Offsetting Mortgage with Callable Agency Bond

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Jaylat
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Offsetting Mortgage with Callable Agency Bond

Post by Jaylat »

I currently have a mortgage at 2.125% fixed for 10 years and, rather than paying it off, am looking to find a low risk, high yield fixed rate investment to offset the mortgage payments. Right now, 10 year callable Federal Agency bonds (Federal Farm Credit Bank) are yielding 4.34%.

Here’s my logic, please let me know if I’m missing anything:
  • Buying the Agencies gives a pretty nice positive arbitrage of over 2.2%, assuming the bonds are not called. Two percent of a California-size mortgage is very good money, and if it keeps up for 10 years is a windfall.
  • If the bonds are called, it will likely be during a low interest rate environment. However, I can always use the bond proceeds to pay off the mortgage loan. So my “call option” on my mortgage offsets the risk of the Agency bonds being called away.
  • The Agencies can be called starting in one year, so the shortest time to run the arbitrage would still give a return of 2.2% of principal– not too bad, and still probably worth the trade.
  • There’s an additional tax play as, in California, the mortgage payments are deductible from state income, while the income from the FFCB bonds are not taxable.
One downside to this strategy would be the potential lost opportunity of buying a non-callable bond to offset the mortgage, which could stay in place for the full 10 years. However, 10-year non-callable Agencies are only yielding 3.2%, so the arbitrage would be much lower, about 1.0% per year. Over 10 years that’s a non-discounted gain of 10% of the mortgage, versus a minimum 2.2% for the callable agencies for one year, and 22% for the full 10 years.

There’s also a potential mismatch as the mortgage is amortizing and the bond isn’t. Using some kind of “Agency bond ladder” might get it closer, but that seems overly complicated. At the least I could buy Agencies in an amount needed to offset the unamortized portion of the mortgage in 10 years.

I don’t foresee the need to sell the Agency bonds, but if I had to for any reason they could book a loss. So you need to maintain plenty of liquidity to make this strategy work.

Assuming FFCB doesn’t default (and it is an implied Federal obligation), and I don’t need to sell the bonds, this seems like a pretty risk-free arbitrage. What am I missing?
Last edited by Jaylat on Thu May 26, 2022 1:40 pm, edited 1 time in total.
mega317
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Re: Offsetting Mortgage with Callable Agency Bond

Post by mega317 »

I'm not bond expert and I didn't fully understand your post but this jumped out:
low risk, high yield
Doesn't that seem like a too good to be true situation?
What is the duration of the bond you are looking at?
Topic Author
Jaylat
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Re: Offsetting Mortgage with Callable Agency Bond

Post by Jaylat »

mega317 wrote: Thu May 26, 2022 1:26 pm I'm not bond expert and I didn't fully understand your post but this jumped out:
low risk, high yield
Doesn't that seem like a too good to be true situation?
What is the duration of the bond you are looking at?
The bond maturity would be the same - 10 years, so the bond duration could be matched to the mortgage.

Investopeda states that "Federal Farm Credit Bank (FFCB) is a GSE (government sponsored entity), thus carrying an implicit [Federal government] guarantee on its debt." FFCB is top rated by Moody's and S&P, so very comparable to Treasury bonds in risk profile.

But yes, your instincts are correct, it does seem too good to be true.
carminered2019
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Re: Offsetting Mortgage with Callable Agency Bond

Post by carminered2019 »

I rather pay off the mortgage and increase the percentage AA on stock.
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HMSVictory
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Re: Offsetting Mortgage with Callable Agency Bond

Post by HMSVictory »

carminered2019 wrote: Fri May 27, 2022 10:02 am I rather pay off the mortgage and increase the percentage AA on stock.
+1 pay the house off and stop trying to be fancy. Increase equity AA in the rest of your portfolio.

How much are you making risking your house on this arbitrage opportunity?
Stay the course!
Topic Author
Jaylat
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Re: Offsetting Mortgage with Callable Agency Bond

Post by Jaylat »

HMSVictory wrote: Fri May 27, 2022 10:21 am
carminered2019 wrote: Fri May 27, 2022 10:02 am I rather pay off the mortgage and increase the percentage AA on stock.
+1 pay the house off and stop trying to be fancy. Increase equity AA in the rest of your portfolio.

