ISM/OSM yet again

[clifp]

I am planning on holding to maturity, just like any other bond. The good and bad news is that OSM/ISM are listed like stocks so it is tempting to trade them like stocks.

So far been a good investment especially with fairly generous interest rate payments. Now if the idiot management at Sallie Mae doesn't do anything incredibly stupid in the next 6 or 7 years it will be a great investment.

 

[FIRE'd@51]

I am planning on holding to maturity, just like any other bond. The good and bad news is that OSM/ISM are listed like stocks so it is tempting to trade them like stocks.

So am I, but I look at it as giving the little guy a chance to swap essentially perfectly-correlated bonds (without changing exposure) for a yield pickup, for a commission of $2 per side.

 

[Coolius]

I am planning on holding to maturity, just like any other bond. The good and bad news is that OSM/ISM are listed like stocks so it is tempting to trade them like stocks.

So far been a good investment especially with fairly generous interest rate payments. Now if the idiot management at Sallie Mae doesn't do anything incredibly stupid in the next 6 or 7 years it will be a great investment.

What are your thoughts on the risks of Sallie Mae? I am kind of tempted to pick up some, but it's hard to find any kind of reasoned dialog on the risks of the parent company.

 

[clifp]

What are your thoughts on the risks of Sallie Mae? I am kind of tempted to pick up some, but it's hard to find any kind of reasoned dialog on the risks of the parent company.

I studied the company prior buying the bonds, and the collapse of OSM/ISM from $20 to $10 had me look at again, but I haven't looked at it all in the last couple of years.

Five years ago Sallie Mae had a very sweet business model where it loan money to students, the loans weren't discharged under bankruptcy, and the government repayed 95% of the principal if they defaulted. It was such a nice model that any idiot could run it, which is fortunate because CEO Lords is in the running for the title. It is worth looking at the thread to see the very unfavorable comments that were made about the guy a few years ago. First the company made a disastrous attempt to loan money to students without government backing a lost their shirt. Next the financial crisis hit. Then finally in an attempt to pay for Obamacare, Congress wiped out all of subsidize for Sallie Mae and the Federal government started making student loans directly to students.

Beside the obvious risks of having a CEO who curses at analysts pissing off Wall St, the biggest risk I see to Sallie Mae, is increasing pressure for student loan modification, like we see for mortgages. This could easily wipe out the company. So to be honest, SLM falls into the too hard category as a stock investment. FWIW, Morningstar rates SLM at 3 stars with fair value of $14.

 

[FIRE'd@51]

The year-over-year CPI-U for August (released today) was 3.77%, the highest it's been in three years.

For the next three months the current yields on par for ISM are:

Oct 5.61%
Nov 5.68%
Dec 5.82%

OSM is 5 bp less.

 

[youbet]

The year-over-year CPI-U for August (released today) was 3.77%, the highest it's been in three years.

For the next three months the current yields on par for ISM are:

Oct 5.61%
Nov 5.68%
Dec 5.82%

OSM is 5 bp less.

Thanks for cranking the numbers FIRE'd. I did that pencil pushing faithfully for a couple of years but finally tired of it.

In the five or so years I've owned ISM and OSM, it's been both a roller coaster and a learning experience. Now that I'm back in the black vs my acquisition price, and with moderate inflation (IMHO) likely to be present going forward, I'm planning on holding to maturity. I think there is some risk (there's a reason they are rated BBB-) but alternative interest bearing investments don't seem all that attractive.

ISM/OSM is about 2.5% of my FIRE portfolio.

 

[RustyShackleford]

For anyone who still holds these, today I was able to sell OSM at the bid and buy ISM at the offer and take out 0.60 per share plus pick up about 20 basis points in YTM.

I did the same thing just now today. But is the YTM of ISM really higher ? I can't reproduce the numbers now, but someone cranked out (early in this massive thread, post #185), that OSM is worth about 40 cents more per share - the fact that it matures almost a year earlier more than makes up for the difference in coupon (2.05% vs. 2% IIRC). That was 3 yrs ago and the price was quite a bit lower so dunno if that's quite true today.

