Achieving Higher Yields Than EM Bond ETFs With Short Maturity Yankee Bonds

Includes: AGG, CEMB, EMB
by: Randy Durig

At the completion of the third Quarter of 2013, we thought it would interest fixed income investors to compare the US dollar Yankee bonds that were acquired in our FX1 portfolio over the last 4 months with the iShares JPMorgan USD Emerging Markets Bond ETF (NYSEARCA:EMB) and the iShares Emerging Markets Corporate Bond (BATS:CEMB). Listed below are the 11 bonds we researched and recommended in the reviews sent to our clients and then published on Seeking Alpha, 8 of which are debt issuances in US dollars of foreign corporations and 3 in alternate global currencies. Each paragraph givens the maturity and the yields obtained at the time of acquisition for the FX1, FX2, or FX3 portfolios, as well as a brief recap of the reason for selection and the coupon rate and credit ratings for each bond. Many of the companies hold prominent, dominant, or even monopolistic positioning within their respective countries, and it is not uncommon to find credit ratings constrained by that nation's sovereign credit ratings. 72% was placed in US dollars, with the following breakdown:

8 US dollar (Yankee) bonds were added to FX1 and FX2.
1 Russian Ruble bond was added to FX2 and FX3.
1 Brazilian Real bond was added to FX2 and FX3.
1 Canadian Dollar bond was added to FX2 and FX3.
(Links to the FX1, FX2 & FX3 dollar weighted Portfolios.)

Overall, the 8 Yankee bonds indicate an average yield over 9.235% and an average 3.77 years to maturity, while all 11 bonds indicate an average net yield over 9.175% and average 3.79 years to maturity.

8.25% Yields, Gajah Tunggal, Yankee Bond, Feb. 2018
Issuer: Gajah Tunggal
Coupon: 7.75%
Maturity: 02/06/2018
Ratings: B2/B+
CUSIP: Y71214AA1
Price: 98.185 (9/26/13)
Yield to Maturity: 8.25%
Portfolios: FX1 and FX2
Rubber Tires, Asia
The increase in net income was a 65% increase from the prior 2011.
For more Gajah Tunggal bond information: 8.25% Yields, Gajah Tunggal

10% Yields, Trade & Development Bank of Mongolia, Yankee Bond, Sep. 2015
Issuer: Trade & Development Bank of Mongolia
Coupon: 8.50%
Maturity: 9/20/2015
Ratings: B1
Price: 97.35 (9/20/13)
Yield to Maturity: 10.0%
Portfolios: FX1 and FX2
Mine financing, Asia
The bank recently had record earnings and solid growth in deposits and assets, moving it towards one of the largest Mongolian banks by assets.
More Mongolia Bank Bond Information: 10% Yields, Trade & Development Bank

9.87% Yields, Alto Palermo, Yankee Bond, May 2017 Issuer: Alto Palermo
Coupon: 7.875%
Maturity: 5/11/2017
Ratings: NR/B
Price: 94 (9/18/13)
Yield to Maturity: 9.87 %
Portfolios: FX1 and FX2
Trophy Real Estate Properties, South America
Profitable high-end malls provided good profits and low debt, with high value real estate assets.
More Alto Palermo's Bond Information: 9.85% Yields, Alto Palermo

9.66% Yields, Ferrexpo, Yankee Bond, Apr 2016 Issuer: Ferrexpo
Coupon: 7.875%
Maturity: 4/07/2016
CUSIP: G34361AA6
Ratings: NR/B
Price: 95.95 (8/23/13)
Yield to Maturity: 9.66%
Portfolios: FX1 and FX2
Steel Industry, Europe
Net income exceeding average. Ferrexpo reduced freight expenses by a whopping 33 percent, which help prompt upgrades.
More Ferrexpo bond information: 9.66 % Yields, Ferrexpo

8.4% Yields, NordGold, Yankee Bond, May 2018 Issuer: NordGold
Coupon: 6.375%
Maturity: 5/07/2018
CUSIP: N64523AA6
Ratings: Ba3/NR
Price: 92.25 (8/16/13)
Yield to Maturity: 8.4%
Portfolios: FX1 and FX2
Gold, Asia/Africa
Revenues in H1 2013 increased by 17% from H1 2012 to US$617.1 million. The increase was mainly due to higher production volumes and gold sales, but was somewhat offset by lower realized gold prices (down 10%).
More NordGold bond information: 8.4% Yield NordGold

11.22% Yields, Aeropuertos Argentina 2000, Yankee Bond, Dec 2020
Issuer: Aeropuertos Argentina 2000
Coupon: 10.75%
Maturity: 12/1/2020
Ratings: B3/B-
Price: 98.5 (8/6/13)
Yield to Maturity: 11.22 %
Portfolios: FX1 and FX2
Airport Management Monopoly, South American
2012 Revenues in Argentine Pesos were up 66% and Net Income was up 46%. This is a sinking bond where ½ of the principal will have been returned by Oct 2017, therefore it has reduced risks and increased cash flow.
More Aeropuertos Argentina 2000 bond information:11.22 % Aeropuertos Argentina

