Turning Volatility Into Yield: 3 Fixed-Income Plays For The Long-Term

Includes: JPM, VZ
by: Rajiv Tarigopula

As the equity and debt markets around the globe slowly trudge through the classic debt deflation cycle, volatility in the markets for fixed-income corporate and government securities is higher than we've been used to. Investors looking for opportunities to achieve higher yields may welcome such volatility, especially when particular plays in long-term investment-grade corporate securities and municipal bonds are examined. Here are three such plays that investors may be able to take advantage of today.

1) New York Tel Co, CUSIP : 650094CB9. These long-term 7% coupon bonds with maturity in December 2033 represent a powerful opportunity in the telecommunications sector. With semi-annual coupon payments in June and December, the bonds are in fact callable, and investors should take this into account when purchasing. However, the bonds were issued in December 1993 and continue to remain on the market; next potential call is December 2013 at 100. The price as of July 6 is at 108.536 for a quantity of 67 bonds, bringing total cost with accrued interest to $10,931.38. In sum, the current yield is at 6.449% and yield to maturity is at 6.269%. After call and all other possible provisions are concerned, the lowest possible yield is about 0.806%, perhaps driving many investors away. However, for those investors confident in the stability of telecom and of the issuing firm in particular, this may in fact be a worthwhile play.

Since this company is a subsidiary of Verizon Communications, Inc. (NYSE:VZ), potential investors should be aware of the parent company's disclosure in a recent 10-K statement filed with the SEC that was brought to my attention in a previous piece on a fellow subsidiary's fixed-income securities:

During 2011, we guaranteed the debentures and first mortgage bonds of our operating telephone company subsidiaries. As of December 31, 2011, $6.4 billion principal amount of these obligations remain outstanding. Each guarantee will remain in place for the life of the obligation unless terminated pursuant to its terms, including the operating telephone company no longer being a wholly-owned subsidiary of Verizon.

As such, as I stated before:

If we take a look at the credit ratings of Verizon Communications, we see a great deal of stability and security for fixed-income investors. Verizon's management, in the words of analysts at Moody's, is actively seeking a strong balance sheet and ample liquidity. EBITDA margin has increased compellingly over the last several years, moving from 32.4% in 2006 to 32.7% in 2007 and 33% in 2008. Debt/EBITDA and free cash flow ratios also signal good health of the parent company with respect to credit status.

2) J P Morgan Chase & Co JPMorgan (NYSE:JPM), CUSIP: 46627BFB2. These financial industry bonds dated from November 2007 with maturity in November 2037 currently offer a 6.121% yield, with 6.086% yield to maturity and a lowest possible yield of 0.111% if called in November of this year. Since call potential represents a relatively short capital lockup of several months of a limited amount of capital (offering of 14 bonds at a price of 102.114 each, with accrued interest, comes to a total cost of $14,359.16 for the package), these bonds with 6.25% monthly coupon payments may be well worth the purchase.

Moody's long-term rating on the credit of JPMorgan Chase & Co. stands at 'investment grade.' The company has a well-known profile, and is a strong player in the financial sector, most recently, in the media for its underwriting of the Facebook (NASDAQ:FB) initial public offering and its rogue trading losses. Examining some of the key indicators of the firm, though, investors have much to be confident about: total assets have steadily grown from $1.35 billion in 2006 to over $2.03 billion in 2009; net interest margin has grown from 1.89 in 2006 to 2.83 in 2009; the firm has, in the words of Moody's analysts, "diversified and sustainable earnings streams," and its credit assessment is overall stable. Impending earnings release has put JPM in the spotlight this week, and its relative strength in comparison with powerful competitors Wells Fargo (NYSE:WFC), Citigroup (NYSE:C), and Goldman Sachs (NYSE:GS) should perhaps be examined before investors make a call on this fixed-income bet.

3) Riverside Cnty Calif Redev Agy Tax Alloc Bds, CUSIP: 769123LX6. These zero-coupon long-term bonds that mature in October 2038 carry an additional benefit for fixed-income investors: as municipal bonds, interest payments on these securities are tax exempt. Issued by Riverside County, California, 220 of these bonds are currently for sale at a price of 18.215. Many investors may be wary of California's current financial situation, but Riverside County looks as if it may be in a better position of stability than its state and neighboring cities and communities, from a fiscal perspective. As such, the yield to maturity that these bonds offer - a stunning 6.601% - may be an opportunity worth taking for investors who are risk-averse and risk-seeking alike. Purchasing all 220 bonds would cost $40,073 as of price on Friday, July 6.

As of October 4, 2011, Standard & Poor's analysts affirmed their A- rating on these tax-allocation bonds, reflecting their view of:

a very large, primarily industrial and residential project area with moderate taxpayer concentration ...stabilization of assessed value [AV] in 2012 after previous years of declines ... adequate 1.3x coverage of maximum annual debt service [MADS] and 1.25x additional bonds test [ABT] ... and a moderate base-to-total assessed value revenue volatility ratio.

Best of luck, and may the markets be with you.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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