Mortgages: “you can just buy the 5% treasuries and now your mortgage is paid without doing anything.”
Not following this.. is bull saying that you should buy treasuries that mature at the same time as your mortgage loan term AND in the same amount as the current outstanding mortgage amount, therefore giving you the 2% spread over the rest of the loan?
If you have 600k liquid you can buy a bond with 5% yield that covers the nut on your mortgage for XX years and get you 600k back at the end. No brainer.
So this would require you to have the same amount in liquid cash as the outstanding mortgage balance correct? If I still owe $1m mortgage at 2.85%, I’d need to invest $1m at the 5% rate for the purpose of this example?
I get the spread piece if you have the extra money to invest in that. But struggle with the part of "never" paying off your mortgage. I'd figure you'd want to aggressively target your principal residence payment and once paid off focus on other investments. For rental properties it makes sense to not pay down, as you can claim the interest as expense.
If you have a 2-3% mortgage today that means no shot paying it off never makes sense ever since every dollar right now can be locked in for 4% for 10 years
If your mortgage rate is 3% and say the treasuries are 1% then yes paying it off can make sense.
This is written quite clearly in the article just look at the yield curve.
Thought Hank was comparing 5% loan to 5% treasuries, so that’s what I meant. Paying cash on 30yr 5% loan is like locking in a 30yr treasury at 5% which is pretty solid.
Multi-year guaranteed annuities (MYGAs) exploded in growth in 2022 given the high interest rate environment. Roughly $112B in sales. They behave similar to CDs.
A client deposits an initial premium, earns a guaranteed interest rate for the product duration (typically 2-10 years) and the initial premium and interest earned is tax-deferred. Most of these products also allow up to 10% of the account value to be withdrawn annually without penalty. To give you an idea of the rates they're earning...
3-Year: 5.50%
5-Year: 5.75%
7-Year: 5.65%
They're offered by highly regulated and well capitalized insurance companies. Better yet, spend a couple days and get a life insurance license, sell it to yourself, and collect a commission (2-3% of the initial premium). Could be another option for those considering a safe place to park cash for a few years and earn a competitive rate.
Can someone help me understand why you'd buy a bond that locks you in for YEARS at ~5% when you can leave your funds in a high interest savings account that earns ~4.5%?
It’s the @BowTiedF’er example/response over again...if you can lock that in for an extended period of time (say 5 years) when rates do change and head down that bond will be worth more and your savings account rate will shrink.
Those bank accounts typically change their rates at will. Fed interest rates go up means bank interest rates go down. With treasury bonds, the rate is locked.
People in the comments are getting hung up on “never pay off your mortgage”. Bull is saying it’s stupid to pay off a loan with a lump sum or extra principal payments (re Dave Ramsay) when treasuries are higher than your loan rate.
Technically speaking, by making your regular payment you are “paying off your mortgage”.
I actually prepared for this kinda way when i sold my house and bought a new 1. I locked my rates @1.59%. The money i made on the first house is 500k. I did kinda a deal instead of leveraged up. I was lucky with timing the newly build 1. The new 1 is already worth way more. But i have a slightly higher morgage. And payed some of from the money i made from the first house. My plan was if intrest rates get high enough i am gonna put that money in a savings account so it pays of the morgage. But now i have to find a way with bonds it sounds even better. Problem is Europe so a little bit more difficult. Also i think Europe always lags on Usa so the rate cycle in Europe when usa stops might take another 6 months.
Bull - I like the point you made (somewhere) that when rates approach the long term return on stocks, that is not good. It got me thinking..
I've got some cash flow positive rental properties which have floating rate debt on them. It's WSJ Prime Rate + 0.75%, which comes out to about 8.5% right now. That's basically the long term rate of return of stocks. Is the move here to just pay off its debt instead of doing any investments? In the short term, it would be a risk free 8.5% and sounds like a good move.
On the other hand, its a 20 year mortgage. Rates will surely go back down within the next 20 years. So, am I shooting myself in the foot by paying it off too quickly? Would love to hear everyone's thoughts.
To clarify, are you saying that the savings are not that significant since they are in the distant future? ie. the present value of shortening the term of the loan is probably not worth making the prepayment now?
Yes, I view it as a double loss. Fewer dollars today when they’re worth more, and I’m actively reducing my leverage, which is one of the best features of real estate.
8.5% interest rate is just a bit hard to swallow when stocks return that over the long term. But, I guess I have to keep in mind that rates will go back down in 4-5 years.
You can buy Treasuries direct from the clunky govt website. But you can also buy them through most big brokerages. Poke around the Income/Bonds tab and you should be able to find it.
Just be aware that you’re buying them secondary market, so the yield you get will vary based on price you pay, and it’s competitive with bid/ask values that can be large for less liquid bonds.
If you hold the bond to maturity, you get your principal back even if the interest moves against you during that time? In other words, you can only have a capital loss if you sell before maturity?
