Corporate bond prices have rallied from lows reached in October 2022, as longer-term US Treasury yields have fallen and many high yield corporate bonds have risen due to strong recent financials of many issuers. This corporate bond returns update includes the following two sections related to BondSavvy's investment performance through January 31, 2023: Section 1: Drivers of BondSavvy's Corporate Bond Returns Section 2: Review of BondSavvy's Corporate Bond Returns vs. iShares Corporate Bond ETFs Through January...Read more
Corporate bond prices have rallied from lows reached in October 2022, as longer-term US Treasury yields have fallen and many high yield corporate bonds have risen due to strong recent financials of many issuers. This corporate bond returns update includes the following two sections related to BondSavvy's investment performance through January 31, 2023:
Section 1: Drivers of BondSavvy's Corporate Bond Returns
Section 2: Review of BondSavvy's Corporate Bond Returns vs. iShares Corporate Bond ETFs Through January 31, 2023
Section 1: Drivers of BondSavvy's Corporate Bond Returns
While many factors impact corporate bond returns, two of the largest drivers are the US Treasury market and the financial performance of our corporate bond issuers. Please read our corporate bond credit spreads blog post to learn how investment grade corporate bonds and high yield corporate bonds are impacted in different ways by these factors.
Financial Performance of Our Recommended Bond Issuers
In the second half of 2022, not a day went by without certain investing experts and talking heads saying we were already in a recession. Then, Q3 and Q4 2022 GDP growth came in at +3.2% and +2.9%, respectively, according to the US Bureau of Economic Analysis. In January 2023, the US economy added 517,000 jobs and unemployment fell to 3.4%.
While these figures point to a strong overall US economy, company earnings provide a clearer picture of how certain sectors of the economy are performing. It's this financial performance that can drive corporate bond prices, especially high yield corporate bonds, as these bond prices are generally more influenced by the issuing company's financial performance than investment grade corporate bonds.
Figure 1 shows the year-to-date 2022 revenue and EBITDA growth issuers of BondSavvy-recommended bonds reported through December 15, 2022. As of January 31, 2023, we rated 52 corporate bonds as either a 'buy' or 'hold.' These 52 corporate bonds were issued by 46 different companies, as, for certain issuers, we recommended two bonds of the same issuer. Of these 46 issuers, there were two that were involved in an asset sale transaction, and we are currently awaiting financials for both stand-alone entities. Therefore, the two below charts include the financial performance of 44 bond issuers.
Figure 1: Financial Performance of Companies Issuing BondSavvy-Recommended Bonds -- Reported Through December 15, 2022
Source: Company public filings and BondSavvy calculations
In Figure 1, we see the majority of our issuing companies have been growing. In the revenue chart on the left side of Figure 1, 33 of the 44 issuers reported positive revenue growth, with 17 issuers reporting year to date 2022 revenue growth of more than 10%. In year to date 2022 EBITDA, 28 of the 44 issuers reported growth, with 19 reporting EBITDA growth over 10%. Read our corporate bond leverage ratios blog post for more information on how EBITDA is calculated and why it's important.
While many of our corporate bond issuers reported strong year to date 2022 financials, others saw revenue and profitability declines. Certain of these companies were coming off a banner 2021, so some declines were expected. In addition, certain companies with weak 2022 financials had very large cash balances relative to their debt burden.
Two of our 46 issuers reported continued poor financial performance. These issuers have been cause for concern over the last several quarters and are working toward turning around their businesses. We update all of our buy/sell/hold recommendations each quarter based on issuing company financial performance and the updated prices of our recommended bonds. For companies like these two that have struggled over several quarters, we offer additional recommendation updates as these companies attempt to improve their performance.
Movement in US Treasury Yields
As discussed in our credit spreads blog post, movements in US Treasury yields can have a significant impact on investment grade corporate bonds in particular. As US Treasury yields rose during much of 2022, this caused many corporate bond YTMs to rise, and many bond prices to fall. As short term US Treasury yields rose to high levels in 2022, we began recommending a number of short term investment grade corporate bonds. Until then, our investment grade bond recommendations were generally longer dated and heavily impacted by movements in long term US Treasury yields.
As shown in Figure 2, US Treasury yields moved higher from November 30, 2021 until October 2022. Many believe that, during periods of rising interest rates, investors should always stick to short term bonds. The problem with this thinking, as shown in Figure 2, is that, during 2022, short term bond yields rose much faster than long term bond yields. From November 30, 2021 to October 24, 2022, the two-year US Treasury yield increased 3.98 percentage points, from 0.52% to 4.50%. During this same period, 30-year Treasury yields increased 2.62 percentage points. That said, due to their long term maturities, the prices of many long dated investment grade corporate bonds fell substantially.
Figure 2: US Treasury Yields vs. Effective Fed Funds Rate -- November 30, 2021 to January 31, 2023
Sources: United States Treasury and the Federal Reserve Bank of New York.
Since October 24, 2022, however, long term US Treasury yields began to fall, with the 10 year Treasury yield falling 0.73 percentage points (or 73 "basis points") and the 30 year Treasury yield falling 0.75 percentage points (75 basis points). These yields fell as inflation began to fall and investors believed the Fed would reduce the magnitude of further interest rate hikes.
