Monday, December 29, 2008

QUERY: 10%+ SHORT BONDS maturing in less than 5 years

In response to a query about short bonds yielding over 10%, I will define that parameter as something maturing in less than  five years that could yield more than 10% per year by combining the coupon yield and capturing the spread between cost and par at maturity, limiting my response to what I have already said in this blog.  As I have said, there are two ways to make money from an individual bond purchase when it is bought at a discount to par value.  You will receive the current yield based on your cost and a profit at maturity which I amortize to an annualized return assuming payment at maturity which may not happen of course. 

I do not give recommendations.   I am bored senseless since my normal routine of buying stocks has now been restrained to almost nothing by my own VIX Asset Allocation Model.   Please see my disclaimer.  I simply discuss what I do and why I do it which is fitting only for someone in my exact financial position, which is both solid and good, risk tolerance (mostly conservative with occasional bursts of temporary insanity evidenced by speculative buys like the recent FCZ and FCY), age (somewhat advanced), and many other considerations including placement within an overall complex asset allocation scheme discussed throughout these posts.

   I would add that anyone buying DKR, one of the selections mentioned in this post, needs to be a little crazy and possessed by the animal spirits, temporarily of their rocker so to speak,  able to lose the entire investment with the same elan as using the money to light a cigarette or flushing it down the toilet, and has to completely and thoroughly understand the risk by doing their own research for that issue as well as all others mentioned by me (even more in depth and painstaking for these speculative ones).     

There is junior debenture issued by J P Morgan contained in the Trust Certificate PYV, which I recently bought because its current yield plus the annualized amortization of the spread between a par value of $25 and a cost of $18.5 would yield close to 12% annualized to maturity in 2014 provided of course JP Morgan survives to pay me in 2014. 
Paying less than $18.50, trying to catch a downdraft with a limit order, will of course increase your current yield and the potential return at maturity.  

I also own a very highly speculative senior bond from Hertz which matures in June 2012 which is the underlying bond in the TC DKR.   The annualized coupon yield plus amortization of the spread would be close to 100% yearly until maturity based on a 7 cost basis and a $25 par value with a maturity in 3 years and a few months.   This is the kind of buy that will be either a large gain or a near total loss except for the interest received.  I am going to do a stop loss somewhere near 4.   If it can stay above 4, I will keep my 100 shares for as long as I can, hopefully until maturity in 2012 at $25.  The financial position of HTZ is dicey. 
These trust certificates are traded on the stock exchange and are bought just like stocks.  Both just went ex interest.  PYV pays quarterly and the very dicey DKR pays semi-annually. 

 By going to the FINRA site, which is very good to help find securities that I briefly mention, like a Prudential short bond, it is possible to locate several short bonds that would yield over 10% and I have mentioned some of them.( referring to recommendations made in the recent SmartMoney magazine  by a manager and by James Stewart in the same issue:  Investment Grade Corporate Bond Spreads/ CPI FLOATER: OSM )     I do not discuss them at great length since they are available for purchase only on the bond exchange.  This requires a separate set of knowledge rules that I am not going to discuss in my blog.  The bond market is generally not an advantageous forum for many small investors who do not have a lot of experience buying individual bond issues.  Some sectors likely to yield above average yields now would be life insurance companies like Hartford and Prudential, and a finance company like CIT.  Bill Gross mentions in his interview in Forbes this week some short bonds from subsidiaries of AIG like International Lease Finance. Bary's Column In This Week's Barron's: Floating Rate Preferred Stocks METPRA GSPRA HBAPRF BACPRE MERPRL/ Gross interview Forbes
Many issues with maturities to 2014 will give 10%+ annualized yields based on a combination of current yield plus a capital gain at maturity (amortized over the life of the bond to achieve an annual return percentage), with the attendant risk having to be assessed for each issue.  I would not view, for example, a 2012 senior bond from Prudential to have the same risk attached to it as one from CIT or International Lease Finance.   
  Most of the senior bonds that will yield me more than 15% per year were opportunistic long maturity bond buys (20+ years) made during meltdowns in the bond market in October through November time frame, with many mentioned in this blog. LINKS TO LONG TERM BOND BUYS IN PRIOR POSTS  By entering a search term in my blog near the top of the page, any relevant discussion in any post will pop up.   An example would be JZE, a Trust Certificate containing a senior AT & T bond maturing in 2031 bought at 12.5 with a $25 par value.   Even with no downgrades in the debt, which would increase the coupon yield, the coupon yield plus an annualized amortization of the spread would yield over 15% per year for every year until maturity or early call. 


  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. In these posts, I am acting as an unpaid financial journalist and an occasional political commentator.   I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me. 

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