Tuesday, August 27, 2013

Update on Exchange Traded Bond and Preferred Stock Table as of 8/27/13

The exchange traded bond and preferred stock table has not been updated since June 2012.  I had some free time this evening so I decided to update it. 

Before I started to lose bonds to redemptions, along with some profit taking, this table reflected a dollar value near $150,000 (e.g. 4/19/11 Post) and was a lucrative area for me during 2008-2012.  It is now at $64,064.13 and will decline at least $9,000 next year without any action on my part. 

For over a year now, I found the pricing of exchange traded bonds and equity preferred stocks to be unappealing, particularly given my views about interest rates and the ongoing interest rate normalization process. The Difficult Path to Interest Rate Normalization 

I am anticipating that the ten year treasury, which was yielding 1.66% on 5/2/13, will go over 4% within 18 months. A 4% to 4.25% ten year treasury yield would be normal when the market is forecasting a 2%-2.25% average inflation rate over that ten year period. The FED's bond buying spree, which hopefully is nearing an end, has driven the entire bond complex to abnormally low interest rates that would not exist in a bond market uninfluenced by the massive FED bond buying implemented pursuant to its various QE programs.

Consequently, I have been mostly allowing this portfolio to run off, but I have started to nibble at a few securities over the past month or so.

Next year, all of my principal protected notes issued by Citigroup Funding will mature at their respective $10 par values. Those securities account for $9,000 in principal amount and will need to be replaced with whatever bonds appear worthwhile at their respective maturity dates. Those Citigroup Funding notes have the following symbols: MOU, MTY (2), MOL (2), MKZ, MKN, and MBC (2). Of those MOU and MKN have had the biggest paydays, as mentioned in a post published earlier this year. Status of Citigroup Funding PPNs: MOU, MBC, MKN, MKZ All of those notes, except for MOL, are in their final annual coupon periods. 

During my ownership periods, the largest coupon on those securities was generated by MOU, a 27.93% annual interest payment made for the annual period ending in February 2011. (see snapshot at MBC & MOU)

While I would not buy MOU now, it has potential for another good payday in its last annual period. 

As long term readers may recall, this one pays a minimum of 3% or up to 37% depending on the performance of the Russell 2000. Bought 100 MOU at $10.12Pricing Supplement

Starting Value of the Russell 2000 on 2/22/13= 916.15 RUT Historical Prices 
End Date: 3/3/14
Maximum Level Violation (MLV) Number= 916.15 x. 1.37= 1,255.12 

If the Russell 2000 closes one day above the MLV number on or before the End Date, the coupon reverts to 3%. If there is no MLV during the current annual period, and the Russell 2000 gains more than 3% over the Starting Value of 916.15 or 943.63 as of the End Date of 3/3/14, then the owner will be paid the percentage increase in the Russell 2000 over the Starting Value, which could be almost 37%.

For example a RUT close at 1100 on 3/3/14 would result in a 20% coupon. (1100-916.15=183.85 divided by 916.15=20%.) A close at 930 or 900 would produce the minimum 3% coupon, as would one close above 1,255.12 between now and the End Date.  

The Russell 2000 closed today at 1,013.49, down 2.41% or 24.98 points. MOU closed at $10.51, down $.19, on the usual light volume. Limit orders have to be used for these securities given the anemic trading volume and unusually large bid/ask spreads. I am not in the market to buy more or to sell what I already own, and will simply allow all of them to mature. 

While MOU had the largest annual coupon, MKN has paid the most, paying interest for one coupon period at 25.56% and another at 18%. (see snapshots at Status of Citigroup Funding link above) 

I own one Bank of American PPN, SDA, which I intend to keep until its 2015 maturity. Item # 7 Bought 100 SDA at $9.8-Roth IRA 

The MTY and MOL coupons are tied to the price of gold. MTY is in its final coupon period while MOL has two coupon payments left at a minimum of 2%. In its current annual period, the starting value on 11/19/12 was $1,730.50 per ounce of gold, London P.M. fix. I am not expecting more than the 2% annual coupon for the current period. Gold would have to rise to more than $1,765.11 by the 11/20/13 End Date to trigger any increase in the minimum 2% coupon. Prospectus There is always hope for the last annual period which ends on 11/19/2014.  

There is some hope for MTY which began its last coupon period on 7/29/13, Final Pricing Supplement, when the price of gold closed at $1,329.75. Kitco Inc. - Past Historical London Fix

Starting Value $1,329.75 on 7/29/13
End Date: 8/4/14
Maximum Violation Number: $1,795.16   (1.35 x. 1,329.75)

I recently received the minimum 3% coupon payment made by MTY for my 200 shares. I have not been paid yet more than the 3% coupon, but there was a good one in the annual period before I made my first purchase:


MTY Taxable
Please note that the broker incorrectly labels the distribution as a dividend. It is an interest payment. 

Exchange traded bonds are discussed in this Gateway Post: Exchange Traded Bonds: New Gateway Post That post contains a discussion of baby bonds, mostly $25 par value bonds traded on the stock exchange. The baby bond category is the most important now as trust preferred securities and trust certificates are moving toward extinction due to redemptions. My most recent baby bond purchases include baby step purchases of three different first mortgage bonds issued by electric utility companies: 

Those bonds were bought in the ROTH IRA, where I in effect convert a taxable bond into a tax free one.  

All of my trust preferred securities are now gone.

I am down to just five fixed coupon trust certificates: JZJ, JZV, KTN (no call warrant attached), IPB (a collection of bonds) and PJA.  

I have my largest unrealized percentage gains in KTN, with two 50 share lots having an average cost of $13.26 and $14.16 respectively, with a closing KTN price today of $29.36. (snapshots Stocks, Bonds & Politics under heading JZJ and JZV Semi-Annual Interest Payments)

I ended up with 118 JZJ and 41 SCEDN after partial calls. Partial Redemption SCEDN; Proceeds Received from Calls of JZE and JZJ (snapshots of  JZJ and JZE profits included in the TC Gateway Post)

The various categories are discussed in more detail in individual category Gateway Posts:

I discuss equity preferred stocks primarily in two Gateway Posts. 

The Aegon and ING hybrids are in fact junior bonds but are treated as equity capital for regulatory purposes. For U.S. taxpayers, their distributions are not treated as interest but as qualified dividends. 

I have bought and sold those hybrids several times. For over a year, I did not own any of them, but I did recently buy AEB after the shares declined by over 20% due to the recent interest rate rise: Bought 50 AEB at $20 That one is a floating rate "bond" that pays qualified dividends at the greater of 4% or .875% over the 3 month LIBOR on a $25 par value. 

I also recently bought back the CPI floater OSM: Bought 100 OSM at $23.12-Roth IRA 

I also recently added 50 of the synthetic floater GYB: Added 50 of the Synthetic Floater GYB at $19.6-Roth IRA 

I have recently bought back, prematurely, two 50 share lots of equity preferred floaters issued by HSBC USA: Bought 50 HBAPRF at $20.95 and 50 HBAPRG at $23.61 

I discuss in my post dealing with AEB why those securities have most likely declined some since my recent nibbles. I also explore that topic in some SeekingAlpha comments made to this article: High Retirement Income With Floating Rate Loan Funds 

One benefit flowing sometimes from these securities is shown by their performance today. While I did have a number of securities go up in value today, as the S & P 500 declined 1.56%, the total loss in this portfolio was $2.71.

Click to Enlarge:

As of 8/27/13

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