Corporate Bond Sell or Hold?

[ExFlyBoy5]

Long story short, I have taken over my Dad's finances (he will soon be 91 years old and in fair health) and am in the process of rebalancing to get him out of being so heavy in stocks.

In reviewing his holdings, I noticed that he holds a Ford corporate bond (CUSPIP 345370CA6) in his IRA that has a Baa2 rating and is of a fairly significant amount (about 15% of all holdings) and the current yield is about 6%. I will admit that my knowledge on bonds (especially corporate bonds) is very limited, so I am looking to the smart folks here for their opinion. In this situation, would you continue to hold the bond, or sell it?

 

[njhowie]

I see yield to maturity on this is 5.2% as it is trading at 121.1/121.5 and has a stated coupon of 7.45%

Though it is yielding about 6%, the price will trend to 100.0 as time goes by until maturity in 2031.

If it were me, I would sell all of them.

 

[pb4uski]

Diversification risk would be a concern for me if that one issue was 15% of the total. While Ford weathered the last storm quite well, you never know.... certainly the bond market also feels there is significant credit risk associated with this issuer as well.

I think it is hard to defend having a 91 yo in junk bonds and especially in a single issue.

 

[ExFlyBoy5]

Diversification risk would be a concern for me if that one issue was 15% of the total. While Ford weathered the last storm quite well, you never know.... certainly the bond market also feels there is significant credit risk associated with this issuer as well.

I think it is hard to defend having a 91 yo in junk bonds and especially in a single issue.

Thanks for the input; your thoughts track mine very closely. I have the opinion that the automakers are too invested in large trucks/SUVs (yet again!) and this is a recipe for significant loses if/when gas prices increase.

 

[Freedom56]

Long story short, I have taken over my Dad's finances (he will soon be 91 years old and in fair health) and am in the process of rebalancing to get him out of being so heavy in stocks.

In reviewing his holdings, I noticed that he holds a Ford corporate bond (CUSPIP 345370CA6) in his IRA that has a Baa2 rating and is of a fairly significant amount (about 15% of all holdings) and the current yield is about 6%. I will admit that my knowledge on bonds (especially corporate bonds) is very limited, so I am looking to the smart folks here for their opinion. In this situation, would you continue to hold the bond, or sell it?

If he bought this bond at or below par, your father is a wise man. The bond will eventually converge to par but you are 13 years from maturity. If you sell now, you can take a capital gain (depending what he paid for it) but what are you going to replace the 7.45% coupon with? Ford's near term notes or other BBB investment grade notes are not paying anywhere near that.

 

[jazz4cash]

If he bought this bond at or below par, your father is a wise man. The bond will eventually converge to par but you are 13 years from maturity. If you sell now, you can take a capital gain (depending what he paid for it) but what are you going to replace the 7.45% coupon with? Ford's near term notes or other BBB investment grade notes are not paying anywhere near that.

It's in an IRA, I think.

 

[Freedom56]

It's in an IRA, I think.

Sorry, I should have said "realize a capital gain (tax sheltered)".

 

[ExFlyBoy5]

If he bought this bond at or below par, your father is a wise man. The bond will eventually converge to par but you are 13 years from maturity. If you sell now, you can take a capital gain (depending what he paid for it) but what are you going to replace the 7.45% coupon with? Ford's near term notes or other BBB investment grade notes are not paying anywhere near that.

He is a very smart man, indeed. He never graduated HS, but with his wealth of knowledge and living a very, VERY interesting life, he defintiely earned a PhD in Life. I can say, without doubt, I have learned a lot more from him than all of my college education.

As best as I can tell, he has had it since the issue date of 1999. If I sell it, it will be held as cash (in the IRA, so no tax implications for gains).

 

[Freedom56]

He is a very smart man, indeed. He never graduated HS, but with his wealth of knowledge and living a very, VERY interesting life, he defintiely earned a PhD in Life. I can say, without doubt, I have learned a lot more from him than all of my college education.

As best as I can tell, he has had it since the issue date of 1999. If I sell it, it will be held as cash (in the IRA, so no tax implications for gains).

