Was It Crazy to Buy These Bonds When I Did?

January 13th, 2014 by

Bond Market Schemes

In the summer of 2013, Treasury rates were steadily climbing higher, and the usual Wall Street chorus of don’t-touch-a-long-term-bond-with-a-100-foot-pole was heard far and wide.  It was during that time that I decided to purchase the following two bonds: On July 8, I purchased Southern Copper’s April 16, 2040 maturing, 6.75% coupon notes (CUSIP 84265VAE5) at 96.978 cents-on-the-dollar (7.00% yield-to-maturity).  Later, on August 7, I purchased Vale’s November 21, 2036 maturing, 6.875% coupon notes (CUSIP 91911TAH6) at 98.434 cents-on-the-dollar (7.011% yield-to-maturity).

 

To see a list of high yielding CDs go here.

 

Since the times of purchase, benchmark yields have headed higher.  The Treasury long-bond closed in the 3.60s on the days I purchased those notes, only to touch 4.00% on the last day of 2013 (CUSIP 912810QY7 offered at a yield of 4.001% on December 31).  Where did the aforementioned corporates close 2013?  Rather than experiencing rising yields, as benchmark Treasuries did, yields on the Southern Copper and Vale notes actually fell.  At the close of business on December 31, 2013, an investor wanting to purchase Southern Copper’s CUSIP 84265VAE5 could do so for a price of 97.739, a yield-to-maturity of 6.937%.  That’s 6.3 basis points lower than the yield I received, despite benchmark Treasuries rising in the neighborhood of 35 basis points since the date of purchase.  At the close of business on December 31, 2013, Vale’s CUSIP 91911TAH6 was offered for 103.503, a yield-to-maturity of 6.576%.  That’s a whopping 43.5 basis points lower than the yield I received earlier in the year, despite long-term Treasuries rising roughly 30 basis points during the same time period.

As should be expected, not every bond I purchased last year reacted in the manner described above (although there are more than just the two from this article).The point of my sharing this experience, however, is to demonstrate that investors need not believe all the typical bad news they read about bonds.  Just because benchmark rates head higher does not inherently mean your long-term bonds will decline in price.  In the world of equities, some stocks head higher even while the broader market declines.  The same is true in the world of bonds.  Throughout the second half of 2013, the financial community, as a collective whole, likely led many investors to the conclusion that there were no opportunities in bonds, let alone in long-term bonds.  In fact, there were plenty of opportunities in bonds, even during the meaningful rise in benchmark Treasury yields.

On many occasions, I’ve written that investors should think about the opportunity cost of waiting to purchase a bond.  Even if you think benchmark rates are heading higher, by the time you end up purchasing the bond you had your eye on, you may end up worse off than had you bought the bond in the first place and held it to maturity.  This is especially true if benchmark rates head higher and certain other bonds don’t follow suit.

Was it crazy to buythe aforementioned bonds last summer?  Some investors may think so.  I, on the other hand, am certainly glad I didnot wait.  Not only would I be paying more now (still true as of January 10, 2014), despite Treasury yields marching higher in the interim, but I would also have missed out on collecting and accruing a few percentage points worth of interest.

More from The Financial Lexicon: 

The 5 Fundamentals of Building a Retirement Portfolio

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