Fixed Income Musings - Federal Home Loan yields

Looking at the fixed income (FI) offerings right now, I think perhaps I found something that may be reasonable for very conservative investors. The issue facing conservative FI investors right now is where to get yield, and where to get yield that will last for a while. It’s easy to buy 5% 4-week, 8-week, 13-week, 26-week bills, but those yields only last for 4, 8, 13, or 26 weeks. After they mature, you are left again to the vagaries of the bond market. If you want 5+% for a longer period of time, you need to look elsewhere. The 1-year, 2-year, and 3-year treasury securities are yielding under 5%, well under 5% in most cases (and even under 4% for the 3-year).

So what to do?

While updating a spreadsheet today, I was looking at fixed income offerings and I noticed that some of the agency securities have nicer yields for longer terms. For example an 18 month (10/21/24 maturity) Federal Home Loan bond is yielding 5.1%. You can’t get 5.1% for 18 months in CDs/etc (I think). Now you might say “but these are not call protected, and when people pay down their mortgages, that sweet 5+% yield will end”, and that is true to some extent. Some of those mortgages will be repaid, or principal paid early, but if you believe that rates are staying “higher for longer”, then there won’t be a wholesale rush to refinance “all” mortgages anytime soon. So it seems that at least some of the money put into these securities will earn 5+% for the duration.

The 10/21/24 one (18 months) is 5.1%, the 4/27/26 one (3 year) is 5.2%, the 04/28/2027 one (4 year) is 5.3%, and the 04/26/2030 one (7 year) is 5.4%.

Seems interesting.


If nothing else, at least they are not inverted. Most other debt greater than 5 years is paying less than 2 and 3 year debt.

Perhaps that is the prepayment risk premium at play.

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If the market is right, inflation will recede to slightly over 2% in the 2 to 10 year time frame.

Because the current bout of inflation was caused by massive monetary and fiscal stimulus taken to address a (hopefully) one-time Black Swan emergency – the Covid epidemic – this may be a temporary opportunity to lock in higher yields. That’s why the yield curve is inverted.

I clearly remember the pain of renewing CDs at low yields after the Federal Reserve cut the fed funds rate in 2020. Because of that, I’m now trying to extend my durations out to 5 to 10 years when the yield is good. But I am only buying non-callable bonds or ones where the call date is very close to the maturity date. I’m sure that many bonds with a 5% yield will be called in a couple of years. Unfortunately, the non-callable bonds sacrifice at least 50 basis points of interest, sometimes close to 100.

Do you have CUSIPs for the 4 and 7 year bonds you mentioned?

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These are all of them being offered right now (out to 10 years) -

FEDERAL HOME LOAN 5.10000% 10/21/2024 3130AVMA7
FEDERAL HOME LOAN 5.20000% 04/27/2026 3130AVNE8
FEDERAL HOME LOAN 5.30000% 04/28/2027 3130AVQG0
FEDERAL HOME LOAN 5.40000% 04/26/2030 3130AVPW6
FEDERAL HOME LOAN 5.55000% 04/26/2033 3130AVPX4