How much are you making risking your house on this arbitrage opportunity?
Thanks, I appreciate the call for caution, but I'm not sure why you say "risking your house"? The bonds are literally US government obligations, with basically no default risk.

Increasing equity AA is a lot more risky that what I'm proposing here.

Why pay off a fixed rate mortgage if you can reinvest at a significantly higher rate?
7eight9
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Re: Offsetting Mortgage with Callable Agency Bond

Post by 7eight9 »

It is funny but I actually bought the bond you are considering yesterday (FFCB 4.35% 06/01/2032 Callable --- CUSIP 3133ENXW5). Not to offset a mortgage but because I liked it.

I believe your strategy is sound and is something that I would certainly consider. The bond may get called but until it does (and you have a year of guarantee no-call - callable at 06.01.23) you are going to make money.
I guess it all could be much worse. | They could be warming up my hearse.
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HMSVictory
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Re: Offsetting Mortgage with Callable Agency Bond

Post by HMSVictory »

Jaylat wrote: Fri May 27, 2022 5:51 pm
HMSVictory wrote: Fri May 27, 2022 10:21 am
carminered2019 wrote: Fri May 27, 2022 10:02 am I rather pay off the mortgage and increase the percentage AA on stock.
+1 pay the house off and stop trying to be fancy. Increase equity AA in the rest of your portfolio.

How much are you making risking your house on this arbitrage opportunity?
Thanks, I appreciate the call for caution, but I'm not sure why you say "risking your house"? The bonds are literally US government obligations, with basically no default risk.

Increasing equity AA is a lot more risky that what I'm proposing here.

Why pay off a fixed rate mortgage if you can reinvest at a significantly higher rate?
I agree with your view that the bond is very low risk but I am not talking about default or call risk of the bond.

I'm talking about the risk of you losing your house if you do not pay the mortgage. All that is required for that to happen is for you not to make the payments (for any reason). Why in the world would you want this risk (even if its small) hanging over your head if you have the money to eliminate it? Like I originally said - how much is this making you?

What happens if you get in a car accident on the way to work this morning? (God forbid - but this is just one example). Is your spouse or heirs up for this trade? Oh and what if rates have increased dramatically? Increasing your equity allocation does not increase your overall risk because your mortgage is a big negative bond and by paying it off you have no monthly payment (and eliminate default risk).

Finally and I doubt I'm going to convince you.... nothing I have read through the course of history has shown that investing with borrowed money has turned out well. Quiet the opposite it has blown up in peoples faces quiet a bit. What you are doing is very, very low risk but my overall point is I would skip it and adjust my AA. I did this in 2018 and I went from 70/30 with a mortgage to 90/10 with no mortgage and it has worked out for me. YMMV.
Stay the course!
ScubaHogg
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Re: Offsetting Mortgage with Callable Agency Bond

Post by ScubaHogg »

HMSVictory wrote: Sat May 28, 2022 5:20 am
Jaylat wrote: Fri May 27, 2022 5:51 pm
HMSVictory wrote: Fri May 27, 2022 10:21 am
carminered2019 wrote: Fri May 27, 2022 10:02 am I rather pay off the mortgage and increase the percentage AA on stock.
+1 pay the house off and stop trying to be fancy. Increase equity AA in the rest of your portfolio.

How much are you making risking your house on this arbitrage opportunity?
Thanks, I appreciate the call for caution, but I'm not sure why you say "risking your house"? The bonds are literally US government obligations, with basically no default risk.

Increasing equity AA is a lot more risky that what I'm proposing here.

Why pay off a fixed rate mortgage if you can reinvest at a significantly higher rate?
I agree with your view that the bond is very low risk but I am not talking about default or call risk of the bond.

I'm talking about the risk of you losing your house if you do not pay the mortgage. All that is required for that to happen is for you not to make the payments (for any reason). Why in the world would you want this risk (even if its small) hanging over your head if you have the money to eliminate it? Like I originally said - how much is this making you?

