BondSavvy founder Steve Shaw, the leading expert on recommending individual corporate bonds to individual investors, presented five new corporate bond recommendations to BondSavvy subscribers on September 9, 2021. As of November 10, 2021, these recommended bonds were available at prices either slightly lower than, or very close to, our September 9 recommended price.
This fixed income blog post includes the following:
|1. Preview of our five new corporate bond recommendations, including price, YTM, leverage ratio, and issuer industry
2. Charts showing how, in spite of a 1250+% volume increase1a, BondSavvy subscribers bought our recommended bonds at or near the recommended prices in the trading days following our Pick Date
|3. Tables showing bond trading fees and how much money you can save by buying bonds online
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Best Bonds - Preview of our New Bond Recommendations
This was our third edition of The Bondcast for 2021. We host these subscriber webcasts following quarterly earnings releases to ensure we have the most up-to-date financial information when identifying the best bonds.
During each edition of The Bondcast, we typically recommend between 4-6 new corporate bonds to buy. Figure 1 provides a summary of the corporate bonds we believed to be the best bonds on September 9, 2021. In our view, the best bonds are those that have attractive yields and prices relative to a bond issuer's financials and can achieve investment returns higher than the leading bond funds and ETFs. Please note that Investment Grade Bonds 1 and 2 were issued by the same company. Purchase our investment newsletter subscription to learn the names and CUSIPs of our recommended bonds and to view the full presentation of The Bondcast that supported our recommendations.
Our goal is for BondSavvy subscribers to be able to buy and sell corporate bonds at or close to our recommended prices. We have taken several actions to limit the market impact of our bond recommendations, and we are pleased to see the "Sept 10, 2021 Avg. Buy Price" in Figure 1 to be at or near our Pick Date Offer Price. The Pick Date Offer Price was the price of the bond at approximately 12:00pm EDT on September 9, 2021, five hours before we recommended the bonds at 5:00pm EDT when markets closed.
Figure 1: Best Bonds Summary -- September 9, 2021 Corporate Bond Recommendations with Updated Bond Prices
* Offer prices and YTMs sourced from Fidelity.com. Assumes 0.1-point markup from market price for Pick Date Offer Price.
**Sept 10, 2021 Avg. Buy Price excludes four customer buy trades that had markups of more than 0.25 points, as these trades would have been transacted via full-service brokerages and would not be from BondSavvy subscribers.
Market Impact of High Yield Bond 1
What good is a bond recommendation if you can't buy it at or close to the recommended price? We are aware of investment newsletters that make recommendations that often cause security prices to spike in the wake of the new recommendations. BondSavvy's approach is much different, as our goal is to minimize the potential market impact our recommendations have. We want our subscribers to be able to transact at or close to our recommended prices.
Across BondSavvy's prior 82 corporate bond recommendations, we created significant market impact on two recommendations, where the prices of our recommended bonds spiked 5-6 points the days we recommended the bonds. We made these two recommendations on December 17, 2020 and, since then, have instituted several initiatives to limit the market impact of our corporate bond recommendations.
Thus far, these initiatives have appeared to work, as changes in the prices of recommended bonds have been limited during the trading days immediately following our recommendations in 2021. As shown in Figure 1, four of the five best bonds were, on average, bought within 0.30 points of our recommended price the trading day following the Pick Date. In our previews of the best bonds to buy March 11, 2021, we show the recommended bond prices and the price two months following our recommendation date. For the best corporate bonds we presented May 20, 2021, we show the bond prices on the pick date and one week following our pick date.
Transparency of Individual Bonds vs. Bond Funds
One of the many advantages of individual bonds vs. bond funds is the higher level of transparency individual corporate bonds provide investors. Ironically, it's often this level of transparency that causes many investors to gravitate toward bond funds, as bond funds don't disclose the bond trading costs associated with their funds. Rather, they mislead investors by touting low 'expense ratios,' which don't include the significant transaction costs bond funds incur.
With individual corporate bonds, investors can see everything. They know the exact bond they are buying, the market price, and any markup or markdown associated with the transaction. Sometimes, markets can move, and a bond could move up several points over the course of a trading day. These market movements occur for both retail and institutional investors. The difference, however, is that investors in individual corporate bonds can decide whether to continue with a trade in the event the market moves against the investor. With bond funds, that level of control is out of the investor's hands and, most often, in the hands of a computer whose primary job it is to replicate an index and not maximize investor returns.
