Wednesday, June 29, 2011

Floating Rate Investment Grade Bond ETF (FLTR)/Case Shiller Index/Sold 50 of the TC FJA at $24.84/Bought Back 1 Mueller Water 7.375% Senior Subordinated Bond Maturing on 6/1/2017 at 94.5

Market Vectors has an ETF that invests in investment grade floating rate securities. Van Eck Global - Market Vectors® Investment Grade Floating Rate ETF (FLTR) I do not plan buying that ETF anytime soon, given the extremely low short term rates. Generally, this type of security will pay a spread over a short LIBOR rate, and those rates are extremely low now. The expense ratio for this fund are capped at .19% until 9/1/2012 and will then rise to .49%.  Even with the cap, the sponsor's web page shows a miniscule yield of .7%.  This is one that I will simply keep in mind.  It would be difficult for me to buy the securities owned by this fund in the bond market.  This kind of fund may have a place in my portfolio when and if I become concerned about rising interest rates.  Besides the low yield, another major drawback is that this ETF has a very heavy concentration in bank issues.

There are exchange traded bonds that provide floating rates.  Many of the floating rate securities, traded in the stock market, are investment grade.  However, most of them have long maturities.  There are several synthetic floaters that are tied to bonds from non-financial firms, which would allow an investor to achieve a greater sector diversification. Synthetic Floaters  In that post, I reference floaters tied to senior bonds from Wal-Mart (GJO), Proctor & Gamble (GJR), Dominion Resources (GJP), AT & T (GYC), Allstate (GJT) and IBM (GJI), along with several issued by banks.  I currently own GJP and GYC in the ROTH IRA. I have sold GJT, GJR and GJO due to their current low yields and realized a profit on the shares. Floaters: Links in One Post  I will own the synthetics only in a retirement account due to their complex tax issues associated with the swap agreement which creates the float. All of these exchange traded synthetic floaters are thinly traded most of the time, with large bid/ask spreads, so I will use limit orders when placing a trade.

The Case Shiller 20 metropolitan area home price index rose .7% in April compared to March, the first monthly increase since July 2010.  Spring buyers and a delay in foreclosures by many banks probably contributed to the rise. However, the 20 city index is down 4% year-over-year.  In that report, it is mentioned that existing home sales in May are 15% below the level from May 2010 and 35% below their 2005 pace.

1. Sold 50 of the Trust Certificate FJA at 24.84 Last Monday (see disclaimer): This TC represents an undivided beneficial interest in senior Embarq bonds maturing in 2036.  Embarq was later acquired by CenturyLink (CTL).  CTL Acquires Embarq FJA' coupon is 7.1% on a $25 par value.  Prospectus   The underlying bond has a higher coupon at 7.995% and is only selling slightly above its par value.  FINRA 

The 50 share lot sold last Monday at $24.84 was purchased at a total cost of  $14.36 over two years ago, so I received a number of semi-annual interest payments in addition to harvesting a 75% long term capital gain on the shares:

50 FJA Purchased at a Total Cost of $14.36

This last sale marks my exit from this position. A prior sale was at $24.75: 

2010 50 Shares FJA +$458.02 Long Term Capital Gain

And there was one quickie transaction in 2009 that netted about a $50 profit plus an interest payment. Bought another 50 FJA at $14.2 BOUGHT 100 of the TC FJA 15.36 The shares sold on Monday, using FIFO accounting, were the shares bought at $14.2. The total cost number shown in the first snapshot includes the brokerage commission. I am more than satisfied with the results of those two purchases made in May 2009 and do not wish to press my good fortune by risking a significant gain on the remaining odd lot. A long bond maturing in 2036 has a boatload of interest rate risk attached to it.

FJA went ex interest for its semi-annual distribution on 5/26/2011.

The realized long term capital gain was $516.02 on a $718 investment, plus interest payments. 

2. Bought Back 1 Mueller Water 7.375% Senior Subordinated Bond Maturing on 6/1/2017 at $94.5(Junk Bond Ladder Strategy)(see Disclaimer ): Maybe Uncle Ben has turned me into a junk bond trader as I scramble for yield.  I previously bought this same bond at the same price back in December 2010. Item # 1  Bought 1 Mueller Water Bond I sold that 1 bond for a small profit last May:  Sold 1 Mueller Water Sen Sub Bond at 100.625  I have bought and sold the common shares many times in the LOTTERY TICKET category. 

The bond is rated well into junk territory.  According to FINRA, this bond is rated at B3 by Moody's and CCC+ by S & P.  This bond is more junior to a senior bond maturing in 2020 with a 8.75% coupon. FINRA  That bond is still rated junk, but at a higher level than the 2017 subordinated bond that I bought again. The 2020 senior bond is also selling well over its par value which makes it off limits to me under this strategy. 

MWA is one of the companies that I regularly follow, due to my interest in its long term turnaround potential.  I did recently place a day limit order to buy 50 shares of the common, but the order was not filled at my $3.5 limit price.  

This is a link to Reuter's Profile page on MWA. 

I do recall reading part of MWA's recently filed 10-Q, where it expressed an interest in strategic alternatives for the money losing U.S. Pipe operation. (page 29)  If that operation can be sold at a reasonable price, I would view it as a positive for the company. 10-Q  

The long term debt is mentioned at page 8 of that Form 10-Q. 

I am assigning a 7- to the 2017 subordinated bond.   Personal Risk Ratings For Junk Bonds

My confirmation states that the current yield at my cost is 7.738% and the YTM is 8.396%. 

No comments:

Post a Comment