BondSavvy's Corporate Bond Returns

Analysis of Select BondSavvy Investment Returns

Verizon and Albertsons Bond Investment Returns: Case Studies

Many investors believe that 'interest rates' are the only thing that impact bond prices. We have two real-world examples that will hopefully dispel this notion once and for all.

On September 26, 2017, during the premier edition of The Bondcast, we recommended Verizon 3.85% 11/1/42 (CUSIP 92343VBG8) and Albertsons 7.45% 8/1/29 (CUSIP 013104AF1). Understanding the changes in these bond prices helps investors better understand what to look for when investing in bonds and what causes bond prices to rise and fall.

Verizon 3.85% '42 Case Study

Verizon is an investment-grade issuer, as its bonds are rated Baa1/BBB+ by Moody's and S&P, respectively. Bonds rated at least Baa3/BBB- are deemed 'investment-grade,' meaning that the credit rating agencies believe they have a lower risk of default than 'high-yield bonds,' which have lower ratings.

In the below chart, we compare changes in the price of the Verizon 3.85% 11/1/42 to its benchmark US Treasury 2.75% 11/15/42 (CUSIP 912810QY7). The reason it is called the 'benchmark' is that the maturity date of this Treasury bond is almost identical to that of the Verizon bond. The price of this US Treasury bond moves up and down based on the demand for this government bond. As the price for this Treasury bond increases or decreases, its yield to maturity ("YTM") moves in the opposite direction. The yield to maturity of this Treasury bond is telling investors what the 'risk-free' investment return is for a Treasury bond that matures 11/15/42, as the US Treasury is deemed to have no default risk. (We don't believe the US government has zero risk of defaulting, but that discussion is for another post.)

When the Verizon bond -- and nearly all other investment-grade corporate bonds -- are quoted on a trading desk, they will be quoted as a spread to the benchmark Treasury. This spread is referred to as the credit spread. For example, suppose:

Verizon 3.85% '42 YTM: 4.22%

US Treasury 2.75% '42 YTM: 2.89%

Credit spread:1.33%

The Verizon bond's YTM is the result of changes in the benchmark Treasury AND the credit spread. As Verizon's credit quality improves, its credit spread will typically shrink, as investors will require less return above the benchmark Treasury to compensate them for the extra credit risk they are taking. When the credit spread shrinks, the bond's yield to maturity decreases and the price of the bond increases. Similarly, if the benchmark Treasury yield moves up or down, that component of the Verizon bond's YTM will also move up or down.

A real-life example is shown in the below charts, which show bond price changes for the Verizon '42 bond we recommended September 26, 2017 and its benchmark Treasury. Since we recommended the Verizon bonds, they have increased in price 12.5 points, from September 26, 2017 through June 30, 2019, generating a total return of 21.4%, while the benchmark Treasury increased 4.3 points during the same time period. The Verizon bond price increase happened because the credit spread for these bonds shrunk, as Verizon has been reporting strong financial results. While moves in the '42 Treasury bond do impact the price of the Verizon '42 bond, the two bonds do not move in lockstep. In this case, Verizon's strong operating performance enabled the bonds to increase in price well beyond the price increase of the benchmark US Treasury bond.

Sources: Historical prices are from FINRA market data. The prices used to calculate the Verizon bond's total return are from Fidelity.com. Total returns include interest income accrued and/or received and capital appreciation. Returns do not contemplate re-investment of interest income. Total returns are not annualized returns.

Albertsons 7.45% '29 Case Study

Bonds rated below investment grade (aka 'high-yield bonds') do not trade in relation to their benchmark Treasury as shown in the below chart, which compares changes in the Albertsons 7.45% '29 bond (CUSIP 013104AF1) we recommended to its benchmark 6.125% 8/15/29 Treasury (CUSIP 912810FJ2). High-yield bonds are known as a 'credit investment,' and their price is driven by changes in the underlying credit quality of the bond issuer. For example, for the first half of 2017, the Albertsons bonds were trading at or above 96. Then, in June 2017, Amazon announced it was purchasing Whole Foods, and many investors thought Albertsons wouldn't be able to compete, which caused the bonds to fall into the 70s, at which point we recommended the bonds at 78.50 on September 26, 2017.

