tom.bec....[at]verizon.net wrote:
- quote -

You also could use TIPS (inflation protected bonds) for interest rate
protection. Both Fidelity and Vanguard have good TIPS funds, and I
suppose that there are some TIPS ETFs out there, too.

Dave

tom.bec....[at]verizon.net wrote:
- quote -

Tom.Bec...[at]verizon.net,

In early 2004 I began to examine hybrids, traditional
preferreds, etc. for potential placement in the fixed income
part of my portfolio. I used to a great extent Quantum
online. I also used other resources, including this
newsgroup.

Based in no small part on the advocacy of one poster here,
in January 2005 I bought seven hybrids. These included one
traditional preferred, four ETDS's, and two TPS's. The
lowest quality one had a rating of A3/A (Moody's/S&P). All
had call dates within the time period late 2008 to 2009.

Ownership can make a huge difference to one's understanding
of a security. Independently, I watched interest rates and
these securities' price movements closely and contemplated
their future. Quickly it began to sink in that I had taken
an enormous amount of risk with these securities, because
(1) interest rates were at record lows; (2) it seemed to me,
interest rates were far more likely to rise in the next few
years than lower or stay flat; (3) this would result in a
significant decline in these securities' prices, while
higher yielding, more "flexible," and lower risk CDs, for
one, became available.

It dawned on me very quickly that as interest rates rose,
the corporations behind the hybrids would have no reason to
call them. By continuing to hold these securities, I was
locking in a historically low interest rate for quite likely
decades.

Perhaps especially where the stakes are high, it's important
to own up to one's mistakes and learn from them. Otherwise,
pride goeth before the fall. Only one month later, I started
selling the seven hybrids I'd purchased. I sold all at small
gains within a year. It is one of the best investing
decisions I made, albeit a 180-degree reversal to my
original plan.

Thank goodness. The average change in share price
(unweighted) for these seven hybrids from January, 2005 to
the present has been negative 8.6%. The price losses (there
were no gains) specifically were:

SVJ - 3.7%
HTN -11.3%
ALF - 7.0%
RBSPRL (RBS-L at Quantum) -11.8%
CPRQ (C-Q at Quantum) -10.8%
IKR -10.1%
PUKPR -5.5%

Here in mid-2006, with two years of Federal Reserve Board
interest rate etc. increases behind us, interest rates may
very well have settled down. But I'm betting not.

In my estimation, if one hasn't an enormous amount of risk
tolerance, then this is still a precarious time to be
getting into hybrids, preferreds, etc.

The yield curve for high grade bonds (= approx. that of CDs)
is extraordinarily flat at the moment. It's arguably,
simply, an unprecedented time for interest rates.

For your IRA I would stick with CDs (or treasuries or high
grade bonds) of maturity not more than two years right now.

A study of historical interest rates will assist you in your
decision-making. Email me in private for a few citations, if
you wish.

"TB" <borekfm[at]pacbell.net> wrote in message
news:3Etfg.43721$Lm5.17873[at]newssvr12.news.prodigy.com...
- quote -

And, more specifically, have no basis in anything that would make
it predictable to you or anyone else.

You said it your self. You labeled it "inexplicable", and by definition,
anything you can't explain, you certainly can't predict to any specific
degree of certainty.

- quote -

So ... basically you just told the guy to go flip a quarter. Sometimes
you'll get it wrong, and sometimes you'll get it right. That's a great
strategy. Can ya pass the bong -- I want some of what you're smokin'.

TB wrote:
- quote -

TB-
Quantum is a very useful site, I use it a lot. It does a nice job of
summarizing what can be the risk factors with the different
preferreds/trust-preferreds, without digging through the original SEC
filings.

A very common one is a call provision, where the company can redeem your
shares at a fixed price (eg $25) anytime after a certain date. It's a
good general rule to buy these assuming the yield-to-worst scenario,
which is usually the yield to call.

So that's a risk factor, you buy some MIPS or QUIPS or whatever at
$26.12 per share and have it redeemed at $25 some time later. So rather
than collecting years of a fat yield, you end up with an effective yield
that is much lower because of your loss on the redemption.

Also, be sure to understand exactly what you're buying - where is the
money coming from? A bank name might be associated with an issue but
what you've really bought is some packaged debt security issued by that
bank, but not backed by its balance sheet. There are some issues out
there that are backed by packaged receivables, or by rent payments, or
by lease payments, that might be considered relatively risky.

Absent the call provisions, these issues should be priced to yield close
to a long-term corporate bond of similar credit quality. It should be a
bit higher because these have lower priority in bankruptcy, i.e. they
have more credit risk to them. They do have the advantage of having a
bit more transparent a market than corporate bonds for a retail
investor, but similar issues exist when buying or selling them.

Given that they're priced like long-term debt, keep in mind that over
the long-view there is typically very little reward for holding
long-term debt. Right now is a textbook example, where long-term bonds
are barely paying above the rate you mentioned for a 12-month CD. Unless
you think rates will rise, there would be little reason to buy
longer-term debt and, by extension, something like a non-callable
preferred that acts like long-term debt. Some people take the approach
of buying only short-term debt (or mutual funds). So this is an implicit
risk factor with preferreds & similar issues.

I don't want to make the trust-preferreds sound like traps, they're not,
and I think they're a nice source of yield for individual investors. But
probably not for the bulk of your fixed-income investment, which could
tick along quite nicely in a low-cost bond fund, while you pick off the
occasional higher yield with a mix of preferreds.

Last point: I think it's worth bookmarking a bunch of these and
following them awhile. For inexplicable reasons you do seem to see
up/down ticks in trading volume and pricing, that have nothing to do
with the company or the debt market. Shaving a little from the buy price
in effect raises your yield. Similar: one way to enhance your total
return is to buy "mildly distressed" preferreds from companies that you
think will improve. For example an issue might trade at $23 instead of
its $25 par value, but for what seem to be temporary reasons. Of course
this involves some judgment calls and can work against you if you get it
wrong, but if you get it right, you end up with a nice yield and a
capital gain as well. This involves risk...as an extreme example, car
companies and airlines have fat yields for this reason, but of course,
they're also riskier.

-another TB

I am rolling over my 401 into an IRA (just retired at 57) and
have done OK in equities over the years. Aiming for an
allocation of 60 equities/40 fixed income, & I have questions on
the 40% fixed income as I have no experience there.
Only experience was bad, bonds were hard to find, get quotes
on, and buy.
I am thinking of putting a small amount in 12 mo CDs (yield
now is 5.4%) for interest rise protection, and for the rest I am
looking hard at Trust Preferred Securities that I am researching
on QOL (Quantum Online). They seem to have better yields
than bonds (for the same company and same risk level -
Moody etc). Anything I should be aware of before moving into
them??
Also Preferred Stocks would be classed as Fixed Income,
correct? Those yields seem to be well above 6% for brand-name
companies (BAC, US Bank, Wells Fargo, Barclays).
Any gotchas I should be aware of for my fixed income
allocation? (I have enough to put into different classes, and
would prefer to avoid bond funds).
Thanks for any thoughts!