Example of Market Impact of September 9, 2021 Recommendations
Across the five corporate bond recommendations shown in Figure 1, High Yield Bond 1 had the highest trading volume the trading day immediately following our September 9, 2021 recommendation date. We are reviewing the trading activity of this bond first and, in connection with this, will discuss the impact of bond markups when individual investors buy individual corporate bonds.
High Yield Bond 1, issued by a US-based manufacturing company, reported a 773% increase in the bond's customer-buy trading volume on the day following our recommendation. Figure 2 shows the bond's customer-buy trading activity1 four trading days leading up to the September 9, 2021 pick date and four days immediately following the pick date. In the four trading days leading up to the pick date, the bond averaged 11 daily customer-buy trades ("CBTs"). Then, on September 10, 2021, there were 96 customer-buy trades. Given the average 11 daily trades leading up to the pick date, we believe BondSavvy subscribers accounted for over 88% of customer-buy trades on September 10, 2021.
As shown in Figure 2, the trades executed on September 10, 2021 were completed at or near the 100.22 recommendation price. In spite of the surge in trading activity, this bond's average September 10, 2021 customer-buy trade was executed at 100.30 compared to the 100.22 recommendation price2.
Figure 2: High Yield Bond 1 Customer-Buy Trading Activity -- Four Days Leading up to and Four Days After Recommendation
Source: FINRA TRACE market data.
* Recommendation price includes 0.1-point markup on our recommended market price. The total customer-buy trades on September 10, 2021 was 96; however, the chart excludes three trades with markups of at least 0.5 points, as our objective is to show whether our recommendation had a material impact on the market prices of our recommended bonds. The markup is tacked on to the market price of the trade by the executing broker.
Our Recommendation Reduced Price Volatility
A compelling observation in Figure 1 is how pricing volatility fell the day after we made our recommendation of High Yield Bond 1. The reason for this is that customer-buy trades include the markups charged by an investor's brokerage, and when investors execute corporate bond trades through full-service brokerages, the markups can be hundreds and even thousands of dollars for just one trade.
We encourage BondSavvy subscribers to buy bonds online through Fidelity.com so they see the broadest bond inventory, the most competitive bid-offer quotes, and low bond trading commissions. In the four days leading up to the September 9, 2021 pick date, many of the trades in High Yield Bond 1 were executed through full-service brokerages, which can charge markups as high as two points, or $20 per $1,000 face value per bond. These markups are 20x higher than the 0.1-point markup, or $1 per $1,000 face value per bond, e-trading venues such as Fidelity.com and E*TRADE charge.
Understanding Corporate Bond Markups and Trade Legs
Investors can tell the amount of bond markups by looking at historical trades shown in their brokerage accounts. For example, on the Fidelity.com order entry screen, investors will see a "Recent Trades" table and can click the "View All" hyperlink to see trading activity in any given corporate bond CUSIP.
As shown in Figure 3, on September 3, 2021, High Yield Bond 1 had four trades reported to FINRA's Trade Reporting and Compliance Engine (TRACE) at 10:49am EDT. Investors' brokerage firms typically do not hold thousands of bonds in their internal inventory, as this can be capital inefficient and risky. Therefore, retail brokerages, upon receiving a new customer order, have to buy bonds from another dealer (the "dealer to dealer" trade leg) before then selling those bonds to the customer (a customer buy trade).
In the series of trades reflected in Figure 3, a retail brokerage purchased 100 bonds from another broker-dealer at a price of 100.57 (shown in the bottom row). It then sold these bonds to three accounts -- one 50-bond trade and two 25-bond trades -- at a price of 102.57, a two-point markup. With a two-point markup equaling $20 per bond, a 50-bond trade resulted in a financial advisor commission of $1,000. The resulting "Investor Fee Burn," the amount an investor paid above what he would have paid buying bonds online, was $950 for the 50-bond trade, as shown in the far-right column of Figure 3.
Figure 3: Example of High Yield Bond 1 Trade Through Full-Service Brokerage
|Investor Fee Burn
|Dealer to dealer
Source: FINRA TRACE market data.
Bondsavvy Fees vs. a Full-Service Brokerage Fees
Paying $1000 to execute a 50-bond trade through a full-service brokerage firm is a lot of money. On the trades shown in Figure 3, it reduced the investor's YTM by 44 basis points or 0.44 percentage points (from 4.87% to 4.43%) compared to the dealer to dealer trade leg. It's likely a financial advisor placed this bond into a bond ladder, so the investment's return will be capped at 4.43%. Currently, BondSavvy's two-year subscription fee is $1,000, and the fee an online brokerage such as Fidelity.com would have charged for this trade was $50, or $1 per bond. We have shown how our corporate bond returns have beaten the leading corporate bond ETFs. In addition, we believe our returns compare favorably to full-service financial advisors given our focus on total return, our far-lower fee structure, and our sole focus on individual corporate bonds. We publicly post our investment returns for each of our recommendations, but we are not aware of any full-service financial advisors who provide the same level of disclosure.
