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Re: Sallie Mae CPI-linked bonds
Old 12-22-2006, 12:39 PM   #41
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Re: Sallie Mae CPI-linked bonds

I don't actively invest much. When I see something like this I usually think that there is some information out there (that impacts prices) that someone else knows and I don't. In this case it is just that not enough people have noticed the gap to close it yet?
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Re: Sallie Mae CPI-linked bonds
Old 12-22-2006, 12:42 PM   #42
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Re: Sallie Mae CPI-linked bonds

Quote:
Originally Posted by scrinch
I don't actively invest much. When I see something like this I usually think that there is some information out there (that impacts prices) that someone else knows and I don't. In this case it is just that not enough people have noticed the gap to close it yet?
That appears to be the case, but no guarantee the gap will ever close.
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Re: Sallie Mae CPI-linked bonds
Old 12-22-2006, 12:53 PM   #43
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Re: Sallie Mae CPI-linked bonds

Well, let's watch and see if it does. In the meantime I've swapped my OSM for ISM.
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Re: Sallie Mae CPI-linked bonds
Old 12-22-2006, 12:56 PM   #44
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Re: Sallie Mae CPI-linked bonds

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Originally Posted by scrinch
Well, let's watch and see if it does. In the meantime I've swapped my OSM for ISM.
They converge from time to time. Within the past month or so I bought OSM for my FIL at about the same price as ISM. The gap widened so I swapped them. I think the gap widens simply because these are a couple of smallish oddball debt issues nobody cares about.
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Re: Sallie Mae CPI-linked bonds
Old 12-22-2006, 12:58 PM   #45
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Re: Sallie Mae CPI-linked bonds

IMHO, you guys are getting pretty excited over less than a 20bp difference in YTM between OSM and ISM.

To me, the real question is why ISM/OSM are yielding something like 130bp over TIPS.
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Re: Sallie Mae CPI-linked bonds
Old 12-22-2006, 01:03 PM   #46
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Re: Sallie Mae CPI-linked bonds

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Originally Posted by wab
To me, the real question is why ISM/OSM are yielding something like 130bp over TIPS.
More like 155 BP, but close.

Its not the issuer's credit. Other SLM issues are trading at 65BP or so.
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Re: Sallie Mae CPI-linked bonds
Old 12-22-2006, 01:19 PM   #47
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Re: Sallie Mae CPI-linked bonds

Quote:
Originally Posted by wab
IMHO, you guys are getting pretty excited over less than a 20bp difference in YTM between OSM and ISM.
With OSM at $22 and ISM at $21.27, (this morning my actual trade prices) and an assummed inflation rate of 3.5 %, it looks more like a 60 bp difference to me.

Seen another way, I swapped 5600 OSM for 5600 ISM for a gross differential of 5600*($22-$21.27)- 2 commissions @$8 each=$4072. And I am left with a larger monthly income even disregarding the interest on the $4072.

It is unusual for the bid-ask spreads to be narrow enough and with sufficient size to allow this, but it was there today.

Ha
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Re: Sallie Mae CPI-linked bonds
Old 12-22-2006, 01:26 PM   #48
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Re: Sallie Mae CPI-linked bonds

Thanks, Ha, for making the market more efficient.

Here's what I get based on current quotes:

OSM @ 21.73, the real YTM is 3.58%

ISM @ 21.34, the real YTM is 3.69%

difference = 11bp

I'm using a 10-year maturity for OSM, and 11 years for ISM.
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Re: Sallie Mae CPI-linked bonds
Old 12-22-2006, 01:47 PM   #49
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Re: Sallie Mae CPI-linked bonds

Quote:
Originally Posted by wab
Thanks, Ha, for making the market more efficient.

Here's what I get based on current quotes:

OSM @ 21.73, the real YTM is 3.58%

ISM @ 21.34, the real YTM is 3.69%

difference = 11bp

I'm using a 10-year maturity for OSM, and 11 years for ISM.
One of us is making a mistake. I have made lots- but if it is you this time, I imagine that you may be forgetting to allow for the dynamic interaction of the assumed (or actual prospective) interest rate and the discount to par at purchase.

As to efficiency, I think $4072 for 10 minutes and no effort, and no change in my risk position and a slight improvement in income is pretty fair. Always happy to do my part in the world's business of getting and spending.

Ha


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Re: Sallie Mae CPI-linked bonds
Old 12-22-2006, 01:52 PM   #50
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Re: Sallie Mae CPI-linked bonds

Quote:
Originally Posted by HaHa
One of us is making a mistake. I have made lots- but if it is you this time, I imagine that you may be forgetting to allow for the dynamic interaction of the assumed (or actual prospective) interest rate and the discount to par at purchase.
How are you calculating yield?

I'm just using the moneychimp YTM calc, and assuming that par is $25 for both issues (but maturities differ). You don't need to make any assumptions about inflation, since both issues use the same coupon formula.

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Re: Sallie Mae CPI-linked bonds
Old 12-22-2006, 02:10 PM   #51
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Re: Sallie Mae CPI-linked bonds

Quote:
Originally Posted by wab
How are you calculating yield?

