Agency Bonds - How Often Have They Been Called?

[wsanders]

There are some semi-risky deals on agency bonds right now in Vanguard's fixed income garage sale . Generally, they have a higher-than-expected coupon, sell slightly above par, and have a call date in the next few months. So you lose some money if they get called.

How often do agency bonds get called? I have not been able to find a web site where I can get this data.

I am not terribly temped, this is probably something I ought to leave up to income mutual fund managers.

[retired@50]

There are some semi-risky deals on agency bonds right now in Vanguard's fixed income garage sale . Generally, they have a higher-than-expected coupon, sell slightly above par, and have a call date in the next few months. So you lose some money if they get called.

How often do agency bonds get called? I have not been able to find a web site where I can get this data.

I am not terribly temped, this is probably something I ought to leave up to income mutual fund managers.

Welcome to the forum.

I guess this decision boils down to your view of interest rate movements between now and the call date(s). If interest rates were to drop enough for a call to make sense for the issuer, then they would probably get called. If not, they wouldn't.

I don't have a strong enough view on future interest rates to make a prediction, so mostly, this is just a welcome to the forum message.

Regards,

[wsanders]

Thanks.

The downside risk is you lose about 1% of the bet, amounting to your fees plus whatever accrued interest you paid. Personally, I don't think rates will go down much in the next few months, but my experience with bonds I have had called is that it's a decision that doesn't seem very much related to interest rate changes. I had a number of bonds called in 2019, 2020, and 2021, but they were corparates. All were called 13 mo or less before maturity and I was made whole or better on all of them. Some even paid a call premium.

It's really hard to get the detailed terms for a bonds, for all I know the ones that paid a call premium had that in the contract. I was a pretty naive bond investor: When Chespeake went bankrupt I held one of their notes and lost most of my principal, wiping out my fixed income gains for a 2021. That bond was rated BBB+, even. Moral: Never invest in a company whose CEO commits suicide after allegations of financial monkey business. Moral #2: For corporates, leave the risk management up to fund managers, or safety in numbers in a bond ETF.

Agencies, I dunno. I think they are more risky than they look, with factions in the government only recently taking about defaulting on Treasuries, and the risk of that and abolishing the Fed, etc, coming up again in a Trump administration. Freddie Mac and Fannie Mae were bailed out in 2008 and I don't think the government would do that now. Government support for home ownership and agriculture is not a universally admired policy.

[TBillT]

I have used Fidelity but not Vanguard in the past for purchasing bonds. Normally they are not selling bonds that lose money, but you could break even if the bond is called soon. But sure, I'd make bets on bonds that might pay off, but might get called. If you bought a 5% callable and interest rates go down, yes they will indeed call them, believe me they will call all of them! But I am not investing unless I at least break even.

[AllMostThere]

Over the past 2 years I have purchased several Agency Bonds. Every one of them have been called. I usually collect one or two coupons before they are called. I just use the funds to buy another Agency Bond (at auction, not secondary market) when I like the rate. No particular reason, but I like the Farm Bonds. I have one this week @ 5.98% that is being called this week.

[jeffyscott]

... this is probably something I ought to leave up to income mutual fund managers.

That's what I would do. It's not worth it to me to do my own analysis, it seems doubtful that I would beat those full time fund managers at their own game.

Vanguard Short-Term Federal Adm (VSGDX) might be one way to do it?

[Ufken1]

Following up on this thread, I am in the mode of purchasing Agency Bonds which are now yielding close to 6%. I'm attempting to understand how the decision is made by the Agency to call a bond, and how the mechanics of that decision work, so as to better understand the probability of a bond being called.

I understand the basics, ie, as mortgage rates decline, the risk of the bond being called after its call date increase. But, if mortgage rates fall from the low 7s currently to say the mid 5s, that obviously does not mean that most of the mortgages wrapped into a 6% bond would be paid off (and the bond called), even if the call date for the bond has already passed. I'm assuming that at some point, the Agency refinances a callable bond if the economics make sense, regardless of the payoff of the underlying mortgages. I've searched for more information on this and can't seem to find anything on point.

I highlight that Agency bonds are available now with 6%+ YTM and 6.1%+ YTC, with call dates in the next 6 months. I'm trying to determine how low mortgage rates would need to go before the probability of one of these bonds being called increases substantially, acknowledging that it is "callable" in the near future.

Does anyone have any thoughts on the topic?

[Geologist]

I’m not sure that you should be comparing your set of available agency bonds to mortgage rates. While an agency like Fannie Mae is in the mortgage business, your bonds are not mortgage-backed securities (these would pay a little principal each month and are not callable as a whole although principal can be prepaid by the mortgage holders)*. That is, these are not bonds with individual mortgages “wrapped in them”. They are bonds issued by the agency to finance other aspects of their business and I think what you would want to do is compare them to what interest rate the agency is paying on similar bonds it is issuing now. If the interest rates on new similar debt issued now are below the rates on the bonds you are considering, the agency will call them because they can replace your bonds with new debt at lower rates.