Executing a Corporate Bond Trade Through an Online Broker
Following our September 9, 2021 bond recommendations, virtually all customer-buy trades were executed the following day via online brokerages. We can tell this since most online brokerages charge a 0.1-point markup, or $1 per $1000 bond face value. Figure 4 shows examples of two High Yield Bond 1 customer-buy trades on September 10, 2021.
Figure 4: Example of High Yield Bond 1 Trades Through Online Brokerage
|Dealer to dealer
|Dealer to dealer
Source: FINRA TRACE market data.
Online brokerages stream live-and-executable corporate bond price quotes from over 100 broker-dealers via alternative trading systems (ATSs) such as Tradeweb and Intercontinental Exchange (ICE). To buy our recommended bonds on September 10, 2021, BondSavvy subscribers entered the CUSIPs of the bonds they wanted to buy into their brokerage's order-entry screen. In the case of High Yield Bond 1, the quoted offer price was 100.12 at 9:26am EDT. As shown in Figure 4, two customer-buy trades were executed within a minute of this time at a price of 100.22, reflecting a 0.1-point markup on the trades. Combined, the online brokerage markup charged for the 15- and 35-bond trades was $50, a savings of $950 compared to the 50-bond full-service brokerage trade shown in Figure 3.
While our active bond investment strategy seeks to achieve returns higher than a bond's YTM, the difference in the YTMs for the dealer-to-dealer vs. the customer-buy trade legs in Figure 4 is a manageable 2 basis points, or .02 percentage points, compared to 0.44 percentage points in the full-service brokerage example shown in Figure 3.
We are only showing the trade leg analysis for High Yield Bond 1; however, a similar dynamic occurs in our other four recommendations. We will now preview all five of our September 9, 2021 best bonds, including pricing charts for the four other corporate bonds we recommended.
Factors Impacting Best Bonds Recommendations
Admittedly, September 9, 2021 was a more difficult time to select bonds with high-return potential than 2021's two earlier editions of The Bondcast on March 11 and May 20, 2021. Long-term Treasurys had rallied since earlier in 2021, driving the 30-year US Treasury yield to 1.90% on September 9 from 2.34% on May 20. This drove many long-dated investment-grade corporate bond prices higher, as their performance can be heavily impacted by US Treasury yields.
In addition, many high yield corporate bonds have performed well during 2021, including many energy-sector bonds, which have been buoyed by surging commodity prices.
Ever-changing investment environment
One of the many reasons we advocate making corporate bond investments throughout the year rather than a Big Bang Bond Ladder is that market conditions are continuously changing, and there is seldom a 'perfect' time to make a new investment. There will be times when we make new corporate bond recommendations, and, shortly afterward, Treasury yields fall and credit spreads tighten (or decrease). In such cases, we may see significant capital appreciation and sell a bond after a number of months, assuming the bond's upside has waned.
Often times, however, we may confront an environment with low Treasury yields and low credit spreads, which can make capital appreciation hard to come by. In these cases, it's even more important to own individual bonds vs. bond funds since, with a select portfolio of individual bonds, it is still possible to find outperformers.
Figure 5 depicts the macro environment across the last six editions of The Bondcast. We show the 30-Year US Treasury yield on the Pick Date, and, for our new recommendations, the lowest and highest credit spread. We also show the composition of investment grade vs. high yield corporate bond recommendations.
Figure 5: Market Conditions and Pick Composition for Last Six Editions of The Bondcast
|# Investment Grade
|# High Yield
|Jun 5, 2020
|Sep 23, 2020
|Dec 17, 2020
|Mar 11, 2021
|May 20, 2021
|Sep 9, 2021
After viewing this table, many investors might believe that, on September 23, 2020, with the 30-year US Treasury yield at 1.42%, selecting bonds that achieved high returns would not be possible. Fortunately, even in this challenging environment, we were still able to recommend bonds that achieved strong returns. One of these bonds was EQT Corp. 3.900% 10/1/27 (CUSIP 26884LAF6), issued by a leading Appalachian Basin natural gas producer. We recommended the EQT '27 bond at a price of 91.70 on September 23, 2020 and then, on June 3, 2021, we recommended BondSavvy subscribers sell the bond at 106.90. This achieved an investment return of 19.52% vs. 7.68% for iShares HYG, the leading high yield corporate bond ETF. View our corporate bond returns page to see how our bond recommendations have performed across a variety of recommendation dates and investing environments.
