Don’t hate all bonds, buy yield paper to call
The ten-year Treasury still hovers around 2%. Junk bond yields and spreads are low and compressed. Still, it could last a lot longer.
YTC stands for “yield to call” in bond language. We have a lot of mnemonics in Bondland: YTW, YTM, teenie, spread, slick, the list goes on.
So have fun, then buy some of the few high coupon bonds that haven’t been called yet.
Having the yield of call paper has several advantages. First, the yield on the worst call date is much better than the yield to maturity of a non-redeemable bond (aka bullet bond). Second, if for some odd reason the bonds don’t call on the call date, then your yield “goes up” (this is called stimulus bonds).
Here is a recommendation.
Refining has always been the ugly sister-in-law in the energy space. The competition is fierce. EPA rules and regulations are stifling, operating margins are the size of a ring for a woman – until now.
Tesoro refines and markets petroleum products. Tesoro is a service provider in the Gulf of Mexico. It owns 850 gas stations and several refineries in the United States. With the brilliant and inexpensive acquisition of the California assets from BP, Tesoro is on the right track.
Of the three Tesoro bonds currently in circulation, the 9.75% due June 1, 2019 stands out like a swan in a duck pond. What CFO or treasurer wouldn’t want to call these high coupon puppies? I’m sure if there had been a blanket provision, they would have done it already.
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:
Call yield in 2014: 2.17%
Yield until 2015: 4.59%
Obviously, I think these bonds will be called in June 2014. A rate of 2.17% is not mediocre compared to your money market yield of 0.01%.
Are there other callable bonds that companies are evolving? Absolutely.
If you haven’t purchased my Icahn Enterprises 2012 recommendation from my Forbes column, please do so now. Icahn Enterprises is Carl Icahn’s holding company active in autos, energy, real estate, pushing lame boards into action.
the Icahn Enterprises 8.00% due January 15, 2018 (CUSIP: 451102AHO) offers a hell of a return. Pay 107.50 and the yield through 2014 (which is the first and worst call) is 3.37%. In 2015, it was 4.67%; 2016 it is 5.09% and 6.17% at maturity. You win anyway.