What happens if you get in a car accident on the way to work this morning? (God forbid - but this is just one example). Is your spouse or heirs up for this trade? Oh and what if rates have increased dramatically? Increasing your equity allocation does not increase your overall risk because your mortgage is a big negative bond and by paying it off you have no monthly payment (and eliminate default risk).
I don't understand why the OP wouldn't be able to pay off their mortgage in the case of a car accident. They would literally be holding a virtually duration matched US gov't bond that is paying out a higher interest rate than the mortgage is charging. If I am understanding it correctly, the OPs net debt position between these two "bonds" (the actual bond and the "negative" bond of a mortgage) would be zero.

And what does higher interest rates have to do with the example the OP is giving? I'm assuming the mortgage would be paid off completely at the end of the bond or at any point that the bond is called. OP, is that correct?
There are more things in Heaven and Earth, Horatio, than are dreamt of in your Expected Returns
DVMResident
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Re: Offsetting Mortgage with Callable Agency Bond

Post by DVMResident »

ScubaHogg wrote: Sat May 28, 2022 5:25 am
HMSVictory wrote: Sat May 28, 2022 5:20 am
Jaylat wrote: Fri May 27, 2022 5:51 pm
HMSVictory wrote: Fri May 27, 2022 10:21 am
carminered2019 wrote: Fri May 27, 2022 10:02 am I rather pay off the mortgage and increase the percentage AA on stock.
+1 pay the house off and stop trying to be fancy. Increase equity AA in the rest of your portfolio.

How much are you making risking your house on this arbitrage opportunity?
Thanks, I appreciate the call for caution, but I'm not sure why you say "risking your house"? The bonds are literally US government obligations, with basically no default risk.

Increasing equity AA is a lot more risky that what I'm proposing here.

Why pay off a fixed rate mortgage if you can reinvest at a significantly higher rate?
I agree with your view that the bond is very low risk but I am not talking about default or call risk of the bond.

I'm talking about the risk of you losing your house if you do not pay the mortgage. All that is required for that to happen is for you not to make the payments (for any reason). Why in the world would you want this risk (even if its small) hanging over your head if you have the money to eliminate it? Like I originally said - how much is this making you?

What happens if you get in a car accident on the way to work this morning? (God forbid - but this is just one example). Is your spouse or heirs up for this trade? Oh and what if rates have increased dramatically? Increasing your equity allocation does not increase your overall risk because your mortgage is a big negative bond and by paying it off you have no monthly payment (and eliminate default risk).
I don't understand why the OP wouldn't be able to pay off their mortgage in the case of a car accident. They would literally be holding a virtually duration matched US gov't bond that is paying out a higher interest rate than the mortgage is charging. If I am understanding it correctly, the OPs net debt position between these two "bonds" (the actual bond and the "negative" bond of a mortgage) would be zero.

And what does higher interest rates have to do with the example the OP is giving? I'm assuming the mortgage would be paid off completely at the end of the bond or at any point that the bond is called. OP, is that correct?
+1. HMSVictory is describing liquidity risks. Looking through the OP's thread history, you'll see this is not an issue.

This is purely an arbitrage play with a little tax deduction to sweeten the deal. I support it :beer

FWIW I also liability match my mortgage also (using a DCP to offset layoff risks and capture some tax savings).
Topic Author
Jaylat
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Re: Offsetting Mortgage with Callable Agency Bond

Post by Jaylat »

HMSVictory wrote: Sat May 28, 2022 5:20 am I'm talking about the risk of you losing your house if you do not pay the mortgage. All that is required for that to happen is for you not to make the payments (for any reason). Why in the world would you want this risk (even if its small) hanging over your head if you have the money to eliminate it? Like I originally said - how much is this making you?

What happens if you get in a car accident on the way to work this morning? (God forbid - but this is just one example). Is your spouse or heirs up for this trade? Oh and what if rates have increased dramatically? Increasing your equity allocation does not increase your overall risk because your mortgage is a big negative bond and by paying it off you have no monthly payment (and eliminate default risk).
The trade would make around 2% per year, or 20% over 10 years. On a $500,000 mortgage that's $10,000 profit per year, so definitely worth it even for one year.

