Would you invest in this bond?

[MichealKnight]

I"ve never invested in individual bonds. Of course I've been researching, reading the basic theory, etc. I'm not here asking the smart kids to do my homework for me on the contrary this is part of my homework.

It's not that I'm asking for a recommendation, what I was hoping some of the experienced folks here would do is give their 'yes' or 'no' - -- BUT more importantly, describe how and why they came to that conclusion. For example if someone brought you a used car, asked your suggestion you'd say "Yeah, I'd buy it. Oil looks clean, brake pads not worn, all the panel paints match, accident-free history and I think you'll be ok driving it for a few years, then selling it off for reasonable value". I"m trying to learn - how you make the sausage.

Synchrony Financial. CUSIP 87165BAS2

PRICE: 96.23

Callable 7/25@100. Maturity: 6/13/25

S/P: BBB-

YTW: 6.928

My goal: Perhaps stating the obvious. 6.92 is better than my 5% VMFXX. I'd like to collect the extra 1.9% until mid 2025 and get my principle back.

Curious how someone here would look at a this investment, and what factors make you lean yes or lean no.

Thanks...............

 

[COcheesehead]

My hope is you are looking to ladder and not put all your eggs in this one basket.
It’s at the edge of investment grade.
It has a bit of duration risk. A lot can happen in two years, though the bank seems to be working through their issues, at least what is known.
At this same rating and duration, you can get 7%+ yield. So consider those as well.
It’s actually callable in 5/25, not 7/25.

Would I personally buy it? Perhaps, if I wanted something more speculative and I buy those from time to time.

 

[Montecfo]

The high yield would deter me. The purpose of my bond application is to provide safe income and ballast. My equity allocation is for the risk portion of my portfolio.

Now, if you want to buy bonds with that high a yield, my suggestion would be to do it via a junk bond fund and consider it part of your equity allocation. This is because such bonds behave more like equities. The benefit of the fund is it provides diversification which the average bond investor would have a tough time building in without a large portfolio. I have invested in junk or high yield bond funds in the past but do not own them presently.

There is an entire thread here on fixed income or bond investing where you can discuss such questions and get ideas.

All the best!

 

[njhowie]

No.

You can get non-callable 2-year CDs for 5.25% today, in my view this should be your comparison, not VMFXX. Either way, comparing AAA/insured vs BBB- is a joke in my view.

How much are you thinking of purchasing, that is, how much of a difference will it make in raw dollar terms? How much is your entire portfolio worth? Is it worth taking any risk? What is your investment objective? Is this emergency fund type money, looking for growth, how much risk are you looking to take with it? Why individual low quality bonds now and not individual equities or maybe less risky preferred shares or exchange traded debt?

I think many folks are still reaching for yield, and there is really no reason to at this time. Two years ago fixed income was paying well under 1%. I cannot fathom why folks are turning their backs on a guaranteed 5% or more at this time.

 

[pb4uski]

Probably not. BBB- is the lowest rating within investment grade, so this credit is dancing on the below investment grade line. I usually only buy S&P A and above for corporate bonds.

That said, an almost 7% yield for 2 years and 190 bps spread over AA+ is enticing (if I had any dry powder available).

 

[Dash man]

No, not BBB-. You can match that yield with LNC, JEPI or MAIN, though they are stock investments. But I don’t see the risk being too different right now IMHO.

But I learned a lesson last year buying an A rated Credit Suisse bond. Fortunately I got out of it with only a minor loss.

 

[aja8888]

Just remember who pays these rating agencies. And look at what happened in the 2008 - 09 GFC. Much, if not all, of the subprime debt was rated A or higher.

 

[dobig]

Less experienced investor here so don't take my opinion as highly as others. Personally if I was looking for yield right now, I'd consider the Wells Fargo perpetual preferred (non cumulative) WFCPRL. Last I checked it was trading at $1133 today for a yield of 6.62%. I'd feel much better about the 3rd lagest bank in the US than Synchrony which is working thru some issues. Of course you would be taking more risk vs a government insured money market.

There was a discussion about it a few years ago if you want to know more about it.

https://www.bogleheads.org/forum/viewtopic.php?t=315451

 

[all4j]

Quick answer is “No”. But I don’t see that as helpful since our situations are different. Your goal isn’t at all obvious to me, but I think it might be to increase yield over money market while not endangering principal. I still say “not a good idea” to use this bond for that. Here’s why…

While specific numbers won’t be known until trade executes, I’ll use your numbers for now. Ironically, the bond’s “Yield to Worst” is basically also its “Yield to Best”. I don’t see any upside, although granted it is technically possible. I believe you underestimate the money market. While the bond yield is set, the money market is likely to increase. Because of frequency of distribution, you have more favorable re-investment chances. That is, it will have a compounding effect the bond won’t. Also, at least for me, part of the money market won’t get taxed. So, I’d expect the spread to be less than 1.9%.