While this drop in US Treasury YTMs caused many corporate bond prices to rally, investors must realize how volatile US Treasury YTMs can be. The rise in US Treasury yields caused corporate bond prices of many of the world's most profitable companies to fall to 60% of par value or lower during 2022. Investors can use these price drops to their advantage and purchase high quality bonds at compelling values.
Section 2: BondSavvy's Corporate Bond Returns vs. iShares Corporate Bond ETFs
We break out BondSavvy's corporate bond returns into two above tables: 1) corporate bond returns of our exited recommendations and 2) corporate bond returns of our current recommendations. Through January 31, 2023, BondSavvy had recommended 105 corporate bonds, of which, we have sold 53 and currently recommend 52 as either a buy or a hold.
Bonds We Sold During 2022
As most corporate bond prices fell during 2022, we did not see many opportunities to sell bonds. That said, we did sell four previous high yield corporate bond recommendations, all of which significantly outperformed the iShares HYG corporate bond ETF, as shown in Figure 3:
Figure 3: Recommendations BondSavvy Sold in 2022
|Recommended Bond||CUSIP||Pick Date||Sell Date||Total Return||iShares HYG Return|
|Albertsons 7.45% 8/1/29||013104AF1||9/26/17||3/24/22||79.52%||15.18%|
|Laredo Petroleum 9.50% 1/15/25 (Now "Vital Energy")||516806AF3||12/18/20||3/24/22||31.71%||-0.93%|
|Quad / Graphics 7.00% 5/1/22||747301AC3||12/12/19||5/1/22||26.03%||0.59%|
|Exterran Energy 8.125% 5/1/25||30227KAE9||1/12/22||10/21/22||14.36%||-13.51%|
BondSavvy generally sells bonds before maturity to secure capital appreciation and maximize total returns. In 2022, we held the Quad '22 date until maturity and achieved a 26.03% total return vs. 0.59% for the iShares HYG ETF. The Exterran Energy '25 bond was called in connection with the company being acquired by Canada-based Enerflex. Its acquisition by Enerflex, a company with a higher bond rating, caused the Exterran '25 bond price to increase, which was one of a limited number of corporate bonds to achieve capital appreciation in 2022.
As shown in Figure 3, at times, BondSavvy recommendations can significantly outperform the iShares corporate bond ETFs. As we will show in the next section, however, there can be times where our recommendations can underperform certain bond index funds. Since bond index funds typically own hundreds or thousands of bonds, their prices are generally less volatile than an individual bond. Individual bond investors must be able to accept this volatility as part of their investing. If they can, we believe an investor's long-term performance can outperform bond funds. At times, this outperformance can be significant.
All Exited Recommendations Through January 31, 2023
Through January 31, 2023, we had exited 53 of our 105 recommended bonds. Of the 53 bonds we sold, we outperformed the benchmark iShares LQD and HYG ETFs for 40 picks, or 75.5% of our recommendations. What's more, for 17 of our exited recommendations, we outperformed by more than 10 percentage points. Through January 31, 2023, there were only two cases where iShares outperformed BondSavvy by at least 10 percentage points. Those two cases related to two JCP bond recommendations, where the company filed for Chapter 11 in the wake of Covid-19 store closures in 2020.
Corporate Bond Returns of Current Buy/Hold Recommendations
In the Corporate Bond Returns of Current Recommendations table above, we show the performance of the 52 bonds we currently rate either buy or hold vs. the iShares corporate bond ETFs. While we have been pleased with the performance of our 53 exited recommendations, registering beats in 40 of 53 vs. the iShares LQD and HYG ETFs, the performance of many current buy/hold recommendations has not met expectations.
Many corporate bonds hit their lows in October 2022, and a good number have recovered since then. That said, there is a long way to go for many of our recommendations. We can break the performance of our buy/hold recommendations into three groups based on pick dates:
Group 1: April 6, 2022-November 16, 2022 Pick Dates
In this group, we have outperformed the iShares corporate bond ETFs for 9 of the 15 picks. Since these picks are less than a year old, it is not time to declare victory or spike the football. That said, as interest rates began increasing earlier in 2022, we focused our recommendations on high yield and short-term corporate bonds. These bonds have, generally speaking, held their value, but there is a long way to go before these become successful long-term recommendations.
Group 2: December 17, 2020-January 12, 2022 Pick Dates
While we had two successful exits from recommendations in this group (Exterran '25 +14.36% and Laredo '25 +31.71%), many of these 22 recommendations have been disappointing. These picks include a number of long-dated investment grade bonds that fell as Treasury yields spiked and several high yield issuers that reported weak financials or that had their bonds sell off for other reasons.
Group 3: September 26, 2017-September 23, 2020 Pick Dates
This group shows the benefit of longer holding periods with our recommended bonds. In this group of 15 recommendations, we have outperformed in 11 picks. Since the yields of our bonds are generally higher than those offered by the leading bond funds, nearly three-quarters of these picks have outperformed, and some of them significantly. Two of the picks (issued by the same company) have been damaged by the weak financial performance of the issuing company. There was concern this company would be filing for Chapter 11; however, it was able to secure a financing package that gave it an opportunity to turn around its business. The bond prices of these recommended bonds have increased since January 31, 2023; however, the company has a very long way to go.