Thursday, November 20, 2008 2 comments ++[ CLICK TO COMMENT ]++

Recap of bond performance

Huge sell-off in the markets and there really isn't much for me to say. I have said in the last few weeks that the stock market was attractive but not exceptionally cheap. Right now, however, I think we may be hitting a cheap level. Anyway, I thought I would look at something different: bonds.

The following table from WSJ Market Data Center summarizes how various bond indexes have done:

Bond yields are hitting recessionary levels. I recall reading recently that junk bond yields just surpassed the 1990-1991 recession levels. Some say that bond yields are forecasting a depression but I don't really see that (except in some specific bonds or in the CDS market--but I don't trust CDS.)

Anyway, I'm investigating whether it is better to invest in junk bonds or stocks right now. Junk bonds yield between 15% to 20% so the question is whether stocks can beat that. One also needs to be concerned with inflation when it comes to a typical bond but this isn't a big issue with junk bonds due to their high yield.


2 Response to Recap of bond performance

November 22, 2008 at 12:39 AM

My broker lets me choose individual bonds, and there are some insane yields for bonds that mature in months - if you can be sure that the business will survive. Obviously there's GM/Ford, but also financial companies like iStar (Marty Whitman bought those), ILFC, Cit Group, various insurers... I wish I knew how to value financials.

November 22, 2008 at 10:30 PM

I would not go near financials unless you are pretty confident with their balance sheet. Certainly the skilled investors like Martin Whitman are investing in companies like GMAC but I am looking at other sectors. I think the safest are non-financial companies, possibly retailers, industrials, or commodty businesses.

I would be very careful with certain industries, such as the auto industry. If the Big Three collapse, the industry will shrink, which means that a sizeable number of companies will go bankrupt or go into liquidation.

I haven't looked but industrials or resource companies may also be worth looking at. If you think the company is viable then even with a bankruptcy, you may emerge with reasonable value. If you can buy them, say, around 40% of par value and a yield of 20%, then the possibiliy of losses seem low. In contrast, if some of these financials go bankrupt, your recovery value is probably zero.

The only financial that I was looking for is MBIA surplus notes, since I think the insurance company (not sure about the holding company) will likely survive. But I don't see them being traded.

The bond that I'm looking at seriously is Sears Roebuck Acceptance Corp. It's quite risky but I'm more comfortable with something like that than any financial. Sears bonds are yielding from 20% to up to 40% for the highly illiquid ones (their maturities range from 3 or 4 years all the way to 25 years.) I'm mildly bullish on the stock itself so the bonds look quite safe to me.

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