Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

A New Strategy for High Income Investing With Ultra-Low Risk

Interest-Rates / Corporate Bonds Dec 03, 2012 - 12:07 PM GMT

By: Investment_U

Interest-Rates

Steve McDonald writes: The Wall Street Journal recently ran a segment about a fund that’s trading high-yield corporate bonds with virtually no risk! All compliments of a fold in the bond market that has been staring at us for the last hundred years – and no one noticed it.

This type of corporate bond is essentially pre-refunded. That means the money to buy the bonds back is already set aside, and the buyback date is already set – in some cases in as little as a week.


There’s virtually no risk!

Better yet: These bonds have a maximum of about a 90-day holding period, some as short as five days. And this very limited amount of market exposure means iron-clad protection from inflation and a market sell-off.

Sounds like an infomercial I know, but this is real. I’m embarrassed I didn’t think of it first.

Most corporate bonds are issued with call features that allow the company to buy them back before maturity. Bonds are called if the company has a lot of cash and wants to reduce its debt load, or if interest rates have dropped significantly and it can refinance the bonds at lower rates.

Both are signs of a solid company.

Right now is an excellent time to get high-cost debt out of circulation, but many bonds either don’t have a call feature built in, or the call is farther out than companies want to wait.

Remember, every day a bond stays on the market costs the company lots of money in interest expense. So every company that has the ability is getting rid of its debt or reducing its interest expense by buying back or reissuing bonds.

Receiving a Tender Offer

Essentially, a tender offer is when a company doesn’t have a call feature available and offers its bond holders a special, one-time deal to buy the bonds back early.

When the tender offer is made, the market price of the bond runs up to the offer price. The bond holders have a set amount of time to respond to take advantage of the offer, and if enough bond holders agree to it, it goes to settlement in anywhere from five to 90 days.

Here’s where it gets interesting!

Between the time the tender offer is made and settlement date, the bond continues to pay interest.

What we have is a bond that has had money set aside to buy it back, always a good sign of the health of a company, and anywhere from five to 90 days of interest before the settlement date from what is essentially a pre-refunded bond.

The buyer of this type of bond not only knows when he will get his principal back, but also that the money is already there to buy it back. Best yet, he gets his accrued interest until settlement.

How could we have missed something this good?

The answer: Until we got into this horrible yield market, no one really needed to look at this type of trade. CDs and savings were paying enough to pay the bills, and no one was interested in stretching the envelope.

Everyone is stretching it now…

An Example of a Tender Offer

Here’s a tender offer from one of the bonds in my Oxford Bond Advantage Portfolio that would have been a great short-term return.

Massey Energy had a 3.25% bond selling at about 88 when we originally bought the bond in August. They made an early tender offer in September of 94, $940 per bond, and a regular offer for the late comers of 92, $920. Two offer prices – a regular and an early – aren’t unusual in a tender. And our return was almost 7% with a holding period of just 53 days.

But, if you bought the bond for 94 – which is what it was selling for after the offer was announced – you would have collected 3.45% annually for each bond you held. And although this wasn’t even close to our highest-paying bond, it wasn’t a bad investment.

A CD of the same holding time is paying virtually nothing. Based on our cost of 94, the current yield of 3.45% is way above anything else available. Treasuries of the same duration pay less than 1%.

A bond that’s inflation and sell-off proof in this market, with any kind of yield, is invaluable!

But, there are a few negatives or gray areas to this strategy…

Things to Watch Out For

First, some of the holding times can be as short as a week. Some can run for 90 days. It’s a function of the settlement date and how quickly the company wants to get the bonds out of circulation.

Next, there may only be two or three tender offers per month in the whole corporate bond market. So you’ll have to stay on top of your broker or his bond desk to get in on them.

This will also be transaction intensive. If you buy all of the available tender offers, you could have as many as nine and 12 bonds in the works at one time. They’re pretty much on autopilot after you buy them – your principal automatically shows up in your account – so you have very little to do, but it’s a lot of activity for some folks.

Most importantly, once in a while a tender offer doesn’t have enough participation and the company will pull it. In that case, you would own the bond until a call or maturity.

One precaution is to wait for a few days after the offer and check with the bond desk to see how the redemptions have been doing. Make sure there have been enough bonds tendered to make the deal viable. You’ll lose a few cents in interest, but you won’t get locked into a long-term commitment.

This strategy isn’t for everyone. You’ll have to invest a lot of cash to make it worthwhile, but you can’t argue with the annual returns compared to the risk.

It’s not my style to describe anything in this business as a “no brainer,” but I’m having trouble finding anything wrong with this strategy. It’s actually one where you could play a lot of money over several plays at a time and watch the small gains add up.

Pre-refunded, an ultra, ultra-short holding time, returns way above anything else of the same duration and a virtual guarantee.

This is a very new concept to both pros and beginners, so move slowly and keep your ear to the ground. In this yield-starved market, this could really catch fire.

And remember: Never get piggish, even with a gimme.

Good Investing,

Steve McDonald

Source: http://www.investmentu.com/2012/December/high-income-with-ultra-low-risk.html

http://www.investmentu.com

Copyright © 1999 - 2008 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: CustomerService@InvestmentU.com

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules