Through October 31, 2022, BondSavvy has made 100 corporate bond investment recommendations. Of these 100 picks, we have sold (or "exited") 53 of them. We recommended five new bonds November 16, 2022; however, these picks are not yet included in our performance data since they were made only two weeks before the end of the November 30, 2022 corporate bond returns update period. As shown above in the Corporate Bond Returns for Exited Recommendations table, for our...
Read moreThrough October 31, 2022, BondSavvy has made 100 corporate bond investment recommendations. Of these 100 picks, we have sold (or "exited") 53 of them. We recommended five new bonds November 16, 2022; however, these picks are not yet included in our performance data since they were made only two weeks before the end of the November 30, 2022 corporate bond returns update period.
As shown above in the Corporate Bond Returns for Exited Recommendations table, for our 53 exited recommendations, we have beaten the iShares LQD and HYG corporate bond ETFs 40 times, or 75.5% of our exited bond picks. For 17 of our exited recommendations, we have beaten the iShares ETFs by at least 10 percentage points. For our 53 exited recommendations, there have only been two cases where the iShares corporate bond ETFs outperformed BondSavvy by 10 percentage points or more.
Corporate Bond Return for Exterran 8.125% '25 Exited Recommendation
Bond price appreciation has been rare in 2022; however, our recently exited Exterran '25 recommendation (CUSIP 30227KAE9) is one of the few corporate bonds that increased in price during 2022.
Exterran Energy was a global provider of natural gas processing and treatment solutions. We recommended the Exterran bond on January 12, 2022 at a price of 94.61. Shortly after we made the recommendation, Canada-based Enerflex announced it agreed to acquire Exterran. As Enerflex was deemed to have a higher credit quality than Exterran, the Exterran bonds increased in price to above par value.
When one company acquires another company, the acquiring company typically assumes the debt of the company being acquired. This is why the Exterran bond increased in price, as the bond would now be the obligation of a company with a higher corporate bond rating.
That said, as part of the Exterran acquisition, Enerflex obtained new financing at a lower rate than the 8.125% Exterran was paying on its bonds. As a result, Exterran called the bonds October 21, 2022 at a price of 102.03. Assuming a 94.61 purchase price and a 0.1-point markup on the purchase, the investment generated a total corporate bond return of 15.30% compared to a -13.51% return of the iShares HYG ETF during the same period.
Exited Returns Have Outperformed Most Recent Recommendations
Above, we displayed our corporate bond returns in two separate areas: Exited Recommendations and Current Recommendations. While we have been pleased with the performance of our exited recommendations, a number of our current recommendations have performed poorly.
The greatest number of bonds with weak performance have been long-dated investment grade corporate bonds, which have been hurt by higher US Treasury yields. As shown in Figure 1, long-term US Treasury yields were on an upward path until October 24, 2022 when the 10 year US Treasury YTM was 4.25% and the 30 year US Treasury YTM was 4.40%. These US Treasury YTMs fell significantly from October 24 until November 30, 2022, with the 10 year US Treasury YTM falling 0.57 percentage points (or 57 "basis points") and the 30 year US Treasury YTM falling 0.60 percentage points (or 60 basis points).
Figure 1: US Treasury Yields vs. Effective Fed Funds Rate: November 30, 2021-November 30, 2022
Many investors automatically believe that investing in short-term bonds is always the best play in a rising interest rate environment. Unfortunately, that strategy hasn't been a good one in 2022, as short-term bond yields have risen substantially more than long-term bond yields. As shown in Figure 1, the two-year US Treasury YTM has increased 3.86 percentage points (386 basis points) from November 30, 2021-November 30, 2022, while the 30-year US Treasury YTM has increased 2.02 percentage points (202 basis points) over the same time period.
While the prices of short term investment grade corporate bonds have generally fallen less than long term investment grade corporate bonds in 2022, purchasing short term investment grade bonds in 2021 was not compelling, as most YTMs of such bonds were very low. For example, the YTM on the Apple 3.45% 5/6/24 bond (CUSIP 037833AS9) was 0.47% on August 2, 2021 when the bond traded at 108.15. On November 30, 2022, the Apple '24 bond was trading at a price of 98.52 and a 4.53% YTM.
As short term bond yields began rising in 2022, we made four new short term corporate bond recommendations on June 16, 2022. Such short term corporate bond investments will not be home runs, but they do enable investors to lock in 4-5+% YTMs over the next several years.
Other Factors Driving Corporate Bond Prices Lower in 2022
Apart from the negative impact of rising US Treasury yields, three of our high yield corporate bond recommendations have been hurt by weak issuing company financial performance. Another high yield bond (High Yield Bond 4 from March 11, 2021) fell significantly in price, as the bond was assumed as part of an acquisition, and the acquiring company heaped billions of new senior debt on the issuing company. This caused the bond's rating to fall, and its price fell with it.
The Exterran '25 bond is the only recommendation we have sold in the second half of 2022. Falling bond prices will generally extend the holding time of our bond recommendations. In addition, should issuing company fundamentals remain strong, we will often recommend subscribers purchase more of a bond that has fallen in price.
Many Bonds Still Available at Low Prices
As shown in our Current Recommendations tables, there are many corporate bonds priced in the 60s and 70s. Many of these bonds are issued by the world's most profitable companies and can provide compelling upside opportunities with very low default risk.