For non US people, I believe there's a 30(?)% withholding on interest income if no dual tax treaty In place. However if held by Irish domiciled ETF, dual tax treaty lowers withholding to 15% on interest paid to Ireland. Ireland doesn't impose further withholding.
In this case, given what @bowtiedeffer mentioned about ETFs, does a short term 0-1 year maturity ETF( like VDST) make sense? Reduction in withholding and maturity suggests basically HTM and buying new 1 year to replace. YTM is about 4.5 ish which is roughly 5.1% minus foreign withholding.
Wouldn’t the smartest decision be 6 month treasuries sometime during April be the smartest for highest ROI? And how long do you think we’re going to be above 5% interest rates because if it’s going to be 3-5 years than 6 month yield is approx 10% a year in this economy is great in large sum of money
Depends - If the 6 month is 5% and the 2 year is 4%
But in 6 months rates drop because a recession, then when your 6 month UST matures you may only be able to invest it at 2% rate. In this case the ROI was better locking in the 2yr at 4% even then 4% was less than the 5%.
That is how the recession ties into the inverted curve piece
Mortgages: “you can just buy the 5% treasuries and now your mortgage is paid without doing anything.”
Not following this.. is bull saying that you should buy treasuries that mature at the same time as your mortgage loan term AND in the same amount as the current outstanding mortgage amount, therefore giving you the 2% spread over the rest of the loan?
Suppose mortgage is 2500 per month/30k per year.
30,000/0.05 = 600k
If you have 600k liquid you can buy a bond with 5% yield that covers the nut on your mortgage for XX years and get you 600k back at the end. No brainer.
So this would require you to have the same amount in liquid cash as the outstanding mortgage balance correct? If I still owe $1m mortgage at 2.85%, I’d need to invest $1m at the 5% rate for the purpose of this example?
If the US treasury rate interest is above any debt rate you have you profit the spread.
This is helpful and what I was trying to get at. Thank you
Yes; this only works if
- you have cash and want to buy a house
- already have a house but it belongs to you (no mortgage yet)
You would just buy the house with cash
Absolutely not.
If you borrow $100K at 2% thats $2K a year
If you make $100K by selling a biz and know you can get 5% thats $5K a year
You NEVER NEVER NEVER pay it off. You leave the $100K at 5% collect $5K and use the $5K to pay the $2K. This nets you 3%.
This is exactly how banks work and honestly surprised this wasn't obvious. They borrow short lend long.
I get the spread piece if you have the extra money to invest in that. But struggle with the part of "never" paying off your mortgage. I'd figure you'd want to aggressively target your principal residence payment and once paid off focus on other investments. For rental properties it makes sense to not pay down, as you can claim the interest as expense.
If you have a 2-3% mortgage today that means no shot paying it off never makes sense ever since every dollar right now can be locked in for 4% for 10 years
If your mortgage rate is 3% and say the treasuries are 1% then yes paying it off can make sense.
This is written quite clearly in the article just look at the yield curve.
If your house is paid off / no mortgage is there a play to make now? With mortgage interest rates so high?
Thought Hank was comparing 5% loan to 5% treasuries, so that’s what I meant. Paying cash on 30yr 5% loan is like locking in a 30yr treasury at 5% which is pretty solid.
No. Completely missed the point.
Invest enough to pay your mortgage with the interest. At the end you get your investment back.
Pay the house you lock in a 2.85% return (in Ed Y example) which is silly if you could get a UST at same maturity for 5%
Thought Hank was comparing 5% loan to 5% treasuries, so that’s what I meant.
Multi-year guaranteed annuities (MYGAs) exploded in growth in 2022 given the high interest rate environment. Roughly $112B in sales. They behave similar to CDs.
A client deposits an initial premium, earns a guaranteed interest rate for the product duration (typically 2-10 years) and the initial premium and interest earned is tax-deferred. Most of these products also allow up to 10% of the account value to be withdrawn annually without penalty. To give you an idea of the rates they're earning...
3-Year: 5.50%
5-Year: 5.75%
7-Year: 5.65%
They're offered by highly regulated and well capitalized insurance companies. Better yet, spend a couple days and get a life insurance license, sell it to yourself, and collect a commission (2-3% of the initial premium). Could be another option for those considering a safe place to park cash for a few years and earn a competitive rate.
Can someone help me understand why you'd buy a bond that locks you in for YEARS at ~5% when you can leave your funds in a high interest savings account that earns ~4.5%?
It’s the @BowTiedF’er example/response over again...if you can lock that in for an extended period of time (say 5 years) when rates do change and head down that bond will be worth more and your savings account rate will shrink.
You can sell bonds on the secondary market.
If you think the interest rate will stay constant or go down, your "high interest" savings account will go to 0.1%. the bond is locked.
Those bank accounts typically change their rates at will. Fed interest rates go up means bank interest rates go down. With treasury bonds, the rate is locked.