The default risk for Ford is low. It is a well managed company. Even during the great recession, they did not need a bail-out. If you sell now you take the gain but you don't get the high coupon. The worst mistake you could make is to sell that bond and buy a bond fund. No investment grade bond fund is paying that kind of yield plus you can suffer a loss of principal from a bond fund whereas holding a bond to maturity you will not. If you don't want to assume any risk, you can sell out and roll the cash in to short term CDs until you find something suitable. Before you sell, always look at the trace data for the bond to get an idea of what it is selling for. Always put a limit order in, otherwise the broker is going to cheat you out of thousands of dollars in the transaction with a bid and ask spread.

 

[pb4uski]

The default risk for Ford is low. It is a well managed company. Even during the great recession, they did not need a bail-out. If you sell now you take the gain but you don't get the high coupon. The worst mistake you could make is to sell that bond and buy a bond fund. No investment grade bond fund is paying that kind of yield plus you can suffer a loss of principal from a bond fund whereas holding a bond to maturity you will not. If you don't want to assume any risk, you can sell out and roll the cash in to short term CDs until you find something suitable. Before you sell, always look at the trace data for the bond to get an idea of what it is selling for. Always put a limit order in, otherwise the broker is going to cheat you out of thousands of dollars in the transaction with a bid and ask spread.

While I agree that the default risk seems low based on my limited, anecdotal knowledge of Ford, the market yield is pretty high so at least the market perceives the default risk is not low.... similarly, the rating is only the second notch of investment grade, the rating agencies perceive more risk that I would as well. Since the market and rating agencies have put more time and effort into studying Ford than I have I would go with them.

Besides, the bigger problem is that it is 15% of the portfolio, so if for some odd reason Ford defaults then it is a big deal to the portfolio.

I would sell and reinvest in a similar intermediate term corporate bond fund like Vanguard Intermediate-Term Corporate Bond Index Fund Admiral Shares (VICSX). Less yield, but also less risk, shorter duration and excellent diversification.

 

[Luck_Club]

While I agree that the default risk seems low based on my limited, anecdotal knowledge of Ford, the market yield is pretty high so at least the market perceives the default risk is not low.... similarly, the rating is only the second notch of investment grade, the rating agencies perceive more risk that I would as well. Since the market and rating agencies have put more time and effort into studying Ford than I have I would go with them.

Besides, the bigger problem is that it is 15% of the portfolio, so if for some odd reason Ford defaults then it is a big deal to the portfolio.

I would sell and reinvest in a similar intermediate term corporate bond fund like Vanguard Intermediate-Term Corporate Bond Index Fund Admiral Shares (VICSX). Less yield, but also less risk, shorter duration and excellent diversification.

So you are going to take less yield with more risk? Don't bond funds have interest rate risk and default risk that can erode the principal? Where as the Ford Bond only has default risk. FWIW VICSX has lost 2.5% of its value since the beginning of 2018.

 

[COcheesehead]

Duration, bad
Concentration risk, bad
Coupon, good
Rating, bad

3 strikes and you're out.

I am not a fan of bonds funds, but more of a bond ladder guy. I would sell and put the funds in short term, high quality bonds laddered no more than two years. If you are a Fidelity guy, they have some great bond ladder builder tools.

 

[ExFlyBoy5]

The default risk for Ford is low. It is a well managed company. Even during the great recession, they did not need a bail-out. If you sell now you take the gain but you don't get the high coupon. The worst mistake you could make is to sell that bond and buy a bond fund. No investment grade bond fund is paying that kind of yield plus you can suffer a loss of principal from a bond fund whereas holding a bond to maturity you will not. If you don't want to assume any risk, you can sell out and roll the cash in to short term CDs until you find something suitable. Before you sell, always look at the trace data for the bond to get an idea of what it is selling for. Always put a limit order in, otherwise the broker is going to cheat you out of thousands of dollars in the transaction with a bid and ask spread.

All good information. I cannot risk putting the proceeds into a CD, as I have put a substantial amount into a 2.0% 15mo CE with Ally...to do so could trigger tax implications on his SS (and other investment income).

