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Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 5/10/16

|Includes: Enbridge Inc. (ENB), ETR, HES, HTGC, NLY

While stocks enjoyed a robust up move today, it was all quiet and peaceful in bond land. I don't think that it will stay that way for much longer, but the Bond Ghouls see tranquility until the end of days.

S & P 500 2,084.39 +25.70 (+1.25%)

TLT: $130.87 +0.01 (+0.01%): iShares 20+ Year Treasury Bond ETF

IEF: $110.61 -0.01 (-0.01%): iShares 7-10 Year Treasury Bond ETF

Investment grade corporate bonds did better than treasuries:

LQD: $119.94 +0.22 (+0.18%): iShares Investment Grade Corporate Bond ETF

LQD can be bought at Fidelity commission free. A similar ETF can be bought in Vanguard brokerage accounts commission free:

VCIT: $87.85 +0.06 (+0.07%): Vanguard Intermediate-Term Corporate Bond ETF; Vanguard Page for VCIT (expense ratio .1%)

I am not exactly sure what made the Stock Jocks so excitable today.

I do own a lot of stocks, so I am fine with the market going up even when I view it as somewhat crazy. I do mind selling more stocks at higher prices.

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This topic was last updated here: Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 4/26/16 - South Gent | Seeking Alpha

Given their current values, and the issuers optional call right, the net capital appreciation for this basket is expected to be minimal over the next ten years, but may improve depending on the severity of future declines and whether I play them successfully.

Fixed coupon exchange traded bonds and preferred stocks have what I call asymmetric interest risk between the owner and the issuer that clearly favors the issuer.

I discuss the asymmetric interest rate risk of exchange traded fixed coupon securities here: Update For Bond And Preferred Stock Basket Strategy As Of 9/10/15 - South Gent | Seeking Alpha

I discussed the interest rate risk and other material topics here: Update On Bond And Equity Preferred Stock Basket Strategy As Of 8/14/15 - South Gent | Seeking Alpha (scroll to following titles in the Appendix section: Interest Rate and Lost Opportunity Risks for Fixed Rate Coupon Equity Preferred Stocks; Credit Risks; Volatility Risk for Equity Preferred Stocks)

The following table includes only exchange traded securities. I do not have a table showing my existing $1,000 par value bonds bought in the bond market. I will discuss some of those trades here.

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Positioning Synopsis:

The underlying theme of the trades discussed below is reducing interest rate risk while maintaining a relatively constant monetary exposure to bonds and preferred stocks.

This is achieved in part by shortening the duration exposure for fixed coupon bonds. In this post I discussed adding two bonds with a 2024 maturity date and selling two other bonds with longer maturities, though one of those longer maturity bonds is likely to be called at the $25 par value.

Another way to reduce interest rate risk is by selling fixed coupon preferred stocks profitably when there price exceeds par value and to buy floating rate preferred stocks that are selling at deep discounts to par value. Most of the recently purchased floaters were issued by Canadian companies and bought in Toronto near 50% discounts to their respective C$25 par values.

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Basket as of 5/10/16:

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1. Sold 50 NLYPRD at $25.03:

Quote: Annaly Capital Management Inc. Preferred Series D (NLY.PD:NYSE)

NLYPRD is an equity preferred stock issued by the Mortgage REIT Annaly Capital Management (NYSE:NLY). that pays cumulative and non-qualified dividends at the fixed coupon rate of 7.5% on a $25 par value. NLY has the option to redeem this security on or after 9/13/17 Prospectus

Trade Snapshot: ($1 Commission):

Profit Snapshot: +$30.02

Item # 2. Bought Back 50 NLYPRD at $24.39: Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 10/30/15 - South Gent | Seeking Alpha

I received two quarter dividends at the $.46875 penny rate per share, bringing the total return up to $76.09 or a 6.23% annualized rate in about 6 months.

I still own 50 shares.

Prior Trades: I have flipped this preferred stock on two prior occassions:

Item # 1 Sold 50 NLYPRD at $24.82-Roth IRA (11/14/14 Post)(profit snapshot=$83.47+ 3 Dividends Totalling $70.32; total return 12.46% in about 10+ months)-Item # 4 Bought Roth IRA 50 NLYPRD at $22.87 (2/10/14 Post)

Item # 1 Sold 50 NLYPRD at $26.01 (5/20/13 Post)(profit snapshot=$41.47)-Item # 6 Bought 50 NLYPRD at $24.99 (1/3/13 Post)

One of the risks is highlighted by those trades. I sold 50 shares at $26.01 and bought them back at $22.87 a few months later. Apparently, I had to be reminded of that downside volatility risk again.