I've got a fixed rate mortgage, so not sure what's the risk if "rates increase dramatically"? It would negatively impact the bond value, but would not affect the interest rate arbitrage, as both rates are fixed. I feel I have sufficient liquidity not to need to sell the bonds, but you are right in pointing out that concern. Actually if rates do jump I'd expect equities to tank, so I would see that as another reason not to double down on equity AA.

Your point about the spouse being up for the trade is a good one.
ScubaHogg wrote: Sat May 28, 2022 5:25 am
I don't understand why the OP wouldn't be able to pay off their mortgage in the case of a car accident. They would literally be holding a virtually duration matched US gov't bond that is paying out a higher interest rate than the mortgage is charging. If I am understanding it correctly, the OPs net debt position between these two "bonds" (the actual bond and the "negative" bond of a mortgage) would be zero.

And what does higher interest rates have to do with the example the OP is giving? I'm assuming the mortgage would be paid off completely at the end of the bond or at any point that the bond is called. OP, is that correct?
Yes the mortgage would be paid off by the bond proceeds. The net position is zero.
Last edited by Jaylat on Sat May 28, 2022 9:13 am, edited 1 time in total.
ScubaHogg
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Re: Offsetting Mortgage with Callable Agency Bond

Post by ScubaHogg »

Jaylat wrote: Sat May 28, 2022 9:07 am
ScubaHogg wrote: Sat May 28, 2022 5:25 am I'm talking about the risk of you losing your house if you do not pay the mortgage. All that is required for that to happen is for you not to make the payments (for any reason). Why in the world would you want this risk (even if its small) hanging over your head if you have the money to eliminate it? Like I originally said - how much is this making you?

What happens if you get in a car accident on the way to work this morning? (God forbid - but this is just one example). Is your spouse or heirs up for this trade? Oh and what if rates have increased dramatically? Increasing your equity allocation does not increase your overall risk because your mortgage is a big negative bond and by paying it off you have no monthly payment (and eliminate default risk).
The trade would make around 2% per year, or 20% over 10 years. On a $500,000 mortgage that's $10,000 profit per year, so definitely worth it even for one year.

I've got a fixed rate mortgage, so not sure what's the risk if "rates increase dramatically"? It would negatively impact the bond value, but would not affect the interest rate arbitrage, as both rates are fixed. I feel I have sufficient liquidity not to need to sell the bonds, but you are right in pointing out that concern. Actually if rates do jump I'd expect equities to tank, so I would see that as another reason not to double down on equity AA.

Your point about the spouse being up for the trade is a good one.
HMSVictory wrote: Sat May 28, 2022 5:20 am I don't understand why the OP wouldn't be able to pay off their mortgage in the case of a car accident. They would literally be holding a virtually duration matched US gov't bond that is paying out a higher interest rate than the mortgage is charging. If I am understanding it correctly, the OPs net debt position between these two "bonds" (the actual bond and the "negative" bond of a mortgage) would be zero.

And what does higher interest rates have to do with the example the OP is giving? I'm assuming the mortgage would be paid off completely at the end of the bond or at any point that the bond is called. OP, is that correct?
Yes the mortgage would be paid off by the bond proceeds. The net position is zero.
I think the quotes got switched. You quoted hmsvictory as me and vice versa
There are more things in Heaven and Earth, Horatio, than are dreamt of in your Expected Returns
Topic Author
Jaylat
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Re: Offsetting Mortgage with Callable Agency Bond

Post by Jaylat »

ScubaHogg wrote: Sat May 28, 2022 9:10 am
I think the quotes got switched. You quoted hmsvictory as me and vice versa
Sorry, should be fixed now. Formatting!
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HMSVictory
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Re: Offsetting Mortgage with Callable Agency Bond

Post by HMSVictory »

Jaylat wrote: Sat May 28, 2022 9:07 am
HMSVictory wrote: Sat May 28, 2022 5:20 am I'm talking about the risk of you losing your house if you do not pay the mortgage. All that is required for that to happen is for you not to make the payments (for any reason). Why in the world would you want this risk (even if its small) hanging over your head if you have the money to eliminate it? Like I originally said - how much is this making you?