Very good info on the spread as well; I noticed that selling is a bit different than selling an equity position. It appears that solicit a bid, and within a certain amount of time, you are presented with it. You can then agree to accept or cancel the order (through TD Ameritrade).

Duration, bad
Concentration risk, bad
Coupon, good
Rating, bad

3 strikes and you're out.

I am not a fan of bonds funds, but more of a bond ladder guy. I would sell and put the funds in short term, high quality bonds laddered no more than two years. If you are a Fidelity guy, they have some great bond ladder builder tools.

I like the 3 strike analogy. I really don't like the rating and although the coupon is a good, I don't think it outweighs the bad.

 

[Freedom56]

While I agree that the default risk seems low based on my limited, anecdotal knowledge of Ford, the market yield is pretty high so at least the market perceives the default risk is not low.... similarly, the rating is only the second notch of investment grade, the rating agencies perceive more risk that I would as well. Since the market and rating agencies have put more time and effort into studying Ford than I have I would go with them.

Besides, the bigger problem is that it is 15% of the portfolio, so if for some odd reason Ford defaults then it is a big deal to the portfolio.

I would sell and reinvest in a similar intermediate term corporate bond fund like Vanguard Intermediate-Term Corporate Bond Index Fund Admiral Shares (VICSX). Less yield, but also less risk, shorter duration and excellent diversification.

I wouldn't buy VICSX. Be aware that 54% of this fund consists of lower tier investment grade issues. The yield is too low given the risk. You can buy a short term note such as from Ally financial that matures in 12-15 months that give you the same yield with much better capital loss protection. I'm willing to bet that even a BB+ rated Ally Financial will return 100% of your capital in a 12-15 month note plus interest. But I can't make the same bet with VICSX.

 

[Freedom56]

All good information. I cannot risk putting the proceeds into a CD, as I have put a substantial amount into a 2.0% 15mo CE with Ally...to do so could trigger tax implications on his SS (and other investment income).

Very good info on the spread as well; I noticed that selling is a bit different than selling an equity position. It appears that solicit a bid, and within a certain amount of time, you are presented with it. You can then agree to accept or cancel the order (through TD Ameritrade).



I like the 3 strike analogy. I really don't like the rating and although the coupon is a good, I don't think it outweighs the bad.

Be aware that TD Ameritrade is the worst for cheating on spreads. I have accounts at Schwab, TD Ameritrade, and Fidelity. With Schwab and Fidelity their bid and ask for a typical issues is consistent with the trace data from FINRA. TD Ameritrade is always 1 or 2 points off which forces you to call in and speak to a fixed income trader directly to get a better price. So on a 100 bond buy or sell that becomes a $1000 - $2000 in excess commission. I have complained several times to TD Ameritrade about this and the need to always phone in fixed income trades. Their solution was to give me a direct high priority number. They acknowledged that their spreads quoted online are much higher and want their clients to phone in to get a better price.

 

[pb4uski]

I wouldn't buy VICSX. Be aware that 54% of this fund consists of lower tier investment grade issues. The yield is too low given the risk. You can buy a short term note such as from Ally financial that matures in 12-15 months that give you the same yield with much better capital loss protection. I'm willing to bet that even a BB+ rated Ally Financial will return 100% of your capital in a 12-15 month note plus interest. But I can't make the same bet with VICSX.

Agree if your time horizon is 12-15 months, but what if it is 12 years?

I concede that there is absolutely nothing in fixed income right now that is attractive.... my thinking was assuming that the OP wants roughtly the same risk profile as Ford but better diversification then VICSX isn't a bad choice (and Ford Motor Company is one of their holdings).... but I concede that the yield is pathetic (as are all intermediate term fixed income these days).

OTOH, if the OP is ok with letting the proceeds tread water for 12-18 months then fine... or perhaps just go out and buy a portfolio of Baa2 bonds maturing in 2031... same risk and return but gets rid of diversification risk.

 

[Freedom56]

Agree if your time horizon is 12-15 months, but what if it is 12 years?

I concede that there is absolutely nothing in fixed income right now that is attractive.... my thinking was assuming that the OP wants roughtly the same risk profile as Ford but better diversification then VICSX isn't a bad choice (and Ford Motor Company is one of their holdings).... but I concede that the yield is pathetic (as are all intermediate term fixed income these days).

