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Bondsquawk, CFA

 
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  • No QE For You [View article]
    jminvest and freddy hutter, thanks for reading and the comments. i appreciate it!

    Best,
    Aug 2 10:48 AM | 2 Likes Like |Link to Comment
  • Bondsquawk's Model Portfolio [View article]
    Hi chgooldtown,

    Good point. Yields are low. That is a fact of the current environment. That said, yields can always go lower. Since this bond has duration, there is always potential for further price gain. Remember that the portfolio yield is a "yield to maturity" calculation. So in order for that return to be realized, the bonds need to be held to maturity to earn that as discussed here:

    http://bit.ly/SDnsPw

    However, what if you believe interest rates continue to fall? What if equities drop and bonds rally because we fall off the Fiscal Cliff, Europe falls into the ocean, and we go into another recession? Since this portfolio has duration, then the prices on these bonds will appreciate in a bond rally scenario. So much that the total return will often exceed the yield to maturity. So that 2% is only an indication of future returns only if certain conditions are met. If rates fall, the return on the portfolio will be significantly much greater than that.

    Also, even if rates do not drop, the portfolio yield is still better than the general overall market by 30bps. The portfolio yield can definitely be increased if you remove a good chunk of the Treasury allocation and focused more on just the Corporates. If the feedback is there, we would be more than happy to show that!

    Thanks again for the comments!
    Dec 7 10:51 AM | 1 Like Like |Link to Comment
  • A High Yield Bond For A Housing Recovery [View article]
    Hi jbzw,

    Great question. Technically speaking, this bond has a "Make Whole" call feature and is continuously callable. Issuers in general rarely utilize this type of feature simply because the costs are ridiculously high and rarely makes sense. Though, if they do and the company calls the debt, the investor is made "whole" and compensated.

    In this case, the Make Whole Call feature is at +50bps so the bondholder would get a dollar price north of $135 if it happened today. Given today's price of $117.22, that would be a nice gain if it were to happen. Unfortunately, that is not going to happen in the foreseeable future where the company decides to retire the debt before maturity.

    Thanks for the comments and let us know on our website, Bondsquawk.com if you have any more questions. We would be happy to help!

    Best,

    Rom
    Dec 7 10:20 AM | 1 Like Like |Link to Comment
  • Key To Maximizing Bond Returns With Yield To Maturity [View article]
    Hi Whiff,

    Thanks for the comments and positive feedback. YTC and YTW are just as important, especially if a bond isn't just your plain vanilla bullet maturity.

    Here's an article we posted awhile back on finding bonds that are cheap simply because they are trading at a premium over par:

    http://bit.ly/TJvLvc

    Thanks again for the comments!
    Dec 7 09:49 AM | 1 Like Like |Link to Comment
  • Stocks Further To Fall If Bond Yields Have Their Say [View article]
    Hi ZS,

    Yields will not rise due to a U.S. "credit shock" if history is an indication. Last year's debt ceiling debacle where the U.S. avoided a technical default is a great example.

    On June 22, the 10-Year was trading at 3.01%. The day after, "an impasse in talks between Biden and congressional leaders develops over proposed tax increases that Democrats insist must be included in a debt bill to go along with the trillions in spending cuts, Republicans say." according to CNN (http://bit.ly/qYD5Xv)

    When a deal was reached on the debt ceiling to avoid a technical default, the 10-Year was trading lower at 2.77%. When S&P downgraded the US from AAA to AA on August 5, the 10-Year yield fell further to 2.40%. So from the end of June to the beginning of August, yields DROPPED more than 60 basis points on a flight to quality.

    Remember that the US is not like a business or household (or Greece for that matter) since the US cannot be insolvent where they cannot ultimately payback principal. So for the latter, their yields would rise. However, that is not the case for the US. The fact is that they are a currency issuer where they control the "printing press." So they will never run out of money to payback debt holders. Also, there will never be a shortage of demand since the Fed requires banks to participate in all Treasury auctions. From the NY Fed website (http://bit.ly/T3m8GB):

    "Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders."

    So in the event that we fall of the Fiscal Cliff due to another impasse, yields will fall and stocks will fall with it.

    For more perspective on the implications of a Treasury default, check out one of our posts

    http://bit.ly/U1FD3d

    Thanks for the comments!
    Nov 15 09:46 AM | 1 Like Like |Link to Comment
  • Microsoft Stock Plus Dividends: Better Than Bonds [View article]
    No matter how you cut it, stocks will always be more volatile than bonds. Comparing bond yields with equity dividends is comparing apples and oranges. They are proxies to each other but should never be thought of as the same due to this risk differential.

    http://bit.ly/UFqTn8
    Nov 13 07:34 PM | 1 Like Like |Link to Comment
  • Earnings Disappointments Leave Corporate Bonds Vulnerable [View article]
    GaltMachine,

    You are absolutely right that the main risk for IG lies in the duration and changes in yields, from either the underlying interest rate found in Treasuries or from the spread which represents the credit.

