Corp Bond pricing and yields

[lawman]

I don't understand...Most of the A rated and even B rated corporate bonds I see for sale have a yield to maturity that is lower than a C.D. Why would anyone buy a corporate bond instead of a C.D.?
Also, I see some A rated bonds such as Financial Lease Corp paying over 7% and many B rated bonds with equal maturity dates paying much lower..Why?

 

[brewer12345]

I will hazard a guess about the low yields: ripoff pricing/markup by the brokerage is the likely cause.

As for the other anomalies, well...

First, the credit markets are in a state of disarray. Prices for credit-risky bonds are volatile and don't trade in an efficient fashion.

Second, the market is worried about financial services companies, ranging from lessors to insurers to banks to brokers. So any bond issued by any of these companies yields more than an equivalently rated non-financial.

Third, the rating agencies have succeeded in embarassing themselves so many times in such a short time that the market does not quite believe the ratings any more.

So I would suggest that you tread carefully if you wish to buy individual bonds. In today's market, you should be willing to accept quite a lot of market price volatility. In return, I happen to believe that that if you choose bonds carefully you will receive a well above average yield, especially given very low treasury rates. If you are not prepared for some bumps and bruises, I suggest that you stick with CDs or well diversified bond funds.

 

[tjon72]

Any thoughts on AIG or International leasing 8% both rated a(+), 2 year duration ?

 

[brewer12345]

Any thoughts on AIG or International leasing 8% both rated a(+), 2 year duration ?

AIG? Who knows what is on that balance sheet? That is the problem. Maybe the rating agencies know, or maybe they do not. I am guessing the latter. Having said that, the company is mammoth, still has a lot ofcapital, does not appear to have a liquidity problem, and does have fundamental earnings power. I am not a fan of the company because of the way it is run, and it is so big and complex that no individual outsider could possibly figure out what is really going on. Opinions could differ on this name.

International Lease Finance Co. (ILFC) is owned by AIG and supported by them. It is an open question (IMO) as to whether ILFC will remain part of AIG or be spun off. ILFC is the largest independent lessor of commercial aircraft, and they appear to be very good at what they do. The problem with their business model is that they would probably have a very difficult time financing themselves in the capital markets if they were an independent organization. When AIG was an unquestioned AAA, this was no big deal. Now that the parent is under stress, the outlook is a lot less clear for ILFC. Having said that, there is some real tangible asset value behind ILFC's bonds, although it is mostly commercial aircraft.

 

[clifp]

I don't understand...Most of the A rated and even B rated corporate bonds I see for sale have a yield to maturity that is lower than a C.D. Why would anyone buy a corporate bond instead of a C.D.?
?

I understand the higher yields on the financial, but I don't get why corporates are sub 5% and long term CDs are over 5%. GE, Wallmart, Toyota, Abbot Labs, Pfizer, Berkshire, Caterpillar are all fine companies. But I when I looked at Schwab's offering there 5-10 year bonds are 4.5-5% and the <5 years bonds are generally 4%. New issues aren't a much better a CAT issue for 4.5% due in 2014 vs a Discover Bank CD of 5.05% due in 2013.

Why should an individual investor buy the CAT bond?

 

[tjon72]

Brewer, Thanks for your input............. truley appreciated

 

[lawman]

Brewer,
I think you are right on target! I mentioned Finance Lease Corp. and I was actually referring to International Lease Finance Corp. I just bought some of their bonds and may buy more..I'm really itching to try some M.L.P.'s like Boardwalk (BWP) or Energy Transfer Partners (ETP) but I'm afraid I know just enough about MLP'S to destroy myself..
I think the future for natural gas has never been brighter. But I don't understand why the unit price of the gas MLP's goes down when the price of gas goes down..It seems like it would be influenced by volume and demand more so than by the price of gas..If I'm smart I'll stick with bonds which means I'll probably buy some MLP's...

 

[saluki9]

International Lease Finance Co. (ILFC) is owned by AIG and supported by them. It is an open question (IMO) as to whether ILFC will remain part of AIG or be spun off. ILFC is the largest independent lessor of commercial aircraft, and they appear to be very good at what they do. The problem with their business model is that they would probably have a very difficult time financing themselves in the capital markets if they were an independent organization. When AIG was an unquestioned AAA, this was no big deal. Now that the parent is under stress, the outlook is a lot less clear for ILFC. Having said that, there is some real tangible asset value behind ILFC's bonds, although it is mostly commercial aircraft.

Add on top that many of ILF's customers aren't very credit worthy and that ILF is at a real risk of having a lot of it's collateral put back to them which in this market could be pretty hard to re-lease.

 

[haha]

But I don't understand why the unit price of the gas MLP's goes down when the price of gas goes down..It seems like it would be influenced by volume and demand more so than by the price of gas..If I'm smart I'll stick with bonds which means I'll probably buy some MLP's...

I was just reading the BWP 2007 10K yesterday. While some of the commodity sensitivity you have noticed may just be market confusion, it is also true that several parts of BWP business are exposed to gas prices, and also exposed to crude oil/ngl spreads.

They own of some their gas in storage which is one source of exposure. Also, in newer shale plays like the Haynesville the speed and completeness of development by producers as well as duration of production in part will depend on gas prices and forecasts of same, and thus the gas load taken out of these fields by processor/gatherers will also depend somewhat on gas prices over the longer term.

If you are not put off by the 50% high split IDRs, Boardwalk seems to me to be a safer investment than some others in that space. (Of course this is an equity, and miles short of an insured CD as to safety.)You don't have to worry about the financial soundness of Loews, the general partner and majority owner. Also, Loews has a long history of treating minority holders fairly. Lastly, the interstate FERC regulated aspects of the business give it considerable stability, at least compared to gathering and processing operations.

Have you considered Loews?

Ha

 

[brewer12345]

Add on top that many of ILF's customers aren't very credit worthy and that ILF is at a real risk of having a lot of it's collateral put back to them which in this market could be pretty hard to re-lease.

Depends on the collateral. Modern, high-efficiency planes are still in very high demand, both within the US and around the world. Don't let the state of the US airline industry fool you: demand is still quite solid elsewhere in the world.

But yeah, you are taking some risk with ILFC bonds.