Short Termt Junk Bonds

[charlie]

Short Termt Junk Bonds

I found a GMAC (S&P BBB-) note on the secondary
market maturing in one year. The YTM is about 4.3%
at the offer price. 1 year CDs are paying about 3%
max currently.

S&P BBB- is on the edge of being junk, but does
anybody think there is a minuscule chance of GM
going belly side up in one year?

Martha and TH ..... maybe this might serve your purpose.

I am thinking hard about it myself!

Cheers,

Charlie

 

[haha]

Re:  Short Termt Junk Bonds

S&P BBB- is on the edge of being junk, but does anybody think there is a minuscule chance of GM going belly side up in one year?

Charlie, it certainly seems unlikely that GM could get into enough trouble in one year for you to lose on this.

Still, I prefer using a principle espoused by Warren Buffet. If you are looking for a safe short term investment, get a safe short term investment. If you want to speculate, and are equipped to do the required analysis, then do the analysis and make up your mind based on that.

GMAC is pretty well studied. If it were as safe as US Treasuries or CDs, it would have a yield very close to them. Since it is yielding >= 135 basis points over those instruments, the market says there are questions. IMO, the risk can't be quantified.

Say you invest $100,000 in either a CD @ 3%, or this paper at 4.35. With the GMAC paper you will have $1350 more at the end of the year. Unless some very unlikely event comes along to disturb GMAC, in which case you might have a whole lot less.

For me, not worth it. You don't have to win everyday, or even every year. You just have to win over time.

Mikey

 

[MJ]

Re:  Short Termt Junk Bonds

1 year CDs are paying about 3%
max currently.

Hi C_L,

Corus bank has a 1 year CD is @ 3.39% APY. A bit better than 3%. Not is good as 4.3% but FDIC insured.

They change their rates on Tuesdays. It was 3.34% a week ago when I put some money in.

MJ

 

[brewer12345]

Re:  Short Termt Junk Bonds

It is up to you. It is hard to imagine GMAC blowing up in a year. OTOH, you really are not being offered much of a risk premium for fairly substantial risk. I would probably look elsewhere, since you are taking not insignificant risk for a modest reward. Personally, if I am going to accept some risk, I want at least the chance of substantial rewards.

 

[charlie]

Re:  Short Termt Junk Bonds

Thanks guys, sometimes I tend to stretch a little.
I think your words of wisdom are right on.

Cheers

Charlie

 

[Martha]

Re:  Short Termt Junk Bonds

I am buying $50,000 of cds at PFCU this week. The spouse is still looking at vehicles for the real estate money. Probably will sit in cash or cash equivalent until an opportunity comes along. The part that makes me nervous is his foreign investments. He did very very well in foreign bonds. Now he is looking at foreign CDs through Everbank (?). Like Mikey, he has significantly reduced his position in stocks.

Thanks Chuck for sharing all your ideas for short term money.

Martha

 

[KB]

Re:  Short Termt Junk Bonds

Charlie,
The GMAC note you mentioned sounds like GMAC Smart Notes that I was looking at and that John Galt owns.

Their rates are attractive, here's the link. http://www.directnotes.com/gmac/rates.asp

I have the GMAC Demand notes which is a Money market paying 3% currently. I'm considering the Smart notes at some point when I have more cash that needs a home but was a little concerned about the rating too.

 

[brewer12345]

Re:  Short Termt Junk Bonds

I am buying $50,000 of cds at PFCU this week.  The spouse is still looking at vehicles for the real estate money.  Probably will sit in cash or cash equivalent until an opportunity comes along.  The part that makes me nervous is his foreign investments.  He did very very well in foreign bonds.  Now he is looking at foreign CDs through Everbank (?). Like Mikey, he has significantly reduced his position in stocks.  

Thanks Chuck for sharing all your ideas for short term money.

Martha

Martha, FWIW, unhedged foreign bonds have a low or negative correlation with domestic equities and have relatively high long term returns. This is such a marked feature over the long term that I am waiting for my chance to add this asset class to my portfolio as a diversifier, possibly up to 10% of the total. In fact, adding some foreign bonds is a good way to reduce your risk, not crank it up. Everbank isn't a bad way to go, but I would noy be eager to place an outsized bet on any particular currency. Better to have a basket.

 

[Martha]

Re:  Short Termt Junk Bonds

Thanks Brewer. The problem is that when I don't understand something, I get nervous. Which probably is as it should be.