OTOH, if the OP is ok with letting the proceeds tread water for 12-18 months then fine... or perhaps just go out and buy a portfolio of Baa2 bonds maturing in 2031... same risk and return but gets rid of diversification risk.

Personally if I had that bond with that coupon from Ford since 1999, I would hold it. Think of how much has already been earned in interest payments over the past 19 years. His initial investment has been recovered and then some. It's better to own a premium priced bond with a high coupon and relatively low risk profile, than low yielding diversified bond fund which will continue to fall if rates continue to rise. I prefer to ladder my own bonds, and pick sectors and companies I want to invest in rather than buy a bond fund that doesn't care what they buy and how much they pay for a particular issue.

 

[OldShooter]

OP, you are a fiduciary for your father. Maybe not legally, but definitely morally. As a fiduciary you would be held by the courts to a "prudent man rule." I.e., are you behaving as a prudent man would in handling your father's money?

My wife spent decades in a megabank Investments and Trusts dept, retiring as an SVP and business unit manager. Their rules said that anything over 15% in a single assets constituted an imprudent concentration. With other organizations I have seen 10% used as the threshold. Holdings above the threshold must sometimes exist, such as when a trust contains a large quantity of a highly appreciated stock. In such cases the holding annually triggers a formal review of the trust officer's [aka fiduciary] decision.

I tend to agree with @pb4uski (which is not uncommon!), so I would suggest that you concentrate primarily on your role as fiduciary to determine whether holding the bond is imprudent and, hence, whether it should be sold. IOW, do not consider it to be primarily an investment decision. (You speak as if it is a single bond, but if the holding is multiple bonds/same CUSIP and you like it, you could also consider a partial sale to reduce the concentration.)

 

[ExFlyBoy5]

OP, you are a fiduciary for your father. Maybe not legally, but definitely morally. As a fiduciary you would be held by the courts to a "prudent man rule." I.e., are you behaving as a prudent man would in handling your father's money?

I am his agent and accordingly, I am legally obligated to be his fiduciary. All the decisions I make are made after conferring with him, and in the case of large transactions, I keep his attorney in the loop. It doesn't hurt that I have almost finished law school, so I now know just enough to get myself in trouble.

My wife spent decades in a megabank Investments and Trusts dept, retiring as an SVP and business unit manager. Their rules said that anything over 15% in a single assets constituted an imprudent concentration. With other organizations I have seen 10% used as the threshold. Holdings above the threshold must sometimes exist, such as when a trust contains a large quantity of a highly appreciated stock. In such cases the holding annually triggers a formal review of the trust officer's [aka fiduciary] decision.

Well, no issues there as there is no trust.

I tend to agree with @pb4uski (which is not uncommon!), so I would suggest that you concentrate primarily on your role as fiduciary to determine whether holding the bond is imprudent and, hence, whether it should be sold. IOW, do not consider it to be primarily an investment decision. (You speak as if it is a single bond, but if the holding is multiple bonds/same CUSIP and you like it, you could also consider a partial sale to reduce the concentration.)

Sorry, it is the same CUSIP, but several bonds.

Thanks for all the info folks, I appreciate it!

 

[OldShooter]

... Well, no issues there as there is no trust. ...

I know. My point was only to give you some benchmarks and an indication of how seriously professional fiduciaries treat imprudent concentrations. Sorry if I was not clear.

 

[pb4uski]

Just wanted to share.... I liquidated some of my bond portfolio a while ago and have been like a deer in the headlights about reinvesting.... I can't find anything in fixed income that is attractive at all.... so for now I just put the proceeds in the Prime MM fund at 1.55% yield.... but in the process of doing so I noticed that there was an Admiral version so I clicked.... $5 million minimum.

https://personal.vanguard.com/us/fu...30&FundIntExt=INT&funds_disable_redirect=true

https://personal.vanguard.com/us/fu...66&FundIntExt=INT&funds_disable_redirect=true

 

[phil1ben]

For my fixed income portfolio I only own individual bonds both muni and corporate. I have been buying individual bonds for many years and almost always hold until maturity. Normally because the process for a retail investor to sell a bond will yield substantially less than the market price. The process to solicit a bid used by Schwab and Fidelity always results in offers almost 10% below market. The parties making the offer know the Seller is a retail investor and low-ball the bid. I am afraid that if you go on EMMA and look at past trades for the bond you have you will find that the sales price (to a retail buyer as opposed to a dealer to dealer trade) will be much higher than what you will be offered. There is no harm in soliciting a bid. You do not need to accept it. No harm no fowl.