What happens if you get in a car accident on the way to work this morning? (God forbid - but this is just one example). Is your spouse or heirs up for this trade? Oh and what if rates have increased dramatically? Increasing your equity allocation does not increase your overall risk because your mortgage is a big negative bond and by paying it off you have no monthly payment (and eliminate default risk).
The trade would make around 2% per year, or 20% over 10 years. On a $500,000 mortgage that's $10,000 profit per year, so definitely worth it even for one year.

I've got a fixed rate mortgage, so not sure what's the risk if "rates increase dramatically"? It would negatively impact the bond value, but would not affect the interest rate arbitrage, as both rates are fixed. I feel I have sufficient liquidity not to need to sell the bonds, but you are right in pointing out that concern. Actually if rates do jump I'd expect equities to tank, so I would see that as another reason not to double down on equity AA.

Your point about the spouse being up for the trade is a good one.
ScubaHogg wrote: Sat May 28, 2022 5:25 am
I don't understand why the OP wouldn't be able to pay off their mortgage in the case of a car accident. They would literally be holding a virtually duration matched US gov't bond that is paying out a higher interest rate than the mortgage is charging. If I am understanding it correctly, the OPs net debt position between these two "bonds" (the actual bond and the "negative" bond of a mortgage) would be zero.

And what does higher interest rates have to do with the example the OP is giving? I'm assuming the mortgage would be paid off completely at the end of the bond or at any point that the bond is called. OP, is that correct?
Yes the mortgage would be paid off by the bond proceeds. The net position is zero.
As most things in life there are pluses and minuses to this transaction. Sounds like you have thought it through.

I was just trying to point out some risks you may not have considered and while the 10k arbitrage (pre-tax, CA taxes and all your prob more like $6k ha) opportunity seems like a good one - there are risks you are taking to earn it. I just prefer not to take these risks with my home. That's all. I'm sure you are in the same boat as me where your overall portfolio moves by $300k+/- or more in a year. So this isn't a make or break decision.

I operate on the principal of Occams razor. The simplest solution is generally the right one.
Stay the course!
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Jaylat
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Re: Offsetting Mortgage with Callable Agency Bond

Post by Jaylat »

HMSVictory wrote: Sat May 28, 2022 10:04 am
As most things in life there are pluses and minuses to this transaction. Sounds like you have thought it through.

I was just trying to point out some risks you may not have considered and while the 10k arbitrage (pre-tax, CA taxes and all your prob more like $6k ha) opportunity seems like a good one - there are risks you are taking to earn it. I just prefer not to take these risks with my home. That's all. I'm sure you are in the same boat as me where your overall portfolio moves by $300k+/- or more in a year. So this isn't a make or break decision.

I operate on the principal of Occams razor. The simplest solution is generally the right one.
Thanks for your very thoughtful comments HMS. You have good common sense (which is not always common!).
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Re: Offsetting Mortgage with Callable Agency Bond

Post by HMSVictory »

Jaylat wrote: Sat May 28, 2022 12:17 pm
HMSVictory wrote: Sat May 28, 2022 10:04 am
As most things in life there are pluses and minuses to this transaction. Sounds like you have thought it through.

I was just trying to point out some risks you may not have considered and while the 10k arbitrage (pre-tax, CA taxes and all your prob more like $6k ha) opportunity seems like a good one - there are risks you are taking to earn it. I just prefer not to take these risks with my home. That's all. I'm sure you are in the same boat as me where your overall portfolio moves by $300k+/- or more in a year. So this isn't a make or break decision.