I'm just using the moneychimp YTM calc, and assuming that par is $25 for both issues (but maturities differ). You don't need to make any assumptions about inflation, since both issues use the same coupon formula.
I use an excell function for accretion. ISM is cpi+2.05; OSM is CPI +2.00.

I disagree that it won' t matter what inflation is. Because you are buying either of these at a steep discount to par, your real current yield increases with CPI inflation and so therefore does the real YTM. I can't explain it very well, but if you make a spreadsheet I think you will see what I mean. If I had paid par, current nominal yield would be just inflation + 2.05% (ISM). Backing out inflation, you have just what you said-CPI +2.05%. regardless of the level of inflation.

However, since I paid 21.27, my nominal current yield is 25/21.27*(2.05+CPI). And my nominal YTM is this term +accretion of discount. So back out the nominal component, and anytime you buy below par you have real yield enhanced by (factor>1)*(cpi+2.05).

At least that is how I see it.

Ha
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Re: Sallie Mae CPI-linked bonds
Old 12-22-2006, 02:44 PM   #52
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Re: Sallie Mae CPI-linked bonds

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Originally Posted by HaHa
I disagree that it won' t matter what inflation is. Because you are buying either of these at a steep discount to par, your real current yield increases with CPI inflation and so therefore does the real YTM.
Hmm, good point. You're getting the CPI at a discount too. But even in the case of 3.5% inflation, I'm still seeing a small YTM spread between the two issues (16bp instead of 11bp).

In any case, ISM looks like the better deal.
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Re: Sallie Mae CPI-linked bonds
Old 12-26-2006, 02:16 PM   #53
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Re: Sallie Mae CPI-linked bonds

Well, after watching the discussion unfold Friday, I decided ISM was a reasonably good bet short term and a low risk long term play, so I'm in for 500 shares at $21.33/share as of today. I figure based on 3.5% inflation going forward, I'll get 4.36% real return (yield to maturity) plus the 3.5% CPI return. A total annual return of 7.86% on an 11 year A-rated bond isn't too bad. If ISM shoots up to around 24 I can always sell and make a quick buck. Also, there's the potential arb play with OSM. Anyone else take advantage of this?
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Re: Sallie Mae CPI-linked bonds
Old 12-26-2006, 02:29 PM   #54
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Re: Sallie Mae CPI-linked bonds

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Originally Posted by justin
I'll get 4.36% real return (yield to maturity) plus the 3.5% CPI return.
That real YTM seems high to me. How'd you come up with that number?
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Re: Sallie Mae CPI-linked bonds
Old 12-26-2006, 02:30 PM   #55
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Re: Sallie Mae CPI-linked bonds

Quote:
Originally Posted by justin
Well, after watching the discussion unfold Friday, I decided ISM was a reasonably good bet short term and a low risk long term play, so I'm in for 500 shares at $21.33/share as of today. I figure based on 3.5% inflation going forward, I'll get 4.36% real return (yield to maturity) plus the 3.5% CPI return. A total annual return of 7.86% on an 11 year A-rated bond isn't too bad. If ISM shoots up to around 24 I can always sell and make a quick buck. Also, there's the potential arb play with OSM. Anyone else take advantage of this?
That's pretty much my thoughts on the subject.
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Re: Sallie Mae CPI-linked bonds
Old 12-26-2006, 02:33 PM   #56
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Re: Sallie Mae CPI-linked bonds

Quote:
Originally Posted by wab
That real YTM seems high to me. How'd you come up with that number?
Probably same way I did.

BTW, arbitrage is not so easy with the wide spreads and low volumes on these things.

Ha
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Re: Sallie Mae CPI-linked bonds
Old 12-26-2006, 02:38 PM   #57
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Re: Sallie Mae CPI-linked bonds

Quote:
Originally Posted by HaHa
Probably same way I did.
That would be interesting if you're both getting the same number.

Brewer, what does Bloomberg print for the YTM?
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Re: Sallie Mae CPI-linked bonds
Old 12-26-2006, 02:45 PM   #58
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Re: Sallie Mae CPI-linked bonds

Quote:
Originally Posted by wab
Brewer, what does Bloomberg print for the YTM?
Depends on what you assume for inflation.

At 2% CPI, it is 5.877% YTM.
At 3%, it is 6.983%.
At 3.5%, it is 7.538%.
At 4%, it is 8.093%.

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Re: Sallie Mae CPI-linked bonds
Old 12-26-2006, 02:49 PM   #59
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Re: Sallie Mae CPI-linked bonds

That's what I get too. Ha and justin seem to be finding another 30bp from someplace.
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Re: Sallie Mae CPI-linked bonds
Old 12-26-2006, 02:57 PM   #60
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Re: Sallie Mae CPI-linked bonds

Quote:
Originally Posted by wab
That's what I get too. Ha and justin seem to be finding another 30bp from someplace.
I think we are beating around the bush, though. At roughly 175BP spread over similar TIPS, this is very attractive.
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