 

[haha]

Re:  Short Termt Junk Bonds

The part that makes me nervous is his foreign investments.  He did very very well in foreign bonds.  Now he is looking at foreign CDs through Everbank (?). Like Mikey, he has significantly reduced his position in stocks. Martha

Hi Martha, I would like to add my ideas on the foreign thing. Personally, I don't think that there is enough data to put a lot of faith in "correlations" or the lack therof. In my mind, foreign needs to be divided at least into several categories. Emerging including crap like Russia; developing Asia, Japan, and developed Europe. Your husband made good money on foreign bonds primarily because of very good timing regarding currency movements. By swiching to CDs, he takes away the risk of adverse interest rate movements and credit risk. He is still exposed to currency fluctuations. In effect he is short the US dollar, unless he is hedging away this risk. And that has its own set of risks.

Many people expect the dollar to fall agaist other currencies for a long time, and it may. But remember Ben Franklin's Rule- "Nothing is certain except death and taxes."

Not long ago the Euro only bought US$0.85. Now it
sits around US$1.30. Some gurus predict it may reach $1.60. Even if it gets there the gain will be less than the potential loss back to 0.85. Gurus say it can't fall back there, and I think they are probably correct. But it was there a very few years ago. Additionally, at the current exchange rate, goods are more expensive in Euroland than they are here. Many currency valuation  models use purshasing power parity as a powerful input.

Disclosure:I still have Euro bonds in my portfolio. I think it is kind of neutral now, and I don't want to recognize the tax gain.

If you would be distressed by adverse currency moves, I would say you have standing to object.

Mikey

 

[Dante]

Re:  Short Termt Junk Bonds

I am buying $50,000 of cds at PFCU this week. The spouse is still looking at vehicles for the real estate money. Probably will sit in cash or cash equivalent until an opportunity comes along. The part that makes me nervous is his foreign investments. He did very very well in foreign bonds. Now he is looking at foreign CDs through Everbank (?). Like Mikey, he has significantly reduced his position in stocks.

Thanks Chuck for sharing all your ideas for short term money.

Martha,

Interesting. I just mailed a check for $50,000 and 5 separate applications for 5-year Pentagon Federal CDs - ($10,000 each) just as you are thinking to do.

However, I am still considering some money ($50K) to invest in a high-yield GMAC SmartNotes type instrument that provides a real high rate and is also very long-term - money that I can forget about for a while.

I personally don't think that GM is going anywhere.

Dante



Martha

 

[Martha]

Re:  Short Termt Junk Bonds

Hi Martha, I would like to add my ideas on the foreign thing. Personally, I don't think that there is enough data to put a lot of faith in "correlations" or the lack therof. In my mind, foreign needs to be divided at least into several categories. Emerging including crap like Russia; developing Asia, Japan, and developed Europe. Your husband made good money on foreign bonds primarily because of very good timing regarding currency movements. By swiching to CDs, he takes away the risk of adverse interest rate movements. He is still exposed to currency flucuations. In effect he is short the US dollar, unless he is hedging away this risk. And thathas its own set of risks.

Many people expect the dollar to fall agaist other currencies for a long time, and it may. But remember Ben Franklin's Rule- "Nothing is certain except death and taxes."

Not long ago the Euro only bought US$0.85. Now it
sits around US$1.30. Some gurus predict it may reach $1.60. Even if it gets there the gain will be less than the potential loss back to 0.85. Gurus say it can't fall back there, and I think they are probably correct. But it was there a very few years ago. Additionally, at the current exchange rate, goods are more expensive in Euroland than they are here. Many currency valuation models use purshasing power parity as a powerful input.

Disclosure:I still have Euro bonds in my portfolio. I think it is kind of neutral now, and I don't want to recognize the tax gain.

If you would be distressed by adverse currency moves, I would say you have standing to object.

Mikey

He has, fortunately or unfortunately, been rewarded for his timing. I do worry he has to much riding on the anticipated falling dollar.

 

[Dante]

Re:  Short Termt Junk Bonds

I am buying $50,000 of cds at PFCU this week. The spouse is still looking at vehicles for the real estate money. Probably will sit in cash or cash equivalent until an opportunity comes along. The part that makes me nervous is his foreign investments. He did very very well in foreign bonds. Now he is looking at foreign CDs through Everbank (?). Like Mikey, he has significantly reduced his position in stocks.

Thanks Chuck for sharing all your ideas for short term money.



Martha

Martha,

Interesting. I just mailed a check for $50,000 and 5 separate applications for 5-year Pentagon Federal CDs - ($10,000 each) just as you are thinking to do.

However, I am still considering some money ($50K) to invest in a high-yield GMAC SmartNotes type instrument that provides a real high rate and is also very long-term - money that I can forget about for a while.

I personally don't think that GM is going anywhere.

Dante

 

[Martha]

Re:  Short Termt Junk Bonds

For those of you watching the Pentagon Federal Credit Union CD rates, I see that there latest rates, including the 5year CD at 5.25% expire January 26.