Whenever I buy an individual bond, I do so with the intent to hold that bond to maturity. Sometimes, however, for various reasons, I decide to sell a bond prior to maturity. Such was the case this past Friday, when I sold senior unsecured notes in Hewlett-Packard and Tyson Foods. I sold the Hewlett-Packard debt for 104.196 after commissions, and the Tyson Foods debt for 103.767 after commissions. Upon glancing at the dates on which I purchased the notes, I immediately realized there was an opportunity to share an insight that bond market permabears frequently seem to overlook.
On August 16, 2012, the 10-year Treasury closed at 1.83%. That same day, I purchased Tyson Foods’ June 15, 2022 maturing notes (CUSIP 902494AT0) at a price of 99.267 and a yield-to-maturity of 4.593%. Fast forward to this past Friday, and at the moment I sold the Tyson Foods notes the 10-year Treasury stood at 2.687%. Interestingly, despite an 85.7 basis points rise in the 10-year Treasury during the time I held Tyson’s corporate debt, the Tyson Foods notes declined 64.5 basis points. And that includes the 10 basis points hit I took on the bid-ask spread, which means the offer price declined 74.5 basis points. Back in August 2012, the chorus of bond bears was telling people to stay away from bonds because Treasury rates were surely going to rise. Indeed, Treasury rates did rise. But the yield on the Tyson Foods corporate notes I purchased actually fell.
Turning to Hewlett-Packard, on February 1, 2013, I purchased the September 15, 2021 maturing notes (CUSIP 428236BQ5) at a price of 99.066 and a yield-to-maturity of 4.507%. Since that time, both the 7-year and 10-year Treasuries have risen in yield, by roughly 75 basis points and 63 basis points respectively (as of the time I sold the HPQ notes). On the other hand, based on my after commissions sale price, the Hewlett-Packard notes declined 77.7 basis points to a yield of 3.73%.
How is it possible that yields on the Hewlett-Packard and Tyson Foods notes fell so dramatically, despite benchmark rates rising in a notable way? It has to do with something bond market permabears seem to regularly overlook: Bond Spreads matter.
Corporate bonds trade at a spread to Treasuries. Even if Treasury rates rise (prices fall), as long as the spread-to-Treasuries declines by a greater amount than the rise in benchmark yields, the corporate bond will experience a falling yield (rising price). That is something I rarely hear mentioned in the financial press. Instead, the focus is almost always on how Treasury yields might move, as if Treasuries alone represent the entire bond market. The next time you hear a bond-market bear tell you that your bonds are about to experience mark-to-market losses, keep in mind that spreads matter. This is true not just of spreads related to broad-market trends, but also to spreads that have moved because of company-specific circumstances.
Perhaps you’ve heard the phrase, “There’s always a bull market somewhere.” That phrase doesn’t just refer to individual stocks. It can refer to individual bonds as well.
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