BondSavvy's Corporate Bond Returns

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 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.

The first half of 2022 was a rough one for bond investments, including many BondSavvy recommendations. We were pleased to see the market recover during July 2022, as 46 of our 48 bond recommendations achieved total investment returns of at least 1.86%, 34 returned at least 5%, and 20 picks returned at least 7%.

Figure 1 provides a summary of the investment returns our 48 corporate bond recommendations achieved during July 2022:

Figure 1: BondSavvy Investment Performance for July 2022 ⁽¹⁾

(1) Please see Figure 2 for additional information on our investment return calculations.

As of July 29, 2022, BondSavvy's 48 corporate bond recommendations included 28 high yield corporate bonds, 16 long term investment grade corporate bonds, and 4 short term investment grade corporate bonds.  Figure 2 shows the July 2022 performance of all corporate bond picks made prior to June 16, 2022 and, for our June 16, 2022 picks, their performance since the pick date. We also compare each group of bonds to the benchmark iShares corporate bond ETF.

Subscribe to BondSavvy to learn the names, CUSIPs, and investment rationale for each corporate bond recommendation.

Figure 2: Summary of July 2022 Corporate Bond Returns for Each Bond Recommendation

July 2022 Corporate Bond Returns vs. iShares Corporate Bond ETFs

We outperformed the iShares HYG high yield corporate bond ETF for 14 of our 28 (50%) high yield bond recommendations. We outperformed the iShares LQD investment grade corporate bond ETF for 14 of our 16 (87.5%) long-term investment grade bond recommendations. Thus far, all of our June 16, 2022 short-term bond recommendations have outperformed the iShares SLQD 0-5 year investment grade corporate bond ETF.

Key Drivers of July 2022 Corporate Bond Returns

A key driver of strong July 2022 corporate bond returns was the fall in US Treasury yields since they reached a peak on June 14, 2022. As shown in Figure 3, YTMs of the 2-, 10-, and 30-year Treasury all fell, with the 10-year US Treasury YTM falling the most: 82 basis points (or 0.82 percentage points) from 3.49% to 2.67%.

Figure 3: Year-to-Date 2022 US Treasury Yields

Credit spreads for many of our recommended corporate bonds fell as well. For example, the credit spread for High Yield Bond 5 fell 90 basis points (bps), from 5.38% on June 30, 2022 to 4.48% on July 29, 2022. This was a big driver of its strong July 2022 corporate bond return. The credit spread of High Yield Bond 1, July 2022’s best performer, fell 93 bps. This bond price increased more than that of High Yield Bond 5 due to Bond 1's longer-dated maturity.

CASE STUDIES OF CORPORATE BOND RETURNS FOR EXITED BONDSAVVY RECOMMENDATIONS

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.