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You Shouldn't Hate All Bonds
04/10/2013 7:45 am EST
Clipping coupons may be just what the bond doctor ordered in this low-yield environment, writes Marilyn Cohen in Forbes.
Never in my 34-year bond career have I heard such vile, vitriolic hatred and fear of bonds.
I understand the multiple explanations, yet nothing has happened. The ten-year Treasury still hovers around 2%-ish. Yields and spreads in junk bonds are low and compressed. Yet this could last a lot longer.
YTC stands for ‘yield to call,’ in bond-speak. So entertain, then buy some of the few high-coupon bonds left that have yet to be called. Owning yield to call paper has several advantages.
- One, the yield to the worst call date is much better than yield to maturity of a non-callable bond (aka "bullet bond").
- Two, if for some strange reason the bonds are not called on the call date, then your yield “kicks up” (these are called "kicker bonds").
Now, here is my recommendation...
Refining has always been the ugly step sister in the energy space. Competition is fierce. EPA rules and regulations are choking; operating margins are a woman’s ring size—until now.
Tesoro (TSO) refines and markets petroleum products. Tesoro is a service provider in the Gulf of Mexico. It owns 850 retail gas stations and multiple refineries all over the US. With the brilliant and inexpensive acquisition of BP's (BP) California assets, Tesoro is on one heck of a glide path.
Of Tesoro’s three bonds currently outstanding, the 9.75% due June 1, 2019 sticks out like a swan in a pond of ducks. What chief finance officer or treasurer wouldn’t want to call these high-coupon puppies? I am certain if there was a make-whole provision, they would have executed it by now.
So take advantage of Tesoro’s high coupon and buy Tesoro 9.75% due June 1, 2019 (CUSIP: 881609AWI). If you pay $113.50, here’s how the numbers flow:
Yield to call in 2014: 2.17%
Yield to 2015: 4.59%
Clearly, I think these bonds will be called in June 2014. A 2.17% isn’t shabby compared to your .01% money market yield.
Are there any other callable bonds whose businesses are cruising along? Absolutely.
If you didn’t buy my 2012 Icahn Enterprises (IEP) recommendation, then do it now. Icahn Enterprises is Carl Icahn’s holding company, active in automotive, energy, real estate, and kicking lame company boards to action.
The Icahn Enterprises 8.00% due January 15, 2018 (CUSIP: 451102AHO) offers a heck of a lot of yield. Pay 107.50 and the yield to 2014 (which is the first and worst call) is 3.37%. In 2015, it is 4.67%; 2016 it is 5.09%; and 6.17% to maturity. You win either way.
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