I was not pleased that this equity preferred stock plummeted in price soon after my purchase at $24.39.

After experiencing that waterfall decline again, I decided that I needed to have a higher yield/lower cost basis given the downside risk. The yield and risk/reward balance is after all better at $21.75 than at $25, Maybe I will remember this piece of advice given to myself more than once for this security before buying it near par value again.

A one year price chart highlights the problem:

2. Bought 2 Enbridge 3.5% Senior Unsecured Bonds Maturing on 6/10/2024 at 93.658

The issuer is the Canadian energy infrastructure company Enbridge (NYSE:ENB). I recently discussed this company here: Item # 1. Bought 300 ENBPRP:CA at C$12.39: Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 2/29/16 - South Gent | Seeking Alpha

Company Profile | Reuters.com

This 2024 bond is priced in USDs.

The confirmation states that the yield to maturity is 4.409%. A YTM calculation assumes that ENB will survive to pay the $1,000 principal amount at maturity.

The current yield would be lower than the YTM at 3.737%. ($3.5 ÷ $93.658)

I had to pay $27.61 in accrued interest to the seller. When Enbridge makes the next semi-annual interest payment, I will receive the entire six month's interest and my broker will include that amount in my 1099. My accountant will then deduct the accrued interest paid to the bond seller from my Schedule B interest income. Accrued Interest and Bond Premiums; Accrued Interest on Bonds:

IRS Publication 550 (2015), Investment Income and Expenses

This bond is currently rated Baa2 by Moody's and BBB+ by S & P according to my confirmation:

I confirmed that information from ENB's website: Credit Ratings - Enbridge Inc.

The FINRA site has a link to the prospectus. Finra Information

Here is the link to the SEC filing: Prospectus

The prospectus contains a make whole provision that makes it highly unlikely that ENB will exercise its optional redemption right:

Interest rate risk is pronounced with any low yielding bond with slightly more than 9 years to maturity. In this case, I would call the interest rate risk for a bond owner, financially capable of holding until maturity without any doubt, as the risk of lost opportunity, a category of interest rate risk.

If interest rates rise materially, the owner of this bond loses the opportunity to buy a higher yield bond that generates more income with the funds tied up in a bond losing value. The escape from that predicament is unfavorable as well-selling at a loss and then investing the proceeds into a higher yielding bond, either from the same issuer or one simiarly rated.

I am not exactly sure why I bought this small bond lot. I would simply proffer the following as possible reasons.

(1) In the current yield environment, a 4.4% YTM yield for a BBB+ rated bond maturing in 2024 is okay, and that yield is likely to be better than a money market yield for most, if not all, of the nine years until maturity.

(2) I recognized that the buildup in my cash allocation was too heavy at near zero returns, and I could hold these bonds too maturity without question.

(3) The long standing Jihad Against the Savings Class is without question wearing me down and lowering my standards for risk adjusted income generation.

I am far from certain that a 4.4% annual average yield to maturity is worth the credit risk given ENB's heavy debt load.

I bought today another $1K par value investment grade bond maturing in 2023 that I will discuss in my next update.

3. Bought 100 HTGX at $24.98-Roth IRA:

Quote: Hercules Capital Inc. 6.25% Senior Notes (HTGX:NYSE)

Trade Snapshot:

The current yield and YTM would be the coupon rate.

If you try to place an order for this simple to understand exchange traded senior bond at Fidelity, this will be Fidelity's response:

That message is part of Fidelity's growing list of securities where online purchases are prohibited as part of Fidelity's implementation of Nanny State Rules. A Fidelity representative, who most likely does not know anything about this bond, needs to explain it to you.

I am not about to call Fidelity for a broker assisted trade. I recently had a horrible experience with that broker when I attempted to buy 300 ENBPRP which I will never repeat again: 1. Bought 300 ENBPRP:CA at C$12.39: Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 2/29/16 - South Gent | Seeking Alpha Barron's ratings for that broker is laughable. At least I have about a $1K USD profit in that position, more than the CAD profit due to the rise in the CAD/USD since purchase. ENB-PP.TO: C$15.56 -0.04 (-0.26%)

Security Description: HTGX is a senior unsecured exchange traded bond issued by the BDC Hercules Capital Inc. (HTGC), formerly known as Hercules Technology Growth Capital, Inc.