Thanks for cranking the numbers FIRE'd. I did that pencil pushing faithfully for a couple of years but finally tired of it.

I made a pretty cool spreadsheet to verify my ISM/OSM dividend payments and the payments on my TIPs. You just have to update the CPI-U column every so often. If anyone's interested ...

 

[FIRE'd@51]

I did the same thing just now today. But is the YTM of ISM really higher ? I can't reproduce the numbers now, but someone cranked out (early in this massive thread, post #185), that OSM is worth about 40 cents more per share - the fact that it matures almost a year earlier more than makes up for the difference in coupon (2.05% vs. 2% IIRC). That was 3 yrs ago and the price was quite a bit lower so dunno if that's quite true today.

According to my spreadsheet, it's still about 40 cents if you assume an annual inflation rate of 3% going forward. At 0% inflation I compute the fair value of the spread to be about 45 cents. The higher the assumed inflation rate, the smaller the fair value of the spread.

 

[FUEGO]

According to my spreadsheet, it's still about 40 cents if you assume an annual inflation rate of 3% going forward. At 0% inflation I compute the fair value of the spread to be about 45 cents. The higher the assumed inflation rate, the smaller the fair value of the spread.

I think I came up with the 40 cents spread from that post #185 (haha's post, but referring to my post). Now I am getting roughly 55 cents for a spread. What I am looking at is when OSM costs $20.90 (current quote), what would ISM have to cost to enjoy the same yield to maturity? I get ISM = ~$20.35. Assuming 3% inflation.

 

[FIRE'd@51]

I think I came up with the 40 cents spread from that post #185 (haha's post, but referring to my post). Now I am getting roughly 55 cents for a spread. What I am looking at is when OSM costs $20.90 (current quote), what would ISM have to cost to enjoy the same yield to maturity? I get ISM = ~$20.35. Assuming 3% inflation.

Interesting. What are your YTM numbers?

For OSM = 20.90, I get 8.82% nominal and 5.65% real

For ISM = 20.35, I get 8.94% nominal and 5.77% real

 

[FUEGO]

Interesting. What are your YTM numbers?

For OSM = 20.90, I get 8.82% nominal and 5.65% real

For ISM = 20.35, I get 8.94% nominal and 5.77% real

I was using a calculator that rounds the number of years to maturity to a whole number - that is probably why I was getting an inaccurate spread greater than 40 cents. Looks like it is 35-40 cents from using a calculator here: Bond Yield to Maturity Calculator

Although I get YTMs closer to 8.3% nominal with OSM at 20.9 and ISM at 20.55 (setting the price to "clean" since it just went ex-div a couple days ago). Using the "dirty" setting, it gives me YTMs closer to what you are getting.

 

[RustyShackleford]

An
The year-over-year change in CPI-U for May (released today) was 3.57%. The current yields (on par) for ISM for the next three months are:

July 4.73%
Aug 5.21%
Sep 5.62%

I suppose an "adventurous" investor could put a PILE of money into these and then pull out when the payments shrink back. Betting any default won't happen in the next few months; of course, perhaps that's a bad bet, if default were triggered by inability to make the big coupon payment.

 

[RustyShackleford]

I suppose an "adventurous" investor could put a PILE of money into these and then pull out when the payments shrink back. Betting any default won't happen in the next few months; of course, perhaps that's a bad bet, if default were triggered by inability to make the big coupon payment.

Wow, not sure what I was smoking when I wrote this; thanks all, for being gentle and not pointing out what a moron I am.

Ergo, the large dividend payments of the next few months might amount to a percent or two of the investment, and the price could easily go down by that much by the time one is ready to pull out.

 

[REWahoo]

Wow, not sure what I was smoking when I wrote this; thanks all, for being gentle and not pointing out what a moron I am.

Congratulations on [-]sobering up[/-] recognizing reality.

As to being gentle, I'm afraid my thinking was something along the lines of, "If he doesn't understand how painfully wrong that statement is, I'm not sure there is anything I can do to help him."