For example, this website summarizes Fannie Mae’s debt funding (https://capitalmarkets.fanniemae.com/de ... il-reports) and if you click on the 2024 “Callable Debt Issuance Detail report pdf”, it appears to me that Fannie Mae is currently issuing debt at interest rates of 5.65% or lower. That would imply to me that outstanding bonds with coupons above 6% that are callable soon will be called because the agency can save significant interest.

*Analysis of outstanding mortgage-backed securities (MBS) is a very complicated business and you should definitely read details about this such as in Annette Thau's The Bond Book before even considering buying individual MBS's.

[whodidntante]

If rates go up, you're stuck with a capital loss and a below market rate.
If rates go down, the bond is called.

Don't take that deal.

[jeffyscott]

If rates go up, you're stuck with a capital loss and a below market rate.

But you're "stuck" with a 6% bond vs. the alternative of being stuck with a 4.5% treasury bond.

Also, it seems like you are double counting by calling it both a capital loss and a below market rate?

[Weathering]

If you bought agency bonds last year (or early this year), get ready to redeploy your capital. I’ve had two agency bonds called in the past week and looking at the call list it seems the flood gate of calls are opening.

[Valuethinker]

It seems like a tricky game for an individual investor.

Anticipating the moves of professionals who are paid to do this for a living.

I know government bureaucracies can be unwieldy & stupid in their decision making. But this seems fairly straightforward and derived from existing Agency policy.

[Weathering]

Two more of my 20 agency bonds were called today. That makes Four in the past two weeks.
Any agency bond with 6+% interest rate is getting called at the first opportunity.

[MikeG62]

Yes I think agency paper that can be called with coupon’s in the mid to upper 5% area are prime for being called.

I have one I bought in Dec ‘22 at auction with a coupon of 5.95% and first call date of Dec ‘23. Received a note yesterday that it being called next week. Ugh. What a great yield.

I fully expected it would not run the full 10 years and get why it’s being called. Am happy I was able to enjoy that yield for 20 months.

I have recently been trying to buy agency paper where the coupons are lower (of course the YTM needs to be decent). Focusing on paper with coupons around 5% thinking those are less likely to get called if there is a ton of paper with coupons 50-100bps higher still outstanding which are callable.

Anyway, when I buy, I focus on those that cannot be called for at least 12 months. I don’t bother with any that can be called in the next few months.

I get why call rates have increased in the last couple of months.

[bd7]

I have one I bought in Dec ‘22 at auction with a coupon of 5.95% and first call date of Dec ‘23. Received a note yesterday that it being called next week. Ugh. What a great yield.

I have the same one and I knew it would be called when I noticed the other day that the market value had gone from $99.99xx to $100.01xx. And now it has been. However, FHLB has an offering settling the very next day (8/22/24) for 5.980% maturing in 2044 and callable in 3 months. Or you can get the same deal for 5.800% callable in 12 months.

[MikeG62]

I have one I bought in Dec ‘22 at auction with a coupon of 5.95% and first call date of Dec ‘23. Received a note yesterday that it being called next week. Ugh. What a great yield.

I have the same one and I knew it would be called when I noticed the other day that the market value had gone from $99.99xx to $100.01xx. And now it has been. However, FHLB has an offering settling the very next day (8/22/24) for 5.980% maturing in 2044 and callable in 3 months. Or you can get the same deal for 5.800% callable in 12 months.

Thanks for pointing that out.

Checking Fidelity's site I see fourteen (14) new issue Agency bonds in the cue awaiting settlement (a lot more than I have typically seen). A whole mix of maturities, coupons, call dates, call styles (Bermudan, European and American and continuously callable and not continuously callable). For me, I would rather not buy anything that is callable in 3 months (especially with a high coupon) as I don't need the funds then and it seems to me they are almost certain to get called. I tend to look for bonds with call dates out at least one year or more. In the cue, there are six with first call dates out 12 months (to/beginning August 2025) and are continuously callable after that date (for comparison, the one-year Treasury yield is currently at 4.53%):

1. FHLB 4.55% coupon maturing 11/26
2. FHLB 5.00% coupon maturing 8/30
3. FHLB 5.15% coupon maturing 8/31
4. FFCB 5.23% coupon maturing 8/32
5. FFCB 5.44% coupon maturing 8/34
6. FHLB 5.80% coupon maturing 8/44

Quite a spread of coupons there. It seems logical to me that the ones with the highest coupons will be first to get called. So, if I buy the sixth one, I would think it quite likely to get taken out next summer. Probably same for the fifth one on the list. Contrasting to the first one, that bond would seem least likely to get called among this group of bonds based upon the lower coupon. For the 2nd through 5th bonds, we see a slight increase in yield for each added year of maturity (as might be expected).

