, like those provided by AM Best, come in. I mean, your normal TANSTAFL instincts should kick in at some point anyway (if you see that some MYGAs are paying 1% and others are paying 3.5%, you can infer those products are not equally risky) but you don't need to rely on intuition.

Image

If you buy insurance from a company rated "B+", you are in the third tier ("Good") on financial strength. The long-term annual average failure rate of such companies is about 2%: in a financial crisis it would likely be higher, and in "normal" years it will likely be lower.

I, personally, would NOT buy a MYGA from a company with a rating that didn't start with an "A". And definitely not in a state like California where the "guarantee" is only 80% of the value of the annuity.

But if I did, I'd spread the risk: in my state there are 8 different insurance companies with B+ or B++ rates offering 5-year MYGAs with relatively low minimums. Spread a $50k purchase across 5 or 6 different insurance companies if you want to reach for the highest yields. Or else be content with the 1.5% to 2.5% you can get from A or better rated companies.
Well, if the guarantees are good (forget CA, let's go with other states), why not just go for the highest paying MYGA(s)? Buy 5 of the highest yielding!

If the guarantees are not good, then there is more risk than you say, regardless of the rating of the company at the time you buy the MYGA.

I mean, basically you are buying a zero coupon "bond" from a company, that happens to be an insurance company, and there is industry group backing/guarantee, under some state regulation, yes? And the "bond" is relatively illiquid.

So one I found, Delaware LIfe, A- rated, pays 2.55 for 5 years. It wasn't clear what the death benefit was; it seemed from the description that in some states you might need a rider (which presumably would cost a bit) to ensure that beneficiaries get the full value at the time of the death.

In comparison you could look at Vanguard's Intermediate-Term Investment-Grade Fund Investor Shares, with a duration of 5.7 years, SEC yield 1.43%

So, I don't know, would I rather have a "guaranteed" 2.55% on money tied up for five years, or a diversified bond fund yielding 1.43% (and that yield may very well go down.....). I don't like either option, personally, but the MYGA doesn't scream buy to me.

And I'd never go all in on these things, so then the question becomes, how useful is an extra 1% or so on X percent of my fixed income holdings? It's not going to make a meaningful difference in my portfolio value, and I have a relatively conservative portfolio.

I can't see them being useful to me (the risk versus extra reward is not interesting). But a lot of people are looking at fixed income rates and panicking a little. Such people should read the description of the MYGA (including death benefits) and the state association guarantees very closely. Maybe they work for those people.
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Re: Thoughts on bonds from Fed decision...

Post by TN_Boy »

jeffyscott wrote: Mon Aug 10, 2020 8:10 am
palanzo wrote: Sun Aug 09, 2020 10:47 pm Swedroe from memory did not talk about these in his book so they must be a more recent insurance product.
They are not that recent, one site had historical rates back to 2000. So they have been around for 20 years or more, apparently.

It seems to be difficult to find any independent analysis of these from anyone. If you look for it, all that seems to come up is about annuities that pay a lifetime income. These are more like a form of a "guaranteed investment contract" for individuals.
https://www.investopedia.com/terms/g/gu ... ntract.asp
I can't find any good writeups by somebody like Swedroe on MYGAs. If anybody sees such a writeup, please post a link.
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