I operate on the principal of Occams razor. The simplest solution is generally the right one.
Thanks for your very thoughtful comments HMS. You have good common sense (which is not always common!).
Anytime.
Stay the course!
annu
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Re: Offsetting Mortgage with Callable Agency Bond

Post by annu »

I have invested in VWIUX, the vanguard muni bond fund, this looks like a much higher yield option and also is state tax free. What is the risk i am missing here, as it is almost 1% more yield.

https://investor.vanguard.com/mutual-fu ... file/VWIUX

Also is the tax free status for other states as well? I am not in California
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Re: Offsetting Mortgage with Callable Agency Bond

Post by grabiner »

annu wrote: Sat May 28, 2022 8:42 pm I have invested in VWIUX, the vanguard muni bond fund, this looks like a much higher yield option and also is state tax free. What is the risk i am missing here, as it is almost 1% more yield.

https://investor.vanguard.com/mutual-fu ... file/VWIUX
This is a fine fund if you are in a high enough tax bracket that munis make sense. However, the yield difference is a risk issue. Agency bonds, even if not officially backed by the US Goverment (GNMAs are), have an unofficial backing; the government backstopped FNMA in the 2008 housing crisis. Municipal and corporate bonds can default, and thus investors will only buy them at prices which give them higher yields.

Currently, the market is expecting significant default risk. Comparing taxable bonds, Vanguard's intermediate-term Treasury index yields 2.87%, while its intermediate-term corporate index yields 4.37%, a 1.5% risk premium. (The corporate index is riskier than most muni funds, with half its bonds rated BBB.)
Also is the tax free status for other states as well? I am not in California
In most states, munis are exempt from state tax only if they are from that state. Some states require a fund to be 50% invested in state-tax-exempt bonds to get any exemption; others prorate, so that a fund with 5% in-state munis has a dividend which is 95% state taxable. In a few states, all muni interest is tax exempt.
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Re: Offsetting Mortgage with Callable Agency Bond

Post by annu »

grabiner wrote: Sat May 28, 2022 10:02 pm
annu wrote: Sat May 28, 2022 8:42 pm I have invested in VWIUX, the vanguard muni bond fund, this looks like a much higher yield option and also is state tax free. What is the risk i am missing here, as it is almost 1% more yield.

https://investor.vanguard.com/mutual-fu ... file/VWIUX
This is a fine fund if you are in a high enough tax bracket that munis make sense. However, the yield difference is a risk issue. Agency bonds, even if not officially backed by the US Goverment (GNMAs are), have an unofficial backing; the government backstopped FNMA in the 2008 housing crisis. Municipal and corporate bonds can default, and thus investors will only buy them at prices which give them higher yields.

Currently, the market is expecting significant default risk. Comparing taxable bonds, Vanguard's intermediate-term Treasury index yields 2.87%, while its intermediate-term corporate index yields 4.37%, a 1.5% risk premium. (The corporate index is riskier than most muni funds, with half its bonds rated BBB.)
Also is the tax free status for other states as well? I am not in California
In most states, munis are exempt from state tax only if they are from that state. Some states require a fund to be 50% invested in state-tax-exempt bonds to get any exemption; others prorate, so that a fund with 5% in-state munis has a dividend which is 95% state taxable. In a few states, all muni interest is tax exempt.
Thanks a lot. Yes, i am in pretty high tax bracket, so got muni. And since there is no state specific one for us, went with VWIUX.
I was asking about this callable bond option though, looks like it is also tax free?
Last edited by annu on Sat May 28, 2022 11:08 pm, edited 1 time in total.
Topic Author
Jaylat
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Re: Offsetting Mortgage with Callable Agency Bond

Post by Jaylat »

annu wrote: Sat May 28, 2022 8:42 pm I have invested in VWIUX, the vanguard muni bond fund, this looks like a much higher yield option and also is state tax free. What is the risk i am missing here, as it is almost 1% more yield.

https://investor.vanguard.com/mutual-fu ... file/VWIUX

Also is the tax free status for other states as well? I am not in California
I'm not sure you have that right? The VWINX fund has an SEC yield of 2.94%, well below the FFCB yield I quoted of 4.35% (now 4.0%). Also the FFCB is duration-matched, the VWINX fund is not, and as noted the VWINX risk is much higher. So VWINX doesn't seem a good candidate to offset a 10 year mortgage.