 

[RustyShackleford]

DAMN you, efficient markets. I want to go back to OSM, from my recent cash-generating move to ISM. But the price of OSM faithfully stays 60 cents or more higher. Oh well, I know they'll get very close at some point soon.

 

[FIRE'd@51]

Not to worry - we're collecting a 5 basis point higher interest payment while we wait.

 

[RustyShackleford]

DAMN you, efficient markets. I want to go back to OSM, from my recent cash-generating move to ISM. But the price of OSM faithfully stays 60 cents or more higher. Oh well, I know they'll get very close at some point soon.

Not to fear ...

 

[FIRE'd@51]

The January ISM interest payment (on par) was the highest in three years at 5.92%.

Due to lower year-over-year inflation, for the next three months, the interest payments will be:

Feb 5.58%
Mar 5.44%
Apr 5.01%

January's CPI data will be released on Feb 17.

 

[clifp]

The January ISM interest payment (on par) was the highest in three years at 5.92%.

Due to lower year-over-year inflation, for the next three months, the interest payments will be:

Feb 5.58%
Mar 5.44%
Apr 5.01%

January's CPI data will be released on Feb 17.

Thanks for the update.

Now that my even my highest priced ISM shares (21.37 bought back in 03/01/07) are in the green, and Sallie Mae doesn't appear to be in immediate danger of collapse, I have to thank Brewer for the tip on these bonds. I mostly sold ten year TIPs that would have matured in 2010/2011, to purchase these things and for the longest time it looked like a very poor trade. But with these bonds consistently paying out 6-7% current yield and providing some nice protection if inflation accelerates, I glad I didn't wait for the TIPs to mature before buying ISM/OSM.

 

[RustyShackleford]

Wow, serious arbitrage (ISM/OSM) opportunities now, OSM is like a buck-and-a-half higher (it's worth more, but not THAT much more).

 

[RustyShackleford]

Wow, serious arbitrage (ISM/OSM) opportunities now, OSM is like a buck-and-a-half higher (it's worth more, but not THAT much more).

Seriously though, OSM is almost $1.50 higher than ISM right now. Is there some new news that favors the risk-profile of OSM vs ISM (other than the fact OSM matures almost a year sooner) ? I realize as 2017/2018 approach, that year has more impact on the price ...

 

[FIRE'd@51]

Seriously though, OSM is almost $1.50 higher than ISM right now. Is there some new news that favors the risk-profile of OSM vs ISM (other than the fact OSM matures almost a year sooner) ? I realize as 2017/2018 approach, that year has more impact on the price ...

You can't just look at the last trades. To do the "arb" you must sell OSM at the bid and buy ISM at the ask. Currently, this spread is about 0.85 (still good), but only 100 shares on each side.

 

[youbet]

I noticed that this Forbes article, which gives one person's opinion regarding possible future inflation, mentions OSM (interestingly not ISM) as a possible inflation defense.

Ben Bernanke's Secret Inflation Plan - Forbes

On the buy side, one adjustable-rate preferred whose payout is tied to the Consumer Price Index is SLM Corp. adjustable preferred maturing on Mar. 15, 2017 (OSM, 23). It is rated Ba1/BBB– and currently pays a 4.96% dividend yield based on monthly year-over-year CPI plus 200 basis points. SLM is the ­student-loan ­organization, Sallie Mae.

 

[FIRE'd@51]

It's been 18 months (how time flies ) since I last updated this.

The year-over-year change in CPI-U for August (released today) was 1.52%. The current yields (on par) for ISM for the next three months are:

Oct 3.80%
Nov 4.01%
Dec 3.57%
=========
Ave 3.79%

The average current yield over the next three months at the current offer price (22.65) is (25/22.65) = 4.18% and, assuming 1.5% inflation for the next 4.25 years, a nominal YTM of about 6%.

I feel a lot more comfortable continuing to hold these with SLM trading at 25 and paying a 0.15 quarterly dividend.

 

[RustyShackleford]

Not much talk about ISM/OSM lately (like, in years). Seemed like they were on glide-path to maturity in a couple years. But I just noticed that prices have been falling over the last few months, and especially the last few days. Any ideas what's up ?