With the advent of the electronic age, it has become easier than ever for individual bond investors to screen the secondary market in search of value. By evaluating all of our options, we can attempt to squeeze every basis point possible out of available offerings. Today, let’s take a look at near investment grade paper of BB and BB+ quality to see what the market bears along the yield curve. The following list of five bonds was taken from available inventory at Fidelity on Tuesday, January 14 at roughly 2 PM. Bonds were selected randomly at intervals ranging from 5-28 years.
As one might expect, we see a gradually increasing yield as we head out longer in maturity. The one exception is the lower yield that we see on the Telecom Italia bond of 2034 as compared to the El Paso Energy paper of 2031. This discrepancy can be mostly explained by the credit, with TI being rated a notch higher at BB+ compared to El Paso’s BB rating.
While BB companies technically sit within the high-yield or “junk” realm, they tend to possess business models and balance sheets that might be considered fairly stable amongst most market watchers. Take, for example, L Brands [formerly Limited Brands (LB)], the parent company of the Bath & Body Works, Victoria’s Secret, Pink, and The Limited retail concepts. The company has provided equity holders with fantastic total return recently and also provides a dividend yield in the 2% range. Though it has pulled back recently, its stock has still gained three-fold over the past four years.
When one buys a bond, one of the main things you want to consider is whether you see a high level of risk developing in the company’s business over the remaining duration of the bond. I, for one, see little problem in L Brands paying back this bond in five years. So, yielding somewhere between 4.1 – 4.2% for five years, I think that the L Brands bond is very solid and provides compelling value compared to investment grade paper yielding anywhere in the 2.5-3.5% range. A five year CD might get you only 2% nowadays.
As we start progressing out the curve, it becomes a bit more difficult to extrapolate whether a company will run into fiscal problems or not. While Energy Transfer Equity and El Paso Energy are both solid companies in what would seem to be a stable sector, the risk needle has unquestionably shifted. With yields of 5.8 and 7.5, respectively, one is being compensated for the risk, but is the compensation enough? Personally, I’d probably pass on both these bonds.
Our final two bonds, Telecom Italia and CenturyLink yield 6.9% over 20 years and 8.5% over 28 years, respectively. Again, we are compensated additionally for the extra time we are loaning the companies money. However, again, I’m not sure that I’m 1) comfortable with either of these companies for the time I’m loaning them the money and 2) regardless my comfort with companies, I’m don’t like the amount of duration risk I’m taking in this ultra low interest rate environment.
For those brave enough to invest in junk debt, I’d probably sacrifice a tad of credit quality and shorten up the maturity to see similar yield, as I think two to three decades is far too long to be locking into anything in this day and age. Having said that, for those with laddered portfolios and less inclined toward timing rates and predicting markets, longer-term paper could still hold merit.
Before taking positions in individual bonds, investors should engage in crude exercises like the one above in order to get an idea of the various yields available in specific credit ranges. Individual credit quality, forward business analysis, maturity, and portfolio fit, amongst other data points, should all factor into the analysis mix. My personal yield-maximizing preference in the current market is to shorten up on maturities and sacrifice credit to hit yield points rather than vice versa, although for capital preservationists and those lacking risk tolerance, this may be an inappropriate strategy.
Note: I am not long any of the above mentioned bonds, but may take a position in the next 72 hours.
About the author:
Adam Aloisi has over two decades of experience investing in equities, bonds, and real estate. He has worked as an analyst/journalist with SageOnline Inc., Multex.com, and Reuters and has been a contributor to SeekingAlpha for better than two years. He resides in Pennsylvania with his wife and two children. In his free time you may find him discussing politics, playing golf, browsing antique shops, or traveling.
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