ISM/OSM yet again

[cute fuzzy bunny]

Mmmm hmmm...might want to run that one through the IRR calculator...

[FIRE'd@51]

Originally Posted by youbet

Of course, if SLM goes belly-up, distributions might be a little less.......

Now let's not have any of that negativity! Believe it or not, by adding to my OSM position when it was trading with a 16 handle, I now actually have a capital gain on my entire position.

[youbet]

I noticed the latest inflation data popped out a few days ago and plugging that into the ISM yield calculator results in an Aug 15 through Sept 14 payout of 6.22% at PAR. At the current price of $18.19, that would result in a payout of 8.55%.

[haha]

Originally Posted by youbet

I noticed the latest inflation data popped out a few days ago and plugging that into the ISM yield calculator results in an Aug 15 through Sept 14 payout of 6.22% at PAR. At the current price of $18.19, that would result in a payout of 8.55%.

No doubt about it- these things are great if they hold together. And they likely will. Still, after the earlier missteps I won't put very much into them. Maybe no more than staying away from the stove that burned me.

Ha

[RustyShackleford]

Hmmm ... down to $16 flat.

[RustyShackleford]

Some good arbitrage opportunities. I just made 50 cents per share
selling OSM and buying ISM.

[haha]

Thanks for the heads up, Rusty. Enough to get my car detailed a couple times, in 5 minutes!

Ha

[FUEGO]

Guys, don't forget that OSM is "worth" more than ISM. About $0.40 per share according to my calculations. That is, if you calculate yield to maturity on these things and compare the prices based on that. But I did this arb last week or maybe 2 weeks ago and got into ISM and "made" $0.80 per share or so. I really only made $0.40 since ISM is worth 40 cents less than OSM (in my opinion).

[RustyShackleford]

Originally Posted by FUEGO

Guys, don't forget that OSM is "worth" more than ISM. About $0.40 per share according to my calculations. That is, if you calculate yield to maturity on these things and compare the prices based on that. But I did this arb last week or maybe 2 weeks ago and got into ISM and "made" $0.80 per share or so. I really only made $0.40 since ISM is worth 40 cents less than OSM (in my opinion).

Maybe. OSM matures a almost a year sooner (3/2017 instead of 1/201 but pays
50 basis points less interest. However, when I use the moneychimp YTM
calculator, you're right, I DO get that the ISM price has to be reduced by about
40 cents to get the same YTM result. However, of course this calculator
effectively is doing a non-inflation linked bond with a very low coupon. I think
if you factor in the typical inflation adjustments to the effective coupon, it
cancels out some of the difference. Or not, but I thought a spreadsheet
I did awhile back kinda indicated that. I'll try to ressurect it tonight.

[FUEGO]

I thought the OSM paid 5 basis points less than ISM.

I think I ran the YTM calcs both ways - with an assumed 3% CPI payment and without. Still about a 40 cent differential in favor of OSM.

[RustyShackleford]

Originally Posted by FUEGO

I thought the OSM paid 5 basis points less than ISM.

You're right, 2.00% versus 2.05%. I was thinking basis pts were 1000ths,
not 100ths. Silly me. Been thinking about milli-UI (in high-speed signalling)
too much ...

I think I ran the YTM calcs both ways - with an assumed 3% CPI payment and without. Still about a 40 cent differential in favor of OSM.

Ok, I guess I'm convinced. Oh well, at least my little escapade didn't LOSE
money, unless sometime between OSM and ISM maturing is when these
turkies finally give up the ghost.

[FUEGO]

Originally Posted by RustyShackleford

Ok, I guess I'm convinced. Oh well, at least my little escapade didn't LOSE
money, unless sometime between OSM and ISM maturing is when these
turkies finally give up the ghost.

That would be ironic - I arbed from OSM into ISM to make a few hundred bucks, and then I hold it for 9 years and then ISM goes to zero some time in 2017 as SLM goes to zero.

BTW, I noticed the Vanguard High Yield (Junk) fund is yielding a bit more than 9% right now. That's about 5.7% over comparable treasuries for a diversified relatively high credit rating junk fund. For all you junk-lovers looking for some diversified yields. Very tempting if I only had some cash.

[cute fuzzy bunny]

I've got some, and yep the yield is just right.

[youbet]

Given the recently issued CPI numbers, I calculated that the ISM payout for Sept 15 - Oct 14 will be 7.07% at par. At today's closing price of $16.75, that would be an effective annualized yield of 10.55%. Your yield will depend on what you paid for it.........

(Note, this is not YTM. And, I'm too lazy to go into the detail of exact number of days in the period and just assume 30.)

Every month they're still in business and plop another interest payment into my account is a blessing.........

[FIRE'd@51]

Originally Posted by RustyShackleford

Ok, I guess I'm convinced. Oh well, at least my little escapade didn't LOSE
money, unless sometime between OSM and ISM maturing is when these
turkies finally give up the ghost.

No harm done, and, as I'm sure you know, these spreads jump around, with ISM sometimes going to a premium over OSM. Last year I was able to do the reverse (sell all my ISM and buy OSM) and take out better than 0.50 per share. In fact, I've been thinking about converting some of my OSM back to ISM (the trade you did) just to be in position to take advantage of the spread going to zero, or, better yet, an ISM premium.

[clifp]

Damn now that I know the rest of the board is on to this little arbitrage opportunity I am going to give up on it. I knew OSM was worth a bit more than ISM, but .40 is more than I thought.

BTW, Anybody know of other corporate inflation linked bond with a higher credit rating?

[Nords]

Originally Posted by clifp

Damn now that I know the rest of the board is on to this little arbitrage opportunity I am going to give up on it.

175 posts later, I was wondering if we'd learned anything from this experience...

[FIRE'd@51]

Originally Posted by clifp

BTW, Anybody know of other corporate inflation linked bond with a higher credit rating?

PFK is rated A3 by Moody's and A+ by S&P. It's structure and maturity are similar to OSM/ISM but it yields about 300-350 basis points less.

[haha]

Originally Posted by clifp

Damn now that I know the rest of the board is on to this little arbitrage opportunity I am going to give up on it. I knew OSM was worth a bit more than ISM, but .40 is more than I thought.

BTW, Anybody know of other corporate inflation linked bond with a higher credit rating?

I believe that there is a very low chance that SLM bonds don't pay interest until maturity, and get paid off in full at maturity. The world has changed since the JC Flowers bid was pulled. Whatever might happen to SLM the stock, or SLM Corp the company, someone if only the US treasury will pay off these bonds.

PFK is good too, but I prefer PRU the common in this case at recent quotes, though I did own PFK from fall 07 until earlier this year.

ha

[cute fuzzy bunny]

Originally Posted by clifp

BTW, Anybody know of other corporate inflation linked bond with a higher credit rating?

With vanguards high yield admiral fund tossing out 9+% with pretty minimal risk of losing more than a low single digit % of your capital, and that being higher than most cpi linked corporate issues that arent likely to take all of your capital away, I personally dont see a whole lot of reason to look elsewhere for good returns, capital safety and excellent sleep at night factors. Inflation would have to run at very high levels for a very long time to get a stable company's cpi linked bonds into the same territory. Or you can get that fat yield all year, every year.

Look at the holdings. Tell me whats going to default...there isnt much junky junk in there.

It isnt a very good diversifier for an equity heavy portfolio, but its a nice fat monthly dividend check.