T-bonds with higher coupons for income

[barrett]

This might be moronic but that hasn't stopped me yet from posting...

I have a question about the bond portion of the PP. I just implemented the PP at the beginning of this year and all the bonds I bought are 11/15/43 issues with a 3.75% coupon. Just got my first interest payments on 5/15/14 and I have to say that felt good (and may be skewing my thinking a bit here as well). A bit of background... I am 55 years old and my PP is set up with individual LTTs, IAU & S&P 500 in retirement accounts with just a bit of cash for rebalancing. The rest of the PP cash I hold is in EE and I-bonds outside the retirement accounts. I'll gradually change the retirement account allocation over the next ten years so that there is a normal 25/25/25/25 asset allocation in my IRAs (actually less IAU because some of the gold allocation will be in coins outside of the IRAs). Those IRAs will eventually fund my retirement to a large extent.

So, here is the question. I know that the recommendation on T-bonds is to replace older bonds with newer ones. Would I be doing something dumb by eyeballing a bond with a higher coupon for the sake of more income? For example, right now I see a 2/15/41 issue with a 4.75% coupon and a YTM of 3.289. I also see an 11/15/42 issue with a 2.75% coupon and a YTM of  3.296. I'd like to have a steady stream of bond income later in life but my guess is that folks here will tell me what I am asking is a complete wash (that either one is fine and it won't really make a difference in the long run which one I choose).

I seem to remember PS posting a few months back that he preferred bonds with a higher yield assuming that they met the long-term requirement. Any thoughts would be much appreciated.

[Pointedstick]

It's a wash in that selling an existing bond to buy new ones with a higher coupon will require that you sell more bonds to buy fewer, since the higher coupon bonds have a higher price. So you will have fewer bonds that individually provide you with more income, which is what the yield to maturity figure is trying to tell you; it's basically a "cost-adjusted" yield. The fact that the 4.75% bond has a lower yield to maturity than the 2.75% bond is probably representative of the fact that it both costs more to purchase it and it also has a 1.75 fewer years before maturity.

All else being equal, I prefer bonds with a higher coupon, but all else is not equal here.

[barrett]

Thanks PS. That helps. I was overlooking the fact that the total number of bonds held in the PP is important as well. Also I was figuring that all things were "more or less equal" in the scenario I laid out. I still feel with the reptilian part of my brain that the higher coupon bonds are better but your line of logic makes total sense.

[Early Cuyler]

Another thing to keep in mind is that the bond with the lower coupon should be slightly more volatile than a higher coupon bond of the same maturity.

[MachineGhost]

The metric you're looking for is duration.  A higher coupon will have a shorter duration, thus relatively less volatility.

[sophie]

I just bought bonds on the secondary market a while ago, and I went for the one with the highest yield, taking buy price into account.  Ironically, it was the one with the 2.875% coupon.  It works because (as PS pointed out) you buy more of them with the same $$ than you would of the higher coupon issue.  I bet the yield for the low-coupon is higher because of that natural tendency to go for the higher coupon - resist it and look at the yields!!!

[ns3]

I just bought bonds on the secondary market a while ago, and I went for the one with the highest yield, taking buy price into account.  Ironically, it was the one with the 2.875% coupon.  It works because (as PS pointed out) you buy more of them with the same $$ than you would of the higher coupon issue.  I bet the yield for the low-coupon is higher because of that natural tendency to go for the higher coupon - resist it and look at the yields!!!

This morning I learned two things about bonds from this forum that I didn't know - 1.) That duration and maturity are not the same thing and 2.) The highest coupon is not necessarily the best deal.

But mostly I learned that the advice in the Fidelity bond buying tutorial to just scroll to the end and pick the one on the bottom is probably a good idea.