Having said that holding 15% of your father's total portfolio in a Ford bond is probably inappropriate. Don't know the rest of his portfolio but I would be inclined to sell half realizing that he will take a haircut on the sale. Currently, I am personally comfortable with the Ford credit but not for 15% of a portfolio.

 

[Freedom56]

Just wanted to share.... I liquidated some of my bond portfolio a while ago and have been like a deer in the headlights about reinvesting.... I can't find anything in fixed income that is attractive at all.... so for now I just put the proceeds in the Prime MM fund at 1.55% yield.... but in the process of doing so I noticed that there was an Admiral version so I clicked.... $5 million minimum.

https://personal.vanguard.com/us/fu...30&FundIntExt=INT&funds_disable_redirect=true

https://personal.vanguard.com/us/fu...66&FundIntExt=INT&funds_disable_redirect=true

Fidelity doesn't allow retail investors to buy that one. I parked my cash in FZDXX yielding 1.45% until I find something. I sold off a lot of investment grade long dated notes and preferred stocks back in December. I parked the cash in a MM fund waiting for the issues I sold to fall below par or find short to medium dated notes with more attractive yields. They are slowly starting to appear as people exit bond funds.

 

[audreyh1]

For my fixed income portfolio I only own individual bonds both muni and corporate. I have been buying individual bonds for many years and almost always hold until maturity. Normally because the process for a retail investor to sell a bond will yield substantially less than the market price. The process to solicit a bid used by Schwab and Fidelity always results in offers almost 10% below market. The parties making the offer know the Seller is a retail investor and low-ball the bid. I am afraid that if you go on EMMA and look at past trades for the bond you have you will find that the sales price (to a retail buyer as opposed to a dealer to dealer trade) will be much higher than what you will be offered. There is no harm in soliciting a bid. You do not need to accept it. No harm no fowl.

Useful info. Thanks!

 

[ExFlyBoy5]

I know. My point was only to give you some benchmarks and an indication of how seriously professional fiduciaries treat imprudent concentrations. Sorry if I was not clear.

No worries! I was only answering what I thought was a question. Nonetheless, the information is good and may be helpful to someone else on down the line.

For my fixed income portfolio I only own individual bonds both muni and corporate. I have been buying individual bonds for many years and almost always hold until maturity. Normally because the process for a retail investor to sell a bond will yield substantially less than the market price. The process to solicit a bid used by Schwab and Fidelity always results in offers almost 10% below market. The parties making the offer know the Seller is a retail investor and low-ball the bid. I am afraid that if you go on EMMA and look at past trades for the bond you have you will find that the sales price (to a retail buyer as opposed to a dealer to dealer trade) will be much higher than what you will be offered. There is no harm in soliciting a bid. You do not need to accept it. No harm no fowl.

Having said that holding 15% of your father's total portfolio in a Ford bond is probably inappropriate. Don't know the rest of his portfolio but I would be inclined to sell half realizing that he will take a haircut on the sale. Currently, I am personally comfortable with the Ford credit but not for 15% of a portfolio.

Well, an update of sorts. I looked at selling about 1/2 of it and the bid was woefully low, so I rejected it... as I wasn't interested in taking a haircut. So, as it stands, I am going to hold it. I am still not 100% happy with the bond(s) being 15% of the portfolio, but considering his age and weighing the fairly low risk in some big issue at Ford happening in a fairly short period...I am more comfortable leaving it as is. In the grand scheme of his total assets, he would have to be in really bad sorts for a substantial period of time before he would *have* to have the money from the bonds.

Thanks again to all the posters. I am now a little smarter about bonds, and I thank all of you for facilitating that!