Tuesday, January 10, 2017

Short Term Bond/CD Ladder: Bought 2 Canadian Natural Resources 1.75% Senior Unsecured Bonds at 99.826 Maturing on 1/15/18

Earlier today, I went down further on the credit rating scales to buy 2 Canadian Resources 1.75% senior unsecured bonds. This bond is currently rated Baa3 by Moody's or just one notch above junk. 

Moody's downgraded CNQ's debt to Baa3 from Baa1 in January 2016: Moody's downgrades Canadian Natural Resources to Baa3; outlook negative

S & P has a BBB+ rating with a stable outlook and DBRS is currently at BBB with a negative outlook. Canadian Natural Resources - Credit Ratings

This senior unsecured bond was originally issued in 2014 and matures on 1/15/18.  

The FINRA trade page shows that my YTM is 1.825% based on my total cost and 1.926% before Fidelity's $2 commission: 

At the time of my purchase, the one year treasury yield was .8%, United States Rates & Bonds - Bloomberg

While I am taking on some credit risk for an additional 1% over the one year treasury yield, I am not currently concerned about CNQ's ability to pay off this bond next January. 

I also own CNQ's common stock which is near break-even based on the current $31.62 share price. 

The short term bond/CD will top out soon near $200K. The ladder is hyper-sensitive to a rise in short term interest rates with multiple securities maturing each month through 2018. This strategy is predicated on the belief that short term rates will gradually rise and will return to something resembling normal over the next few years. 

As securities mature throughout 2017, I am anticipating that the proceeds can be used to buy securities maturing in 2019 at higher rates than now. 

The ladder is also intended to generate at a minimum 1% more per annum than the Fidelity Government Money Market fund that is the primary funding source for this ladder. While I have not done a precise calculation, I am now at about a 1.5% spread over that low yielding MM fund. 

U.S. treasuries are included in the ladder along with high quality short term corporate bonds, mostly rated A- or higher and bought at discounts to par value. The yield-to-maturity ("YTM") for those bonds will generally be higher than the coupon rate. 

The shortest maturity instruments will be the 4 week treasury bills bought in my Treasury Direct account where I have scheduled 25 reinvestments which can be changed later. 

I am buying short term fixed coupon U.S. treasuries either at auction or in the secondary market which can be done commission free at Schwab, Fidelity and Vanguard. Some other brokers may charge a commission even for auction orders (e.g. TD Ameritrade).  

Except for the 4 week treasury bills, the purchased securities start to mature in March 2017. There are already multiple securities that mature throughout every month from March 2017 through December 2018. A few securities have been bought with 2019 maturities. The intent is to fill out the 2019 maturities with the proceeds received from securities maturing in 2017 and then to use the 2018 maturities to fill out the 18 month period starting on 1/1/20.  

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