Since then, Albertsons has delivered strong financial performance, and the bonds increased in price 18 points from the date we recommended the bonds through June 30, 2019. You'll see the benchmark Treasury fell 2.4 points during this same time period, and movements in the prices in both bonds were not correlated.

Investment Returns Table Footnotes

* Source of bond price charts: FINRA market data. Total returns calculated by BondSavvy. Returns are not annualized.

(1) Prior to our March 11, 2021 recommendations, the pick date price is the top-of-book offer price shown on Fidelity.com the trading day prior to the pick date. Price assumes a $1/bond (0.1 points) mark-up on the quoted offer price. On March 11, 2021, we began hosting The Bondcast at 5:00pm EDT, so the pick date price for all recommendations beginning this date is the top of book price with at least 100 bonds in quantity shown on Fidelity.com the afternoon of the pick date.

(2) The prices of bonds reflect a) the best bid price on Fidelity.com on the period-end date that could fill an order of at least 150 bonds or, if such quantities were not available, 2) the latest customer sell price reported to FINRA's Trade Reporting and Compliance Engine (TRACE) that was executed closest to 5:00pm New York Time on the last day of the performance period.

(3) Returns are calculated from the trading date immediately prior to the pick date through the end of the period shown, with the exception of recommendations beginning March 11, 2021, which are calculated beginning on the pick date. For returns calculations under "Corporate Bond Returns of Current Recommendations," the Pick Date Price and end-of-period price are calculated pursuant to footnotes 1 and 2 above. For "Corporate Bond Returns of Exited Recommendations," the Pick Date Price is calculated pursuant to footnote 1. With respect to the selling price: (i) for bonds owned by our founder Steve Shaw, the selling price comes from his trade confirmation statements; (ii) for corporate bonds not owned by Mr. Shaw, the selling price reflects the top-of-book bid price available on Fidelity.com when the sell recommendation was issued or, for sells beginning September 10, 2020, the average of the three customer sell trades, as reported to FINRA TRACE, executed immediately after such sell recommendations were made. Beginning June 3, 2021, for sells of bonds not owned by Mr. Shaw, the sell price was based on the top-of-book bid price available on Fidelity.com on the sell date that could satisfy an order of at least 250 bonds. BondSavvy believes these returns may be understated compared to the methodology of iShares returns, as (a) BondSavvy's total returns do not factor in re-investment of interest income and capital gains, which the iShares returns do include and (b) the individual bond returns reflect a purchase at the offer price and a valuation at the bid price, which can negatively impact returns from 0.25 to 0.75 percentage points on average. The iShares returns are calculated based on changes in the fund's net asset value and, therefore, aren't penalized as significantly by a bid-ask spread. Returns calculations are not annualized. BondSavvy total returns include capital gain/loss and interest accrued.

(4) During the 11/19/18 Super Bondcast, we recommended subscribers buy additional amounts of these previous BondSavvy picks. We also updated all other prior BondSavvy corporate bond investment recommendations, other than three companies which had yet to report earnings. This was BondSavvy's first edition of The Super Bondcast, a subscriber-only webcast where we evaluate the financial performance of our issuing companies and the performance of each recommended corporate bond. In certain editions of The Super Bondcast, we may recommend buying bonds of recommendations we had previously made a 'Hold.' When we show 'Exited Recommendations,' these returns will show returns from both the initial pick date as well as from other times we recommended subscribers purchase these bonds over the course of our ownership of the bond. For simplicity, other than the 11/19/18 Super Bondcast, we only show the performance from the initial pick date for bonds listed under the heading 'Corporate Bond Returns of Current Recommendations.'

(5) BondSavvy recommended these bonds at 89.92 on September 26, 2017. The price shows the blended price Steve Shaw has acquired these bonds across four different transactions. Note that we no longer are recommending purchases of these bonds but now recommend shorter-dated bonds of the same issuer.

(6) Returns calculated from the day immediately prior to the Pick Date through (i) the final trading day for the period for current recommendations or (ii) the sell date for recommendations we have sold. Source of iShares returns is the iShares website. We went to the home page for each iShares ETF, clicked "Performance" and then clicked the "View Full Chart" hyperlink under the "Growth of Hypothetical $10,000" heading. We then entered the various date ranges and recorded the investment returns shown for the specific iShares ETF.