Is it smarter to accept the lower coupon on the first bond given the higher probability it will remain outstanding longer (although it matures in only 27 months)??? That's the rub.

Also, there is one FHLB bond maturing in 8/29 with a first call date out 24 months (beginning August 2026 - and then callable only once every six months thereafter - it is not continuously callable) with a coupon of 4.25%. For comparison, the two year Treasury is currently yielding 4.08%.

Maybe I will invest is a number of these (first two, last one and the one not callable for 24 months). Will give it more thought over the weekend.

Edited (on 8/20/24):

Ultimately decided to invest in the last two (5 & 6). Concluded that the yield hit I would take from investing in the 1st one or the bond with the call date out to 2026 was too large to make sense for me. Even if the one's I bought get called in 8/25 and the ones with the lower coupon's do not, the yield premium I would have received over the next 12 months provides quite a buffer against my reinvestment risk. My current thinking is to rinse and repeat when the high coupon one's get called (replace them with new higher coupon Agency bonds with call dates out at least 12 months). To me, that seems more likely to result in a better outcome over the next several years than buying the lower coupon ones and hoping they remain outstanding in what appears to be a lower interest rate environment ahead of us.

[jeffyscott]

It seems logical to me that the ones with the highest coupons will be first to get called. So, if I buy the sixth one, I would think it quite likely to get taken out next summer. Probably same for the fifth one on the list. Contrasting to the first one, that bond would seem least likely to get called among this group of bonds based upon the lower coupon. For the 2nd through 5th bonds, we see a slight increase in yield for each added year of maturity (as might be expected).

Is it smarter to accept the lower coupon on the first bond given the higher probability it will remain outstanding longer (although it matures in only 27 months)??? That's the rub.

For the limited dabbling that I have done, I just picked the highest yield and only considered those with at least a year or two until the next call. I don't know enough to predict calls other than assuming the high coupons that I bought are nearly certain to be called at the first opportunity and I don't want to have to reinvest every few months.

I got one with a 6% YTC/YTW/YTM with about a year to the call, when 1 year treasury was about 5.1% and 6.1% with 2 years to call, when 2 year treasury was at about 4.9%.

[YangtzeCruiser]

Found this schedule of FHLB calls for the next 10 days: https://www.fhlb-of.com/ofweb_userWeb/p ... chedule-84 And I have to say, I don't get it. There are 20-year 6.25% bonds that are not being called, and a 4.00% bond that is being called. My plan is to aim for the bonds with the highest YTW that I'd be willing to hold to maturity.

[jeffyscott]

My plan is to aim for the bonds with the highest YTW that I'd be willing to hold to maturity.

Is that without regard to the earliest call date?
I've only looked at those that are not callable for about a year or more.

Do the yields/spreads impact the term for which you are willing to hold?
For example, yesterday I bought a 10 year with 5.4% yield, rather than 20 year with 5.7%. Both are callable next November. I'm very likely able to hold for 20 years if I live that long, but I guess my willingness to do so depends, in part, on the term premium that is being offered, in case the bond is not called.

[YangtzeCruiser]

I'm sitting on a 15-year 5.75% and a 20-year 6.00%, both first callable May, 2025. They represent my first foray into Agencies; previously I had the funds in Treasuries. Worst case (aside from default) - both are called in May and I've done significantly better than I would have with 6-month Treasuries.

I'm still in the mode where I'm trying to find a comfortable bond strategy. Yield spreads definitely are a factor in my decision-making process, but I don't have a good feeling yet for what my acceptable YTM vs. term curve looks like below 15 years. So, out of curiosity, I added your 5.4% for10 years point to my two and looked at the best fit line, Decent fit; 4.82% at t=0 and adds 6 bps per year. Good enough for now.

[Selfdirected23]

Another year of market experience in the Agencies. I have taken a different approach to these high yield/callable bonds. As the Fed started cutting rates I grabbed some of those higher yield bonds in full anticipation of them being called in the next several months (i.e. using for short-term/some risk FI AA). Got into a couple positions too early, but overall have done well vs staying in T-bills (75-125+ extra bps interest vs rolling T-bills). Of course, the risk of buying callable long bonds is a sudden spike in inflation driving up long rates BEFORE they are called (leaving the dilemma of holding such bonds (lost interest income opportunity) or selling 'em at a loss). FWIW- I've cut back on this approach lately as (IMHO) Fed rate cuts may be nearing (reaching?) their end for this cycle (less favorable risk/reward profile vs T-bills).