Even so, would I accept 1.9% to be adequate compensation for the additional risk? A rule of thumb for me would be to start at wanting at least 2% based on credit rating. Meaning, I’d likely not look further if I got this far. This is a unsecured bond that trades thinly in an industry that may not fare well in what I expect likely over that 2 year period. I would want more for my concern over liquidity (especially compared to money market) and not less. I’m more confident the money market won’t “break the buck” than I am the company staying intact for 2 years.

I didn’t examine the prospectus, etc. to understand the capital structure. I did look at their preferred series A – which I assume is lower (by 1 step?) in the structure. It yields about 1.5% more than this bond & seems to have upside potential on price IF (note big IF) the company stays a viable enterprise & there isn’t a change of control or bankruptcy. That makes me feel that either the preferred or the bond is mispriced & the preferred seems to be slightly more liquid (meaning market maybe more efficient??). And yes, the preferred could go down in price & I've no intention of buying it either.

Buying the bond may not be disastrous, but also not (imho) the best option available.

 

[MichealKnight]

Thanks

The high yield would deter me. The purpose of my bond application is to provide safe income and ballast. My equity allocation is for the risk portion of my portfolio.

Now, if you want to buy bonds with that high a yield, my suggestion would be to do it via a junk bond fund and consider it part of your equity allocation. This is because such bonds behave more like equities. The benefit of the fund is it provides diversification which the average bond investor would have a tough time building in without a large portfolio. I have invested in junk or high yield bond funds in the past but do not own them presently.

There is an entire thread here on fixed income or bond investing where you can discuss such questions and get ideas.

All the best!

No.

You can get non-callable 2-year CDs for 5.25% today, in my view this should be your comparison, not VMFXX. Either way, comparing AAA/insured vs BBB- is a joke in my view.

How much are you thinking of purchasing, that is, how much of a difference will it make in raw dollar terms? How much is your entire portfolio worth? Is it worth taking any risk? What is your investment objective? Is this emergency fund type money, looking for growth, how much risk are you looking to take with it? Why individual low quality bonds now and not individual equities or maybe less risky preferred shares or exchange traded debt?

I think many folks are still reaching for yield, and there is really no reason to at this time. Two years ago fixed income was paying well under 1%. I cannot fathom why folks are turning their backs on a guaranteed 5% or more at this time.

Been reading all the informative replies, thanks.

I"m looking to allocate $50,000 - funds that I need 3 years from today. And yes, the difference between a 5.25% CD and a 7% bond isn't that much....and I et the point - why risk just for about $2800 profit over 3 years? Well the answer is: Yes, I know. Hence I'm asking here. But -----$2800 in 3 years solely for making a bet that company XYZ won't go out of business -- well, I feel it's worth looking into. I would not have put all $50k into this one entity. 2-3 similar ones - perhaps.

Percentage: $50k Excluding primary residence....this represents about 1.4% of net worth.

On 5% guaranteed returns - I am certainly partaking. When I early retired 3 years ago at age 45, I had figured a 35% stock allocation........I cam currently at 25% with the excess in 5% MMF and CD.

 

[MichealKnight]

thanks

No, not BBB-. You can match that yield with LNC, JEPI or MAIN, though they are stock investments. But I don’t see the risk being too different right now IMHO.

But I learned a lesson last year buying an A rated Credit Suisse bond. Fortunately I got out of it with only a minor loss.

Thanks for sharing. A worthy reminder that "A" doesn't mean guaranteed.

 

[MichealKnight]

Agencies

Just remember who pays these rating agencies. And look at what happened in the 2008 - 09 GFC. Much, if not all, of the subprime debt was rated A or higher.

Very valid point. And yes I highly doubt the situation is now much better.

(The lady in those glasses might still be working there like she was in The Big Short

 

[MichealKnight]

all4j, appreciate the thought process.

Based on what I'm reading here I'm thinking of standing down, accepting the safe 5.25 over the risking 6.9. Sign. "Run Forrest Run" seems to be both my strength and my weakness all thru my business life.

I'm thinking it's better not to reach for that extra just eat out less. If I want to risk extra funds - I think that's better off as 'dry powder' and inevitably when Blue Chips get crushed - add shares.

Just trying to get a few more bucks....but yeah, my conclusion is that it would be a pity to lose $50k that I needed in a few years - all because I wanted another $2k.

 

[pb4uski]

According to Bard, the probability of a default of a BBB- bond is 1-2% and the typical loss in the event of default is 40%.

So 190 bps seems to be a fair credit risk premium.

 

[COcheesehead]

According to Bard, the probability of a default of a BBB- bond is 1-2% and the typical loss in the event of default is 40%.

So 190 bps seems to be a fair credit risk premium.

I’ve always bought only investment grade, but the full spectrum from BBB- to AAA and knock on wood, still have never had a default.

I wouldn’t load up on BBB-, but for a small percentage of a ladder, they can be advantageous to give you a little more yield pop. Some I hold, some I flip. It just depends what the market gives me. Unlike equities I get paid to wait. Interest always accrues.