HTGX will pay a 6.25% coupon on a $25 par value and will mature on 7/30/24 unless redeemed earlier by the issuer. The issuer has the option to redeem at par value, plus accrued interest, on or after 7/30/17: Page S-8 Prospectus (risks are summarized starting at pages S-13 and 11)

S & P currently has a BBB- rating on HTGC's senior unsecured notes. Hercules Receives Investment Grade Credit Rating From Standard & Poor's on Its Family of Unsecured Notes (HTGC)

This bond was originally sold in July 2014.

Hercules sold more of them last April at a slight discount to par value:

April 2016 HTGX Prospectus

Note that the underwriters received $.6916 per share, and it cost HTGC another $500K or so in internal expenses.

HTGC does not specifically mention using the proceeds to redeem two outstanding exchange trade senior unsecured notes that mature in 2019 and can be redeemed now at their respective $25 par values plus accrued interest:

Those other notes are HTGZ and HTGY:

Hercules Capital Inc. 7% Senior Notes due 2019 (HTGZ:NYSE); Prospectus

Hercules Capital Inc. 7% Sr. Notes due 2019 (HTGY:NYSE); Prospectus

Hercules redeemed last December $40M face amount of HTGY out of an outstanding $85.9M. Hercules Expects to Increase Net Investment Income Through Continued Proactive Management of Its Capital Structure (HTGC)

I own 228 shares of another 7% Hercules senior unsecured bond maturing on 4/30/19. Of that amount, 76 share lot are currently owned in the same Roth IRA account as the HTGX purchase just made. The reason for owning 76 shares rather than the 100 originally purchased was an issuer partial redemption of 24 shares. Hercules Technology Growth Capital Announces Intention to Partially Redeem its 7.00% Senior Unsecured Notes due 2019 (NYSE:HTGC)

Item # 3 Bought 100 HTGZ at $24.6-ROTH IRA (5/25/12 Post)

Will More HTGZ Be Redeemed Prior to 2019?: This subject is something that I will consider for various reasons. For example, if I believed that an early redemption was probable, it may be advantageous to sell the HTGZ shares held in two taxable accounts when the price goes too far above the $25 par value. Another reason would be to simply replace or potentially substitute another HTGC bond anticipating an early HTGZ redemption.

HTGX may be called on or after June 30, 2017 and the lower coupon makes it more unlikely that HTGC will redeem early given that it just sold more at a slight discount to par value when interest rates were still at abnormally low levels.

My thought process relating to redemption possibilities is explained below.

While the redemption notice expressed an intent to redeem more of HTGZ at a later time, no further redemptions have taken place and none may occur for the following reasons: (1) Hercules just sold more of the 6.25% HTGX and did not indicate specifically that it would use those proceeds in part to redeem either of the 7% coupon bonds maturing in 2019; and (2) HTGZ matures in slightly less than three years and the savings in interest costs between 6.25% and 7% probably does not justify the cost of issuing more bonds which include the underwriters' discount and HTGC's internal costs including legal fees.

While I am still unable to read other people's minds, though I have seen that done many times on TV and in the movies, I suspect that HTGC's managements will allow the remaining principal amounts of both the 7% HTGZ and the 7% HTGY to mature in 2019 or come close to their maturities dates and then refinance them both in one bond offering.

It is also possible that HTGZ will be redeemed in whole or in part with the HTGX proceeds recently received; notwithstanding the failure to mention that possibility in the "use of proceeds" section of the SEC filed HTGX prospectus.

Recent Earnings Report: 2016 First Quarter

Hercules Announces First Quarter 2016 Financial Results and Quarterly Dividend of $0.31 per Share (HTGC)

"As of March 31, 2016, net asset value per share was $9.81 on 73.2 million outstanding shares, compared to $9.94 on 72.1 million outstanding shares as of December 31, 2015." (emphasis added)

The 3/31/16 NAV per share is slightly lower than when I bought the common shares in January 2012. Bought 100 HTGC @ $9.7 Net asset value per share was at $9.83 on 12/31/11 (page 60 Form 10-K). I sold those shares a few months later at $10.64. I have frequently mentioned in comments here at SA that I viewed the common shares as overvalued (and still do at over $11+) and frequently emphasized that point when the common was selling at over $15 per share. HTGC Interactive Stock Chart