People in the comments are getting hung up on “never pay off your mortgage”. Bull is saying it’s stupid to pay off a loan with a lump sum or extra principal payments (re Dave Ramsay) when treasuries are higher than your loan rate.
Technically speaking, by making your regular payment you are “paying off your mortgage”.
Yep. You are correct.
I actually prepared for this kinda way when i sold my house and bought a new 1. I locked my rates @1.59%. The money i made on the first house is 500k. I did kinda a deal instead of leveraged up. I was lucky with timing the newly build 1. The new 1 is already worth way more. But i have a slightly higher morgage. And payed some of from the money i made from the first house. My plan was if intrest rates get high enough i am gonna put that money in a savings account so it pays of the morgage. But now i have to find a way with bonds it sounds even better. Problem is Europe so a little bit more difficult. Also i think Europe always lags on Usa so the rate cycle in Europe when usa stops might take another 6 months.
Would love to see an Instagram for newbies post.
Would you consider crypto stablecoin yield above 5% and viable alternative to bonds (for instance VELA finance, or some pools on curve)? or too risky?
DeFi ed substack talks a lot about risk management.
How much are you being paid for your extra risk? What are your extra risks?
Over a 10% yield...
Thank you for this, I've read the latest paid post and I didn't understend anything
Bull - I like the point you made (somewhere) that when rates approach the long term return on stocks, that is not good. It got me thinking..
I've got some cash flow positive rental properties which have floating rate debt on them. It's WSJ Prime Rate + 0.75%, which comes out to about 8.5% right now. That's basically the long term rate of return of stocks. Is the move here to just pay off its debt instead of doing any investments? In the short term, it would be a risk free 8.5% and sounds like a good move.
On the other hand, its a 20 year mortgage. Rates will surely go back down within the next 20 years. So, am I shooting myself in the foot by paying it off too quickly? Would love to hear everyone's thoughts.
Partial prepayment of a mortgage just carves principal off the back end of the loan, effectively shortening the term.
It doesn’t refinance and reduce your payment based on lower principal.
Unless you can fully pay it off I don’t think prepayment is a good play.
That makes sense.
To clarify, are you saying that the savings are not that significant since they are in the distant future? ie. the present value of shortening the term of the loan is probably not worth making the prepayment now?
Yes, I view it as a double loss. Fewer dollars today when they’re worth more, and I’m actively reducing my leverage, which is one of the best features of real estate.
Makes sense.
8.5% interest rate is just a bit hard to swallow when stocks return that over the long term. But, I guess I have to keep in mind that rates will go back down in 4-5 years.
Right. You’re not gonna sit on an 8.5% rate for 30 yrs, so you’re not really saving the 8.5% on the prepayment
How do you practically buy a treasury bond vs a treasury bond etf? Do you have any resources to help guide with this?
You can buy Treasuries direct from the clunky govt website. But you can also buy them through most big brokerages. Poke around the Income/Bonds tab and you should be able to find it.
Just be aware that you’re buying them secondary market, so the yield you get will vary based on price you pay, and it’s competitive with bid/ask values that can be large for less liquid bonds.
Great 101. I’m curious how this fits in your overall framework. Would be cool to see your monthly portfolio new bond allocation (in level 2+ post).
If you hold the bond to maturity, you get your principal back even if the interest moves against you during that time? In other words, you can only have a capital loss if you sell before maturity?
Yes. If you buy $1M of 5% bonds for 2 years
This means you get $50K year 1 $50K year 2 and your $1M back.
If rates go to 0% or they go to 10% you get the same thing.
Unless you think the government can't print money to pay you then the risk is extremely low.
Yeah don't assume 10% FTX bonds 30-year maturity is the same as USA 30-year bond
For non US people, I believe there's a 30(?)% withholding on interest income if no dual tax treaty In place. However if held by Irish domiciled ETF, dual tax treaty lowers withholding to 15% on interest paid to Ireland. Ireland doesn't impose further withholding.
In this case, given what @bowtiedeffer mentioned about ETFs, does a short term 0-1 year maturity ETF( like VDST) make sense? Reduction in withholding and maturity suggests basically HTM and buying new 1 year to replace. YTM is about 4.5 ish which is roughly 5.1% minus foreign withholding.
Gracias.
👏🏼👏🏼👏🏼
Wouldn’t the smartest decision be 6 month treasuries sometime during April be the smartest for highest ROI? And how long do you think we’re going to be above 5% interest rates because if it’s going to be 3-5 years than 6 month yield is approx 10% a year in this economy is great in large sum of money
Depends - If the 6 month is 5% and the 2 year is 4%
But in 6 months rates drop because a recession, then when your 6 month UST matures you may only be able to invest it at 2% rate. In this case the ROI was better locking in the 2yr at 4% even then 4% was less than the 5%.
That is how the recession ties into the inverted curve piece
Yes.