No bids for agency bond at Fidelity

[Church Lady]

Having determined I'd get more money trading my current agency bond (at a loss) for a higher yielding bond, I submitted a 'bid request' to Fidelity. Twice. Both bids expired with no takers.

Am I stuck with this bond (Federal Farm Credit Banks Bond, matures 2028)? Or is there a way to sell it?

The bond is in a Fidelity Roth IRA.

[blueskytoo]

Wait until after the debt limit is settled, then try again.

A lot of investors are avoiding the Federal market until there is clarity on the future of payment of interest and principal.

The current rising interest rates is also driving down the current value, and investors are holding out for the bottom. This is why individual investors should be wary of longer term bonds, government or otherwise.

5 years to maturity seems long to us, but to insurance companies matching expected payout times, they are short times.

Can you offer at a fixed price/yield to entice smaller investors to buy at a known yield? I take it that there is no bid or asked for your cusip.

[Northern Flicker]

Having determined I'd get more money trading my current agency bond (at a loss) for a higher yielding bond...

Why do you think you will get more money by doing that? The higher yielding bond will have more prepayment risk if rates turn back lower.

[Church Lady]

Having determined I'd get more money trading my current agency bond (at a loss) for a higher yielding bond...

Why do you think you will get more money by doing that?

I put the numbers into a spread sheet, comparing
(remaining interest payments + return of full principal)

to

(interest payments on diminished principal + return of diminished principle)

and the reinvestment came out way ahead.

The higher yielding bond will have more prepayment risk if rates turn back lower.

True, but I believe rates will stay high for a few years.

I could be totally wrong, of course. After all, I let someone convince me I needed bonds in my portfolio for 'ballast'. In a rising interest rate world, the 'ballast' has been sinking the ship!

[Church Lady]

Can you offer at a fixed price/yield to entice smaller investors to buy at a known yield? I take it that there is no bid or asked for your cusip.

Fidelity apparently does not allow placing an order for this bond ... at least not when selling online. The only option is request for bid.

[Valuethinker]

Having determined I'd get more money trading my current agency bond (at a loss) for a higher yielding bond...

Why do you think you will get more money by doing that?

I put the numbers into a spread sheet, comparing
(remaining interest payments + return of full principal)

to

(interest payments on diminished principal + return of diminished principle)

and the reinvestment came out way ahead.

The higher yielding bond will have more prepayment risk if rates turn back lower.

True, but I believe rates will stay high for a few years.

I could be totally wrong, of course. After all, I let someone convince me I needed bonds in my portfolio for 'ballast'. In a rising interest rate world, the 'ballast' has been sinking the ship!

It's all in the shape of the yield curve.

For an equivalent set of securities (ie same credit risk, liquidity) then you shouldn't be able to "do better" by selling the 5 year bond, and buy the 1 year bond + a 4 year security (that starts in 1 year's time). That's a fundamental market arbitrage condition. You've got no guarantee, in other words, if you sell now and buy a 1 year security, that in 1 year's time you will be able to buy a 4 year security which will give you better total returns as just holding onto this bond.

Now for illiquid bonds, sometimes holes open up - the sort of big debt funds that would close these gaps (or trading desks of the banks) just are not active. But as a retail investor, you face a wider bid-ask spread than they do.

The bond has 5 years to maturity. You've taken the pain of the last 12 months. It could get more painful, still.

But it's also quite likely that, in a year's time, or sooner, the market decides the Fed is not going to keep raising rates. The yield curve will un-invert. Short rates will no longer be above longer term rates. The bond will appreciate in value.

If you genuinely believe that interest rates will be above current market expectations, for longer, then yes, you should cut and move shorter on the curve. But you have to believe that you have superior information and judgement than the market as a whole.

Otherwise the market's already moved. The price of your security reflects market views of interest rates over the next 5 years.

Portfolio safe haven did not work well in the last 12 months or so. But there are events which can cause stock markets to fall very sharply. For example political instability. War. Military confrontation between superpowers. Recession. At which point, equities are not going to look too safe.

This past 12-18 months stock and bond markets fell for the same reason - rising inflation & Central Bank tightening. Doesn't mean that the same causative factor will reoccur.

BTW it was the worst year for bonds since at least 1994, and 1980 before that. That doesn't say that 2023 or 2024 won't also be bad. But it does give one some hope, I think, that the bear market in bonds is not forever.

If the US defaults by the way, things really will hit the wall - but it's quite unpredictable in what ways, exactly.

[Valuethinker]

Having determined I'd get more money trading my current agency bond (at a loss) for a higher yielding bond, I submitted a 'bid request' to Fidelity. Twice. Both bids expired with no takers.

Am I stuck with this bond (Federal Farm Credit Banks Bond, matures 2028)? Or is there a way to sell it?

The bond is in a Fidelity Roth IRA.

As per my other post, it's almost certainly the case that the "higher yielding bond":

- is not an equivalent security. For example it might be a US government Agency bond with (early) repayment risk (GNMAs have this, I don't think FFCB do?). Or it might have a lower credit rating (if it's not US govt guaranteed)

- or it is of shorter maturity

- or it is fundamentally less liquid, thus commanding a higher yield. And recall limited liquidity is your concern here

You've taken the pain on this bond. Its price will now move towards par as it moves towards maturity. You will be able to reinvest coupons at the prevailing rate that is available then.

The threat of US govt default has jacked up yields on very short term bonds - the market assumes that eventually the situation will be resolved even if a technical default takes place (there's a long thread to discuss this possibility).

[Northern Flicker]

Having determined I'd get more money trading my current agency bond (at a loss) for a higher yielding bond...

Why do you think you will get more money by doing that?

I put the numbers into a spread sheet, comparing
(remaining interest payments + return of full principal)

to

(interest payments on diminished principal + return of diminished principle)

and the reinvestment came out way ahead.

The higher yielding bond will have more prepayment risk if rates turn back lower.

True, but I believe rates will stay high for a few years.

You can believe whatever you want, but the market doesn't care. The higher interest payments for the reduced principal of the new bond are higher because you are being compensated for the increased prepayment risk. That is fine. If you prefer to take that risk in return for (possibly) earning more interest, that is a perfectly valid choice.

However, the market value for the current bond is probably not what it will net in a sale because of the bid-ask spread. You should have your broker pull actual bids available, and use the associated net proceeds from the best bid in your spreadsheet, likewise for the actual ask for the new bond.

I think prepayment risk is partially diversifiable, so the compensation for that when holding a single bond may not be full compensation for the risk. That is, the idiosyncratic aspect of the risk that is unique to a particular bond is not compensated because it is diversifiable. Thus, I consider holding a diversified MBS fund like VFIJX to be preferred to holding an individual FNMA.