One of HTGC's portfolio companies recently filed for bankruptcy: BIND Therapeutics Initiates Voluntary Chapter 11 Bankruptcy Protection Proceeding (discussed in footnote 7 of HTGC's first quarter earnings report)

4. Sold 1 Hess 7.125% Maturing in 2033 at $105.041:

Item # 5. Bought 1 Amerada Hess 7.125% Senior Unsecured Bond at 86.75 (now known simply as Hess):Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 2/14/16 - South Gent | Seeking Alpha

Profit Snapshot: $177.96

5. Sold 39 ELB at $25.65: This reduces my ELB position to

Trade Snapshot: ($1 Commission):

Profit Snapshot:

Security Description: The Entergy Louisiana LLC First Mortgage Bonds 6.00% Series 2040 (ELB) is an exchange traded First Mortgage Bond issued by Entergy Louisiana, a subsidiary of Entergy Corp.(NYSE:ETR).

Prospectus for ELB

I discussed buying 100 shares here, which I no longer own: ADDED 100 ELB In Roth IRA: An Exchange Traded First Mortgage Bond Issued By Entergy Louisiana - South Gent | Seeking Alpha (3/24/15 Post).

Interest payments are made quarterly.

The issuer may call this bond on or after 3/15/15 at its par value plus accrued interest.

If not redeemed early, the bond matures on 3/15/2040.

According to Quantumonline, this bond is rated A2 by Moody's and A- by S & P.

I had lost 11 shares in this account to an issuer redemption and 11 shares in a Roth IRA account where I still own 39 shares which I intend to hold. A full or partial call is likely IMO as long as longer term rates remain near current levels or below.

The First Mortgage Bonds issued by Entergy (NYSE:ETR) subsidiaries have been selling over par value and have optional redemption rights reserved by the issuer at par value. The ELB optional redemption right creates asymmetric interest rate risk that clearly favors the issuer and caps appreciation above par value since it would be advantageous for the issuer to refinance now.

I discussed this issue when I bought another Entergy Louisiana First Mortgage bond:

Scroll to Item # 1. Added 50 ELA at $25.17-Commission Free in Fidelity Account: Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 3/19/16 - South Gent | Seeking Alpha

Scroll to Item # 2. Bought 100 of the First Mortgage ELA at $25.29: Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 2/14/16 - South Gent | Seeking Alpha (IB account purchase $1 Commission)

I am just trying to clip some interest and to sell these bonds at whatever profit is available down the road.

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Appendix: I have snapshots of net trading gains for the following exchange traded bonds and preferred stock categories:

Trust Certificates: New Gateway Post= $28,971.16

Advantages and Disadvantages of Equity Preferred Floating Rate Securities= +$13,773.45

Baby Bonds - South Gent | Seeking Alpha= +$7,291.66

REIT Cumulative Equity Preferred Stocks= +$6,061.71

Aegon Hybrids: Gateway Post= +$4,512.81

TRUST PREFERRED SECURITIES - South Gent | Seeking Alpha= $4,122.09

ING Hybrids = $2,117.96

Non-REIT Fixed Coupon Equity Preferred Stocks = $2,337.47 (snapshots now at the end of REIT Cumulative Equity Preferred Stocks Post linked above)

Total: $69,188.31 (excluding dividend and interest payments)

Synthetic Floater transactions are included in the Trust Certificate category.

Exchange Traded Bonds: New Gateway Post

ING Hybrids: Links in one Post

Trust Preferred Securities: Links in One Post

Baby Bonds - South Gent | Seeking Alpha

TRUST PREFERRED SECURITIES - South Gent | Seeking Alpha

Examples of Exchange Traded Bond and Equity Preferred Stock Categories:

Senior Unsecured Baby Bonds:

Kennedy-Wilson Holdings Inc. 7.75% Senior Notes due 2042 (KWN:NYSE

Argo Group International Holdings Ltd. 6.5% Senior Notes Due 2042 (AGIIL:NASDAQ)

TravelCenters of America LLC 8% Senior Notes (TANP)

TravelCenters of America LLC 8% Senior Notes 12/15/29 (TANO)

THL Credit Inc. 6.75% Notes Maturing 12/30/22 (TCRZ:NYSE)

Prospect Capital Corp. 6.25% Notes Due 2024 (PBB:NYSE)

Hercules Technology Growth Capital Inc. 7% Sr. Notes due 2019 (HTGZ:NYSE)

