Sallie Mae CPI-linked bonds

[donheff]

I just started reading this thread and got my interest piqued. But I need some 101 counseling.

When I look at ISM on Schwab or Morningstar I can't tell anything useful about it except the price of 21.36. In fact, I would assume it is some sort of stock from what the sites say. You folks are describing it as a bond but the site makes no mention of that. Also the yield shows as a monthly figure with what I assume is a annual projection (6.8%). Is that the cumulative result of CPI and other interest? How would you figure out what you are buying? And what exactly is ISM, a bond, a bond fund, a stock?

 

[FIRE'd@51]

I just started reading this thread and got my interest piqued. But I need some 101 counseling.

When I look at ISM on Schwab or Morningstar I can't tell anything useful about it except the price of 21.36. In fact, I would assume it is some sort of stock from what the sites say. You folks are describing it as a bond but the site makes no mention of that. Also the yield shows as a monthly figure with what I assume is a annual projection (6.8%). Is that the cumulative result of CPI and other interest? How would you figure out what you are buying? And what exactly is ISM, a bond, a bond fund, a stock?

Try this link. Put ISM in the search box.

http://www.quantumonline.com/search.cfm

 

[brewer12345]

Try this link. Put ISM in the search box.

http://www.quantumonline.com/search.cfm

Second that. Ignore what Schwab and Morningstar say.

ISM is a senior unsecured bond issued by Sallie Mae (SLM) and traded like a stock. Par value (what you get at maturity) is $25. In the meantime, you receive interest monthly based on the yOY change in the CPI plus 2.05% (based on $25 par value).

 

[donheff]

Thanks FIREd and Brewer. Quantum give a nice, concise description. You would think Schwab and Morningstar could do the same.

 

[brewer12345]

Thanks FIREd and Brewer. Quantum give a nice, concise description. You would think Schwab and Morningstar could do the same.

Lack of retail investor interest for many, many years, unfortunately. All anyone cares about is stocks, so bonds that the public can actually buy and trade on an exchange tend to fall through the cracks.

 

[Independent]

Any thoughts as to why it's trading so low ($21.35 at close 12-18)? The computed interest rate for all periods through 3/14/2007 is pretty low. And the inflation outlook seems benign. Anythng else come to mind?

Future interest rates (par basis) for ISM:

Dec 15 through Jan 14 = 4.11%

Jan 15 through Feb 14 = 3.35%

Feb 15 through Mar 14 = 4.02%

Your actual rate = $25/your price X the above rates.

edited to fix date.

I'm trying to get up to speed here. Taking Brewer's advice, I searched this forum and found an earlier thread with a CUSIP number (78442P601). Using that number on the Sallie Mae site, I got a "Pricing Supplement". I can use it to match your interest numbers. So that all makes sense.

But, reading the pricing supplement, I don't see anything about changing the maturity value to reflect inflation, or adjusting the par value when calculating monthly coupons. It seems like you need to do both to get real inflation protection. Am I missing something obvious?

 

[brewer12345]

But, reading the pricing supplement, I don't see anything about changing the maturity value to reflect inflation, or adjusting the par value when calculating monthly coupons. It seems like you need to do both to get real inflation protection. Am I missing something obvious?

Par value desn't change, it is always $25 a "share." With TIPS, you get paid the spread over inflation and the actual inflation rate is tacked onto the par value. With ISM, you get paid monthly both the spread over inflation plus the actual amount of inflation. So with ISM, you get cash on the barrel-head, but with TIPS you let the actual inflation component ride.

 

[Independent]

Par value desn't change, it is always $25 a "share." With TIPS, you get paid the spread over inflation and the actual inflation rate is tacked onto the par value. With ISM, you get paid monthly both the spread over inflation plus the actual amount of inflation. So with ISM, you get cash on the barrel-head, but with TIPS you let the actual inflation component ride.

Thanks. I don't know why I couldn't see that. I was probably too focused on TIPS to shift gears.

Now I can see how to calculate the 3.7% YTM if inflation is zero, and I can see how other inflation rates really give you a little extra if you buy at a discount (your later comment). Thanks for the education.

 

[donheff]

Par value desn't change, it is always $25 a "share." With TIPS, you get paid the spread over inflation and the actual inflation rate is tacked onto the par value. With ISM, you get paid monthly both the spread over inflation plus the actual amount of inflation. So with ISM, you get cash on the barrel-head, but with TIPS you let the actual inflation component ride.

Continuing in Bonds 101 mode, with a TIPS or an I-Bond does the fixed portion (e.g. 1.5%) always return against the original investment amount or does it return against the increasing par value. I.e if it returned $150 in year one against a $10,000 investment, in year ten would it still return $150 or would it return 1.5% of the current value? If the later over a long period the return on these these investments would level out and potentially reverse, right?

 

[brewer12345]

Continuing in Bonds 101 mode, with a TIPS or an I-Bond does the fixed portion (e.g. 1.5%) always return against the original investment amount or does it return against the increasing par value. I.e if it returned $150 in year one against a $10,000 investment, in year ten would it still return $150 or would it return 1.5% of the current value? If the later over a long period the return on these these investments would level out and potentially reverse, right?

For TIPS, whatever the coupon rate is times the accreted par (not original) is the payment. Same thing with I bonds, although you don't actually receive the coupons in cash until you cash the I bond in.

 

[haha]

Just swapped ca 6000 OSM for 6000 ISM and pocketed a lttle over $4000. I figure the yield on ISM at this price is markedly better than OSM at $22.00

So much for market efficiency!

Ha

 

[brewer12345]

Just swapped ca 6000 OSM for 6000 ISM and pocketed a lttle over $4000. I figure the yield on ISM at this price is markedly better than OSM at $22.00

So much for market efficiency!

Ha

Easiest trade in the universe. Congratulations: you are now an arbitrageur. Even beter wuld be to buy 6000 more ISM and short 6000 OSM.

 

[scrinch]

I joined this conversation late. Why again is OSM trading higher than ISM when OSM has a lower spread over inflation (by 5 basis points)?

 

[brewer12345]

I joined this conversation late. Why again is OSM trading higher than ISM when OSM has a lower spread over inflation (by 5 basis points)?

Beats the fcuk out of me. Retail investors are ill-informed morons, perhaps?

 

[haha]

I joined this conversation late. Why again is OSM trading higher than ISM when OSM has a lower spread over inflation (by 5 basis points)?

So much for market efficiency!

 

[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?

 

[brewer12345]

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.

 

[scrinch]

Well, let's watch and see if it does. In the meantime I've swapped my OSM for ISM.

 

[brewer12345]

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.

 

[wabmester]

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.

 

[brewer12345]

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.

 

[haha]

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

 

[wabmester]

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.

 

[haha]

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

 

[wabmester]

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.