    Relatively speaking, credit risk is the predominant risk in High Yield. My rule of thumb throughout my career has always been that if a bond is quoted in a dollar price as opposed to a spread, then it has no duration, effectively (interest rates do not drive price changes). In these cases it is solely a credit play. Usually this is reserved for distressed or speculative bonds.

    I like your suggestion on ways to model high yield bonds in a recession. I will work on that as a future post. So be sure to visit my website. Thanks for the awesome feedback and as always the continued support!

    Best,

    Rom
    Sep 7 03:20 PM | 1 Like Like |Link to Comment
  • The Rally In Treasuries Hasn't Ended Yet [View article]
    http://bit.ly/NGvzZe
    Jul 23 09:44 AM | 1 Like Like |Link to Comment
  • The Rally In Treasuries Hasn't Ended Yet [View article]
    http://bit.ly/MDoXxu
    Jul 23 12:22 AM | 1 Like Like |Link to Comment
  • CommonWealth REIT: New Bond Not Attractive [View article]
    Excellent Article, Michael!
    Jul 20 10:17 AM | 1 Like Like |Link to Comment
  • Terex Corp Bond Offers High Income Opportunity [View article]
    22,

    Glad to help. Let me know if you have any other questions. The best way is to visit bondsquawk.com and post a comment on one of our articles. We monitor everything on SA but not as often as our website.

    Best,

    -Rom
    Dec 17 11:39 AM | Likes Like |Link to Comment
  • Terex Corp Bond Offers High Income Opportunity [View article]
    22,

    Here's an example of the cash flows. I modeled it on excel to solve for the price of the bond if you assume the bond is called at par in 2018 and a constant yield of 5.03% throughout its life. As you can see, the price moves toward par as it ages but again, the coupon offsets the price decline.

    To make it simple, I used April 2012 as the starting date in order to make the first period a full year. So the dollar price is a little off from today's prices listed in the analysis. So this is used to illustrate that the higher-than-market coupon offsets the price decline.

    Price at 5.03% Price Chg Coupon
    4/1/2012 107.53
    4/1/2013 106.43 -1.0% 6.5%
    4/1/2014 105.27 -1.1% 6.5%
    4/1/2015 104.05 -1.2% 6.5%
    4/1/2016 102.76 -1.2% 6.5%
    4/1/2017 101.42 -1.3% 6.5%
    4/1/2018 100.00 -1.4% 6.5%
    Dec 17 10:09 AM | Likes Like |Link to Comment
  • Terex Corp Bond Offers High Income Opportunity [View article]
    22,

    Good question. If the yields were the same and I was indifferent between the two, then I would take the par bond all day long. However, they are rarely the same since your initial concerns are shared by many. It is one of those "inefficiencies" that occur in the bond markets. I believe since it is difficult to short corporate bonds, these inefficiencies occur regularly, ie short the par bond and go long the premium bond. If you could, then I think that inefficiency would be stripped away. Luckily for some investors, these inefficiencies create opportunity for value, especially if you plan to hold until your receive your principal back.

    I really hope this helps. Again, I really appreciate the comments.
    Dec 17 09:51 AM | Likes Like |Link to Comment
  • Terex Corp Bond Offers High Income Opportunity [View article]
    22,

    Bonds that are either a discount or a premium, will acrete toward par as the bond ages toward either the call date or the maturity date. In the case of the premium, you are receiving a high coupon to compensate you for that negative acretion. In the end, the Yield to Worst which is a simple Net Present Value calculation of what you will earn.

    What you are afraid of it seems is the potential dollar loss just by looking at the price. As with any investment, the price doesn't incorporate all of returns. If a stock did not change for several years, one can easily argue that the stock did not perform. However, that does not tell everything since we need to look at the dividend yield. Looking at a bond is no different except that we know the cash flows throughout the life of the bond.

    Keep in mind that these are market prices. I do not make these up. While the bond markets have some inefficiencies (as do commodities and stocks), bond prices are driven by supply and demand from a wide variety of players. If buying a premium bond is in truly a loss and is shared by everyone, no one would touch them. If that was the case, then callable bonds would never trade above par. If you take the prices listed here as market prices, then there is something that you need to do more homework on.

    I would suggest reading this resource on premium bonds:

    http://bit.ly/V26cWh

    If you are still skeptical, then I would suggest you follow whiff's example of calculating the future cash flows and coming up with a yield calculation.
    Dec 16 08:15 PM | Likes Like |Link to Comment
  • Bondsquawk's High Yield Bond Portfolio [View article]
    brunoar,

    Well said. Along similar lines, that is why I use Yield to Worst to determine its potential of return. This factors the price of the bond today, all possible call dates and its maturity. Its simple and easy to use. Also, it screams opportunity, especially when you compare it to similar bonds. In particular, you can see two bonds from the same issuer with similar maturities. The difference between the two lies in the price. Usually, the one trading at a premium dollar price is trading cheaper with a higher YTW. This comes from people's bias toward par bonds which result in a lower yield. This doesn't make sense from an economic perspective on the same basis you pointed out. In the end, I will never complain because this is easy opportunity to find good relative value.
    Dec 11 03:51 PM | Likes Like |Link to Comment
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