Last fall, I wrote the article, “4 Ways to Find ‘Real’ Yields in a Low Interest-Rate Environment.” Given the difficulty of finding inflation-adjusted positive returns in high-quality, shorter-dated bonds, I presented the following four ways to find real yields.
- Extend maturities
- Move down the credit quality scale
- Look for one-off opportunities in companies or industries that have experienced spread widening
- Move down the capital structure from bonds into equities
At this time, I think broader-market corporate credit spreads have narrowed to an extent that it is hard to find a ton of “bang for your buck” in number two from the list above. Additionally, after the massive run-up in stocks in recent years, it is difficult to find equities that provide “real” yields and trade at attractive valuations. That currently makes number four on the above list less of an inviting strategy. Instead, I think it is worth focusing one’s efforts on numbers one and three.
In terms of extending maturities, preferred stocks are one way to do that. The downside of doing it today is that preferreds have been on a tear this year, and, in many cases, yields have fallen quite a bit. With that said, if you still find preferred stocks of interest, you can find a few discussed in my prior LearnBonds articles.
Furthermore, there are still some opportunities to extend maturities in the corporate bond market and capture “real” yields. I recently ran a screen searching for investment-grade corporate bonds with at least 10 years to maturity, yields greater than 5%, and prices of 103 cents-on-the-dollar or less. The screen returned 53 CUSIPs from, among others, companies such as Petrobras, Southern Copper, Newmont Mining, Kinross Gold, and Western Union. If you have concerns about investing in longer-dated bonds, you may find my article, “What’s So Scary About Long-Term Bonds?” informative.
Finally, one-off opportunities do occasionally pop up. For investors who are not intimidated by Safeway’s going private, the company’s 2031 maturing notes may be of interest. Moreover, there is often an opportunity to capture attractive yields in corporate bonds that have recently been issued but not yet had their first settlement. Often times, once the first settlement occurs and the bonds begin to trade on all the retail bond platforms, the spreads to Treasuries narrow and yields fall. This doesn’t happen every time, but it is something I have had success taking advantage of. Vanguard is one retail bond platform that offers investors the opportunity to buy corporate bonds before the first settlement date.
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