8.89 % Yields, Berau Coal, Yankee Bond, Mar 2017 Issuer: Berau Coal Energy
Coupon: 7.50%
Maturity: 03/13/2017
Ratings: B1/BB-
Price: 95.0 (7/26/13)
Yield to Maturity: 8.89 %
Portfolios: FX1 and FX2
Coal, South Pacific
1H 2013 Production was up 19% from 1H 2012, while Coal prices for 1H 2013 fell 20% compared to 2012. Cost of sales was down 10%, and major cost reduction initiatives were underway. EBITDA declined to $74m from $139m in 2012, resulting in an Operating Loss of $11m. More efficiencies are anticipated under its new leadership.
More Berau Coal bond information: 8.9 % Yields, Berau Coal

8.5% Yield, Federal Grid Co., Russian rubles, Mar 2019
Issuer: Federal Grid Company
Coupon: 8.446%
Maturity: 3/13/2019
Ratings: Baa3/BBB
Price: 99.75 (7/16/13)
Yield to Maturity: 8.5%
Portfolios: FX2 and FX3
Utilities Monopoly, Russia
1H 2013, Revenues in rubles were up 14%, EBITDA was down 3.8%, and operating profits were 10,619 million rubles ($348.5 million). Adjusted profit for the period was 7,878 million rubles ($243.1 million). The Government has restructured its ownership.
More Federal Grid bond information: 8.5% Yield Federal Grid Co

10.1% Yields, TransGlobe Energy, Canadian dollars, Mar 2017
Issuer: TransGlobe Energy
Coupon: 6.00%
Maturity: 3/31/2017
CUSIP: 893662AB2
Ratings: NA
Price: 87.445 (6/26/13)
Yield to Maturity: 10.1%
Portfolios: FX2 and FX3.
Oil, North Africa/Middle East.
1H 2013 Revenues in Canadian dollars were up 2%, while cash flow was down 3% and profits were down 48%. Forward guidance for cash flow from operations was $145 million, while long-term forecast of oil production was reduced.
More TransGlobe Energy bond information: 10.1% Yields TransGlobe Energy

9.88% Yields, COELBA, Brazilian reals, Apr 2016
Issuer: Companhia de Eletricidade do Estado do Bahia (COELBA)
Coupon: 11.75%
Maturity: 4/27/2016
CUSIP: P30587AA0
Rating: Baa2/BBB-
Price: 104.5 (6/19/13)
Yield to Maturity: 9.88%
Power Utility Monopoly, South America
Portfolios: FX2 and FX3
More COELBA bond information:9.94 % Yields COELBA

11.6% Yields From Transportadora de Gas Del Sur's Four Year Bonds
Issuer: Transportadora de Gas del Sur S.A.
Coupon: 7.875%
Maturity: 5/14/2017
Ratings: B3/B-
Price: 88.4 (6/3/13)
Yield to Maturity: 11.625 %
Portfolios: FX1 and FX2
Natural Gas Pipeline Monopoly, South America
1H 2013 Revenues in Argentine pesos up 10%, Cost of Goods Sold was flat, and gross profit was up 25%. Strong operational improvements.
More TGS bond information:11.6% Yields Transportadora de Gas Del Sur's

The chart below compares the last 8 Yankee Bonds we placed in FX1 with the iShares Emerging Markets Corporate Bond ETF . This is a relatively small sample of issues that we have reviewed as selected for addition to our fixed income clients, and it is not intended to be a complete comparison that can or should be made. We focus more on short "maturity certain" bonds cycles when interest rates are climbing. By making comparisons in several categories, such as indicated yields and projected costs, it becomes much easier to see why this approach to fixed income investing is so attractive. Considering that we have successfully steered clear of any bond defaults with this high yield, high cash flow, short maturity model, it's also easy to understand why most of our bonds selections are simply held to maturity.





iShares JPMorgan USD Corporate Bond



11.47 years

iShares Emerging Markets Corporate Bond



5.38 years

iShares Core Total U.S. Bond Market ETF (NYSEARCA:AGG)

2.43 %


6.89 years

Fixed Income 1 portfolio



3.77 years

Fixed Income 1 compared to the best.

The last 8 USD bonds of FX1 provided a 74% boost in yields over the EMB emerging corporate bond ETF.

The Fixed Income 1 last 8 bonds issues proposed cost is .42 basis points more than the very low cost AGG.

The last 8 FX1 bonds average maturity is 30% shorter than the short CEMB ETF

*This is a proposed cost only.

We hope you enjoy our high-income approach!

Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.