Corporate Bonds

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Mar 31, 2009 10:27 am

How is everybody feeling about corporate bonds right now?  I see Caterpillar and John Deere have 5.65% for 4 years and 4.75% for 5 years.  Both are A rated.  These don't seem to be too bad for some fixed money.  Any thoughts?  I like them, feel they are both solid companies. 

Mar 31, 2009 9:15 pm

My feeling always has been on corporate bonds that they don't pay enough vs cd's.  Granted you can't make gross commissions on CD's but you will do what fixed income is supposed to do preserve client's money.  I bought a 4 year cd for 3.05% today for a client. . Do i think caterpillar defaults, no way, for my money i would rather play corporate bonds thru a mutual fund.  The one time i would buy a corporate they probably go bust.

Apr 2, 2009 10:27 am

Sickowire,

 
If I read you right you don't do individual bonds because of fear of default.  Your fear in these difficult times may be well founded.  To me, for those clients that you explain everything to and can get them 2.6% more per year over the next four years vs. a cd, as long as they know the risks, I think it's worth it.  Mainly because I don't believe that Cat will go broke and it's only a portion of their account.
 
Apr 2, 2009 9:53 pm

Great timing on this post, typically I have bought single bonds, but with what has happend and more clients looking for safe yield alternatives---I would like to hear anyones suggestion on bond funds. Corporate investment grade or near. Thank you in advance.

Apr 2, 2009 10:40 pm

JPM Core Bond is pretty solid

Apr 2, 2009 10:42 pm

JK- all that sounds good, but lesson one i learned was that a retail client cares mostly about one thing, don't lose money.  Sure you can buy 10K worth of CAT in an account with 500K in it, but if something were to happen in year 5, and the thing trades at 5K, the client will see it and remember it.  Losing 50% or 20% on a corporate bond is not worth 2.5 percentage points in my opinion.  A lot of grizzled vets talk about how they had corp's that went to 50 cents and came all the way back etc etc.  Yet these guys all own gm and gmac and ford motor bonds.  "they'll never let gm go under" i heard a couple of years back.  fixed income is to preserve wealth.  whenever i've reached for yield it has always bit me in the ass. 

Apr 4, 2009 11:07 am

JK,



I sell quite a bit of corporates and bond funds. There are some really good deals on short term, high quality issues like CAT and DEERE. Also, if you look at short term bond funds like Lord Abbett Short Duration, you can get close to a 5% yield with the average underlying bond maturity of only a few years. The bonds that comprise that fund are trading at 90-95 cents on the dollar so there is potential for gains on top of the income.



What you have to very careful of is comparing bonds/bond funds to CDs.   I explain to my clients that this is an investment and it WILL fluctuate in market value. Client tend to focus on the 5% number you give them and then complain when they see a drop in value on their statements. Make sure you document and disclose to protect yourself.



I've been moving quite of few clients away from cash and easing them into short term bond funds to try and take advantage of the potential gains in NAV. I explain to my clients that you are going to get a nice monthly dividend while we wait for the prices of the bonds to return to normal.   If things work out, between income and appreciation, you could be looking at a nice return.



Of course Mr. and Mrs. Client past performance is not an indication......

Apr 4, 2009 5:29 pm

Take a look at non publicly traded REIT's.

Now, before everyone gets their panties in a bunch, I know they're not bonds and shouldn't be compared to bonds.  They are an alternative and they can be an alternative to bonds for appropriate investors.  They aren't the most liquid investments, but the ones I'm using have had no fluctuation in share price and pay a monthly dividend of 6.5% to 7% annualized.
Apr 4, 2009 6:56 pm

I wouldn't put any money into something that was illiquid. 

Apr 4, 2009 8:04 pm

Rifon14 - can you explain to me the nature of non publicly traded reits? How are they structured and when do they become liquid? In what ways do they differ from publicly traded reits, other than the fact that they are not publicly traded and not liquid?
I have a prospect i am working on with some of these in his portfolio.

Apr 4, 2009 8:13 pm
sickowire:

I wouldn't put any money into something that was illiquid. 

 
So, do you not put money into your 401k?  CDs?  Real Estate?
 
Do you even know the definition of 'illiquid'?
Apr 5, 2009 12:36 am
sickowire:

I wouldn't put any money into something that was illiquid. 


You don't know what you are talking about....

Apr 5, 2009 3:56 pm

I do believe the short term (under 3 year) CAT and Deere bonds are a great deal, especially for more rural clients or clients who use those company's products as well.  As another poster mentioned, you do need to explain that these are not an apples to apples comparison to CD's (no FDIC insurance).