The callable bond from FFCB is state tax free, but taxable on a Federal level.
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Re: Offsetting Mortgage with Callable Agency Bond

Post by annu »

Jaylat wrote: Sat May 28, 2022 11:05 pm
annu wrote: Sat May 28, 2022 8:42 pm I have invested in VWIUX, the vanguard muni bond fund, this looks like a much higher yield option and also is state tax free. What is the risk i am missing here, as it is almost 1% more yield.

https://investor.vanguard.com/mutual-fu ... file/VWIUX

Also is the tax free status for other states as well? I am not in California
I'm not sure you have that right? The VWINX fund has an SEC yield of 2.94%, well below the FFCB yield I quoted of 4.35% (now 4.0%). Also the FFCB is duration-matched, the VWINX fund is not, and as noted the VWINX risk is much higher. So VWINX doesn't seem a good candidate to offset a 10 year mortgage.

The callable bond from FFCB is state tax free, but taxable on a Federal level.
Sorry, yes meant your posted bond seems to be much higher yield. If it is also tax advantaged, then even better. Will like to move all muni into this, since it is quite more yield and looks only little more risk profile.
Can you post a link to buy from? I will look into selling, maybe tax loss harvest VWIUX with this option.
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Jaylat
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Re: Offsetting Mortgage with Callable Agency Bond

Post by Jaylat »

annu wrote: Sat May 28, 2022 11:11 pm Sorry, yes meant your posted bond seems to be much higher yield. If it is also tax advantaged, then even better. Will like to move all muni into this, since it is quite more yield and looks only little more risk profile.
Can you post a link to buy from? I will look into selling, maybe tax loss harvest VWIUX with this option.
I'm hesitant to recommend the FFCB bond to anyone blindly, as the bond is callable, which means that this juicy 4% rate could go away after one year - and at the worst time, when reinvestment rates are low.

That's okay for me, as I can just pay off my mortgage, or maybe refinance at an even lower rate. But unless you have a specific use for it I would be cautious to buy the FFCB bonds. There's a reason the rates are higher, to compensate for reinvestment risk.
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Re: Offsetting Mortgage with Callable Agency Bond

Post by annu »

Money intended to buy a car, that i dont plan to anymore, as working remotely..so if only risk is money will be available earlier...not bad at all
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Jaylat
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Re: Offsetting Mortgage with Callable Agency Bond

Post by Jaylat »

annu wrote: Sat May 28, 2022 11:44 pm Money intended to buy a car, that i dont plan to anymore, as working remotely..so if only risk is money will be available earlier...not bad at all
If rates go up you could lose money on the FFCB bond. I would not recommend to invest if you need the money before the 10 year maturity.
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grabiner
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Re: Offsetting Mortgage with Callable Agency Bond

Post by grabiner »

Jaylat wrote: Sat May 28, 2022 11:26 pm
annu wrote: Sat May 28, 2022 11:11 pm Sorry, yes meant your posted bond seems to be much higher yield. If it is also tax advantaged, then even better. Will like to move all muni into this, since it is quite more yield and looks only little more risk profile.
Can you post a link to buy from? I will look into selling, maybe tax loss harvest VWIUX with this option.
I'm hesitant to recommend the FFCB bond to anyone blindly, as the bond is callable, which means that this juicy 4% rate could go away after one year - and at the worst time, when reinvestment rates are low.

That's okay for me, as I can just pay off my mortgage, or maybe refinance at an even lower rate. But unless you have a specific use for it I would be cautious to buy the FFCB bonds. There's a reason the rates are higher, to compensate for reinvestment risk.
And that is the same issue with munis. I noticed that the duration of Vanguard Long-Term Tax-Exempt (VWLUX) is up to 6.6 years, which is a change of more than a year in the last few months, as bonds are less likely to be called. The 3.36% tax-free yield is compensation for this risk.

But callable bonds make sense for liability-matching a mortgage, because the call risk is symmetrical. If rates fall, callable bonds will be called and reinvested at a lower rate, but you can also call your mortgage and refinance at a lower rate.
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Re: Offsetting Mortgage with Callable Agency Bond

Post by Jaylat »

On reflection, it seems the one scenario where this trade might blow up is having to sell the house during a high interest rate environment. As I'm retired I don't anticipate that happening, but you never know. High interest rates could cause all sorts of cascading negative effects on investment portfolios, the economy, etc.

If it does happen, the low rate mortgage and the arbitrage would go away, and the FFCB bonds' value would be through the floor.
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