Duration: 4:17
Transcript: If you’re looking to buy higher grade securities with a higher rate of return, then you might consider going out a little further. If you are only seeking to build a ladder, one to five years in this example, we can certainly help you with that.
One of the questions we receive is, should I buy longer dated securities, specifically bonds or shorter dated maturities, specifically bonds. And it really depends on your investment objective.
And what we have found is that most bonds, and I’ll speak to municipal bonds, get called prior to the maturity date, whatever that call date might be. If you’re really wanting shorter term maturities, say three to five year paper, one to three year paper, five to seven year paper, we can certainly accommodate that. The call dates are gonna be relatively short, assuming there is gonna be a call date on that particular asset class and that particular maturity range.
But if you’re looking to buy longer dated securities, let’s just say greater than fifteen years, the call dates are usually gonna be between one and say seven or eight years. Why does that really matter?
The it matters because it depends on what your expectation of yield is. If your expectation of yield is say, North of 4%, in other words, higher than 4%, you will have to go out longer on the yield curve or maturity curve, say 15 years, maybe 10 years, depending upon what state you live in obviously, in order to get that 4%. If you’re looking just to build a bond ladder, let’s just say one to 5 year paper, one to 7 year paper, your yield of course will be lower due to the duration of that bond. We typically go out 15 years, maybe 18 years with a shorter duration of call, call it one to 5 years to maybe seven.
And like I said earlier, what we’ve found is, is that most of the bonds that you’re gonna be purchasing with there are exceptions, but most of the bonds you’re purchasing, you’re going to have a bond that’s gonna be redeemed prior to the maturity date. Why do I stress that? The reason I stress that is, is that if you’re gonna go out longer, let’s just use a fifteen year maturity date and let’s just use a five year call date.
You’re gonna get paid a much higher percentage on that longer maturity. Let’s just say, call it 4.25 for this example, versus if you only buy a 5 year bond, let’s just pretend it’s 3.5. So, you’re gonna receive a higher rate of return while you hold those bonds. When the call date comes up again, in my example, it was 5 years.
Then the likelihood of that bond being called not necessarily on that fifth year, but bonds, once they get through the call date, they’re callable, what’s called continuously callable, which means that the municipality city of Houston, for example, can redeem the bonds at any time at par or maybe a premium. So it doesn’t necessarily mean that, oh my gosh, I’ve gone through my 5 year call when it’s never gonna be called. And all of a sudden, I’m gonna have to go to 15 years or 20 years or whatever the maturity date is. Between the call date and the maturity date, there is a call that could happen at any time with 30 days notification.
So regardless of whatever the interest rates are at the time of call, 5 years in our example, doesn’t necessarily mean that they won’t call the bonds in the year 6, or year 7, or year 8, or so on. So, if you’re looking to buy higher grade securities with a higher rate of return, then you might consider going out a little further.
If you are only seeking to build a ladder, one to 5 years in this example, we can certainly help you with that. And we’ll explain all of this obviously with you as we discuss and go through your investment journey. So we wanted to share that information with you.