Hercules Capital Inc. 6.25% Notes due 2024 (HTGX:NYSE)

Junior Baby Bonds:

AmTrust Financial Services Inc. 7.25% Subordinated Notes due 2055 (AFSS:NYSE)

National General Holdings Corp. 7.625% Subordinated Notes (NGHCZ:NASDAQ)

Global Indemnity PLC 7.75% Subordinated Notes Due 2045 (NASDAQ:GBLIZ)

Texas Capital Bancshares Inc. 6.5% Subordinated Notes due 2042 (TCBIL:NASDAQ)

Hanover Insurance Group Inc. 6.35% Subordinated Debentures due 2053 (THGA:NYSE)

First Mortgage Bonds:

Entergy Mississippi Inc. 6.20% Series First Mortgage Bonds due 2040 (EFM)

Entergy Louisiana LLC First Mortgage Bonds 6.00% Series 2040 Stock Price Today (ELB:NYSE)

Entergy Louisiana LLC 5.875% 1ST Mtg Bond Series 2041 (ELA:NYSE)

Trust Certificate-Junior Bond

Structured Products Corp. 8.205% Credit-Enhanced CorTS (KTN:NYSE)

Trust Certificate-Synthetic Floaters with Minimum Guarantees

Corporate Asset Backed Corp. CABCO Series 2004-101 Trust Goldman Sachs Capital I Floating Rate Certficates (GYB:NYSE)

Corporate Asset Backed Corp. CABCO Series 2004-102 Trust SBC Communication Inc Floting Rate Certificates (GYC:NYSE)

Trust Certificate-Synthetic Floaters with No Minimum Coupon

Synthetic Fixed-Income Securities Inc. Fltg Rate STRATS Series 2006-1 for Procter & Gamble Secs. Seies 2006-1 (GJR:NYSE)

Synthetic Fixed-Income Securities Inc. STRATS Trust for Allstate Corp. Securities, Series 2006-(GJT:NYSE)

Synthetic Fixed-Income Securities Inc. Floating Rate STRATS Series 2006-2 for Goldman Sachs Group Secs (GJS:NYSE)

Fixed Coupon Equity Preferred Stock: Non-Cumulative

TCF Financial Corp. 6.45% Preferred Stock (TCB.PC:NYSE)

National General Holdings Corp. 7.5% Preferred Stock Series A (NGHCP:NASDAQ)

JPMorgan Chase & Co. 6.15% Preferred Series BB (JPM.PH:NYSE)

EverBank Financial 6.75% Non-Cumulative Preferred Series A (EVER.PA:NYSE)

Discover Financial Services 6.5% Non-Cumulative Preferred Series B (DFS.PB:NYSE)

Banc of California Non-Cumulative 7% Preferred Series E (BANC.PE:NYSE)

Fixed Coupon Equity Preferred Stock: Cumulative

Digital Realty Trust Inc. 6.35% Cumulative Preferred Series I (DLR.PI:NYSE)

Bluerock Residential Growth REIT Inc. 8.25% Series A Preferred Stock (BRG.PA:NYSE)

Fixed Coupon MREIT Preferred Stock: Cumulative

Annaly Capital Management Inc. 7.5% Pfd. Series D (NLY.PD:NYSE)

CYS Investments Inc. 7.75% Cumulative Preferred Series A (CYS.PA:NYSE)

Fixed Coupon Equity Preferred: Cumulative and Convertible

EPR Properties 5.75% Cum. Conv. Pfd. Series C (EPR.PC:NYSE)

Floating Rate Equity Preferred Stock with Minimum Guarantees: Non-Cumulative (both of the following have 4% minimums)

Goldman Sachs Group Series D Preferred Stock (GS.PD:NYSE)

Morgan Stanley Non-Cumulative Preferred Series (MS.PA:NYSE)

Fixed to Floating Rate Equity Preferred Stock: Non-Cumulative

Goldman Sachs Group Series J Fixed-to-Floating Rate Preferred Stock Price Today (GS.PJ:NYSE)

IBERIABANK Corp. 6.625% Series B Preferred Stock (IBKCP:NASDAQ)

Aspen Insurance Holdings Ltd. 7.401% Non-Cumulative Preferred Stock (AHL.PA:NYSE)

Regions Financial Non-Cumulative 6.375% Preferred Series B (RF.PB:NYSE)

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Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics:ERROR CREEP and the INVESTING PROCESS. Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.