Shopping the Globe for Bond Yield

by: Randy Durig

The past several months has been a challenging market to manage a solid bond portfolio. The 10 year US Treasury yield has gone from as low as 2.5% in October 2010 to 3.46% in April 2011. The 30 year US Treasury has moved from historic yield levels of 3.55% in September 2010 to 4.50% in April 2011. Such moves typically cause erosion in bond holder principal. The increasing likelihood of Treasury yield
curve flattening and higher interest rates and yields across the maturity spectrum in the coming two to three years means looking at fixed income portfolios and evaluating how they are positioned and managed for that longer-term scenario.

Our bond selections have not experienced the yield rise or price drops that the 10 and 30 year US Treasuries have experienced. The bond bull market of the past 30 years may have finally come to an end. During this time of rising interest rates, our selection strategy of finding bonds with strong balance sheets and income statements while attempting to maximize income for our clients has worked extremely well. We have provided high income while seeing limited, if any, principal decline. Investors should remain cautious about what issues they are using to ladder their portfolios. Here's an update on some of our recommended bonds:

United States Corporate Bond

We originally wrote our review of this Netflix issue back in September 2010. The company continues to perform well but the rating agencies still have a junk rating (Ba2/BB+) on their issues. In the trailing twelve months , Netflix (NASDAQ:NFLX) has generated revenues of over $2.162 billion with net income of $160.8 million. Long-term debt remains at $200 million while the market cap has reached over $12.9 billion. The company has enough cash to pay off the issue. Netflix also makes enough over the course of a year on a pretax basis to pay off the debt and have a staggeringly low (almost zero) long term debt to equity ratio. We still like this bond even though it is trading at higher prices.

United States Corporate Bond

We started placing Blyth Inc bonds for clients in mid December ahead of their large Christmas quarter. Sales for the third quarter ended October 31, 2010 declined approximately 3% to $215.5 million from $221.6 million for the prior year period. Blyth's (NYSE:BTH) operating profit for the third quarter increased to $5.7 million this year versus $3.0 million last year. Third quarter operating profit increased versus last year due to the impact of higher sales and lower overhead costs within the Midwest-CBK business, as well as improved operating margins at the Miles Kimball Company and ViSalus Sciences.

United States Corporate Bond

We started placing this bond for clients in August 2010. Frontier Oil reported net income of $3.6 million for the quarter ended December 31, 2010, compared to a net loss of $75.1 million for the quarter ended December 31, 2009. Frontier Oil's (NYSE:FTO) fourth quarter and full year results benefitted from improvements in crude oil differentials and product margins, higher refinery throughput, and reductions in corporate overhead, as well as operating expenses at both refineries. Cash and investments are still larger than long-term debt and the market cap of the company has almost doubled.


New Zealand Currency Corporate Bond

We placed General Electric bonds denominated in Austrialian Dollars for clients in December. GE announced strong fourth-quarter 2010 earnings from continuing operations of $3.9 billion up 33% from the fourth quarter of 2009. This is GE’s third consecutive quarter of double digit earnings growth. The company has combined cash and equivalents of $79 billion. When looking overseas, we like finding companies that people are familiar with such as General Electric.

Australian Government Bond

The Australian economy grew solidly in the fourth quarter of 2010, up 0.7%, bucking the headwinds of rising interest rates, a still fragile global backdrop and devastating floods that inundated the coal-rich state of Queensland in December and January.

The hit to exports as a result of the disasters could reduce tax revenues and cut around a percentage point from first-quarter growth. A hit to growth on that scale could result in a first-quarter contraction, a rare event in an economy that hasn't experienced a recession in 20 years. The Treasury department forecast that Australia would grow at 3.5% over the year and return an underlying deficit of 41.5 billion Australian dollars.

Australia's central bank left interest rates firmly on hold for a fifth straight month in April. Inflation isn't a problem for now as the Australian dollar tops levels not seen since the early 1980s and market forces keep prices low. Austrailian bonds continue to perform well with no erosion of principal.

Brazil Government Bonds

Brazil's economy ranks highest among all the South American countries and it has also acquired a strong position in the global economy. Fitch recently upgraded Brazil's credit rating by one notch to BBB from BBB-minus, saying the country's potential economic growth has increased while President Dilma Rousseff's government has shown greater fiscal restraint. The present GDP is $1.6 trillion and the real growth rate of GDP is 3.7%. rate of unemployment is 9.6% and inflation is 3%. Brazil's economy has been undergoing continuous growth and development since 2004 which has led to a rise in employment and real wages.

The central bank has hinted at one more interest rate hike this year and then stable rates. Money continues to pour into Brazil causing the currency to appreciate. Brazilian real bonds have performed well for the quarter.

New Zealand Government Bond

New Zealand escaped recession in the final quarter of 2010 despite a destructive earthquake, but may be unable to avoid its economy shrinking this year following a second, more damaging temblor last month. The nation’s gross domestic product grew 0.2 percent in the three months ended Dec. 31. The economy contracted by 0.2 percent in the previous quarter. The economy grew 1.5 percent for the whole year, in a weak recovery from a recession that began in late 2008 and last five quarters.

There were reasons to be optimistic about growth picking up later this year, including record high commodity prices for dairy and log exports, low interest rates and inflation, and a likely boost to construction coming from rebuilding after the second Christchurch earthquake. The New Zealand Dollar exchange rate appreciated 8.74 percent during the last 12 months. New Zealand’s highly rated (Aa3/AAA) High yielding bonds continue to look attractive.

New Zealand Currency Corporate Bond

Toyota Motors (NYSE:TM) announced financial results for the nine months ended December 31, 2010. Net revenues totaled 14.351 trillion yen, an increase of 5.0 percent compared to the same period last fiscal year. Net income increased from 97.2 billion yen to 382.7 billion yen. Strong vehicle sales in emerging markets and continued cost reductions boosted results. Concerning operating income by region, a year-on- year improvement in all regions for the nine months was achieved. Reflecting these results, Toyota Motor Company revised its consolidated vehicle sales for the full fiscal year ending March 31, 2011 from 7.41 million to 7.48 million units, an increase of 70 thousand units from TMC’s forecast announced in November 2010. Toyota Bonds continue to act well in this environment.

Multiple Currencies Corporate Bonds

The World Bank is an international financial institution that provides loans to developing countries for capital programs. The World Bank has a goal of reducing poverty. By law, all of its decisions must be guided by a commitment to promote foreign investment, international trade, and facilitate capital investment. World Bank bonds offer investors the highest credit quality (AAA/Aaa) rating, liquid issues and portfolio diversity opportunities. The bonds are backed by 187 member governments, including the US, Japan, Germany, France, and UK. Several are reviewed here.

One of the easiest ways to further diversification is to add some foreign holdings. While often achieving a much higher income, it also protects clients from the possible continuous risk of the long term decline of the US dollar. Even thought we may be starting to see a bear market for bonds, we believe that there are still good opportunities out there for investors seeking income.

We believe it's possibly more important than ever to find offerings with shorter maturities, strong cash flow, and solid fundamentals that might also be improperly rated, allowing clients to obtain a current yield often much higher than most fixed income alternatives.

We continue to seek out foreign debt that could help investors diversify their fixed income holdings.

Disclosure: I am long NFLX, BTH, FTO, GE, TM.