Also, the yields are respectable---not too high, not too low for comparable bonds. As a trader, I like that, because, I don't second guess the trade.






Apr 6, 2009 10:07 am

Good comments from all.  This is the kind of information exchange I was hoping to see.  Sicko, I see where you are coming from, once burnt twice shy.  I woulndn't go away from them forever, there are good companies giving decent rates.  Not all of them will bite you in the a**.  BTW LOS 7+ yrs so I do know not to compare them to CD's, good lesson for some of the younger crew out there.  I had been using mostly bond funds for the last couple of years but recently started looking at individual bonds again for individual situations.


Thanks everyone!

Apr 6, 2009 11:42 am
Sportsfreakbob:

Rifon14 - can you explain to me the nature of non publicly traded reits? How are they structured and when do they become liquid? In what ways do they differ from publicly traded reits, other than the fact that they are not publicly traded and not liquid?
I have a prospect i am working on with some of these in his portfolio.

 
The idea is essentially you are raising money for the company(Inland,KBS,Wells) to go buy property(or debt on property in KBS) and then you get a monthly dividend.
 
Depending on how you purchase them(commission or nav).. For commission the surrender in generally 4 years(You pay $10/share, 1st year, 9.25, 2nd, 9.50 3 9.75, 4th no charge)...
 
However at anytime(they must notify) the company can close down redemptions(meaning if you want your money back... too bad... until it goes full cycle(8-10 years from initial start date, depending on company).
 
The share don't change in price unless the company thinks they are no longer worth $10/share(See Inland Western)... The dividend can change at any time(up or down)..
Apr 6, 2009 1:45 pm
Rifon14:

Take a look at non publicly traded REIT's.

Now, before everyone gets their panties in a bunch, I know they're not bonds and shouldn't be compared to bonds.  They are an alternative and they can be an alternative to bonds for appropriate investors.  They aren't the most liquid investments, but the ones I'm using have had no fluctuation in share price and pay a monthly dividend of 6.5% to 7% annualized.
 
Do you use Cole REIT"S??
 
Apr 6, 2009 4:31 pm
Rifon14:

Take a look at non publicly traded REIT's.

Now, before everyone gets their panties in a bunch, I know they're not bonds and shouldn't be compared to bonds.  They are an alternative and they can be an alternative to bonds for appropriate investors.  They aren't the most liquid investments, but the ones I'm using have had no fluctuation in share price and pay a monthly dividend of 6.5% to 7% annualized.
 
BE CAREFUL WITH REITS!
 
In a letter I received from Piedmont they are advising us that they are lowering NAV to $7.40 and lowering the dividend.  They did however reopen the share redemption plan, of course you will only get $7.03/s (95% if latest NAV price) vs the $10 that they were purchased for. 
 
They say to bear in mind that the average publicly traded REIT stock has declined 70% in value over the past two years.  They talk about many REIT'S have tenants downsizing and losing major customers. Widespread deteriorating leasing conditions and the tightening of credit markets as reasons for lower demand pushing real estate values down across the country.
 
Just a little FYI.  Not sure if now is the best time to be looking at these. 
 
Your customers need to know they are illiquid and could get back less than what they put into it. 
Apr 6, 2009 9:41 pm

Been buying individual corporate bonds in wrap accounts lately.

 
Client knows when to expect their principle back and when they get interest payments.
 
When am I getting my principle out of the bond fund that's down 20%?
 
To reduce risk I'm trying to buy small percentage amounts in each issue. That's also the reason for the wap account. Small ticket bond pays nothing. 
 
Last thing I'm watching the stocks of the bonds I buy. Been buying Goldman, GE, JPM, AXP, HD, Little bit of BAC, MS, and others. If I can't assume that Goldman or GE can pay their short term obligations how can I justify buying any equities.
 
Maybe I'll get screwed. We'll see but it seems logical to me.  
 
 
Apr 7, 2009 4:42 pm
CreditOnion:
Rifon14:

Take a look at non publicly traded REIT's.

Now, before everyone gets their panties in a bunch, I know they're not bonds and shouldn't be compared to bonds.  They are an alternative and they can be an alternative to bonds for appropriate investors.  They aren't the most liquid investments, but the ones I'm using have had no fluctuation in share price and pay a monthly dividend of 6.5% to 7% annualized.
 
Do you use Cole REIT"S??
 
 
Yes, Cole is one of the REIT's I use.  I like their strategy.