Finding compelling bond values on September 9, 2021
To maximize total returns and manage risk, we believe investors should be flexible when evaluating new corporate bond investments. We believe this flexibility should extend across bond ratings, bond maturity dates, and issuer industry. In short, due to bond rating flaws, there are often times bonds rated below investment grade where the issuing companies have superior financials to investment grade corporate bond issuers. In addition, investors who can accept greater pricing volatility can achiever higher potential returns with long-dated investment grade corporate bonds rather than sticking with ultra-short investment grade bonds that have very low yields and virtually no upside.
Figure 5 showed a relatively even split between investment grade and high yield corporate bond recommendations over the last six editions of The Bondcast: 14 investment grade vs. 15 high yield corporate bonds. For bonds we had recommended and sold prior to this fixed income blog post, the split was 20 investment grade (42.5%) and 27 high yield (57.5%). For the 38 corporate bonds we rated a buy or hold as of October 31, 2021, the recommendation split was 60% high yield and 40% investment grade.
Our investment grade corporate bond recommendations
As shown in Figure 5, 30-year Treasury yields had fallen 44 basis points (0.44 percentage points) from May 20 to September 9, 2021. This caused many investment grade corporate bonds to rally and erased many of the bargains we saw earlier in the year. That said, on September 9, 2021, two of our three investment grade best bonds were at significant discounts to par value.
While the YTMs of these investment grade corporate bonds ranged from a low 2.40% to 2.83%, over time, we have found success investing in bonds of high-quality issuers priced at a discount to par value. For example, on September 26, 2017, we recommended BondSavvy subscribers buy Verizon 3.85% 11/1/42 bonds (CUSIP 92343VBG8) at 89.72. Then, on September 9, 2019, we recommended subscribers sell the bond at a price of 106.43. This recommendation achieved an investment return of 27.01% compared to 12.53% for the iShares LQD ETF, the leading investment grade corporate bond ETF.
Our high yield corporate bond recommendations
For our high yield bond recommendations, we were pleased to recommend two bonds of companies that had leverage ratios around 3x and YTMs, on September 9, 2021, of 4.97% and and 5.70%. High yield bonds have been strong performers, as the US has been recovering from the Covid-19 pandemic. Like many high yield bond issuers, the issuers of our two high yield bonds struggled in 2020. During that time, both companies cut costs and became more efficient operators. High Yield Bond 2, issued by a natural resources company, has been bolstered by the increase in certain commodity prices. We had looked at this bond several times over the last 3-4 years, but the company's financials were not up to our standards. After the rally in certain commodity prices and a significant reduction in its debt load, the company is on strong financial footing and was a compelling buy on September 9, 2021.
Market Impact of Our Four Remaining Corporate Bond Investments
Earlier in this fixed income blog post, we showed the trading activity of High Yield Bond 1, which was our most actively traded recommendation on the day immediately following our September 9, 2021 recommendation date. We're now going to turn to the four other corporate bond recommendations we made.
High Yield Bond 2 Market Impact Analysis
High Yield Bond 2 was issued by a US-based natural resources company that has engineered a significant turnaround in its business over the last year. As noted above, we had conducted bond investment analysis on this opportunity several times, but the numbers never worked, as the company's credit risk was too high. The game has changed, and as of June 30, 2021, the issuing company had an investment-grade-caliber leverage ratio of 2.6x.
As shown in Figure 6, customer-buy trading activity increased 1,675% on September 10, 2021, from an average of four customer buy trades in the four trading days leading up to the September 9, 2021 Pick Date to 71 customer-buy trades on September 10. In the price chart, we eliminated one customer-buy trade that had a one-point markup, as the purpose of this chart is to show the prices at which BondSavvy subscribers were able to execute trades in our recommended bonds and whether our recommendation changed the market prices of our recommended bonds.
In spite of the large increase in transaction volume, the average customer-buy trade on September 10, 2021 was executed at a price of 109.68 vs. our 109.85 recommendation price from the previous trading day.
Figure 6: High Yield Bond 2 Customer-Buy Trading Activity -- Four Days Leading up to Recommendation and Four Days After Recommendation
* Recommendation price includes 0.1-point markup on our recommended market price.
Investment Grade Bond 1 Market Impact Analysis
A key difference between the high yield and investment grade bonds we recommended is the level of pricing volatility throughout the trading day immediately following our Pick Date. This was due, in large part, to how high yield and investment grade corporate bonds trade on professional trading desks. Figures 2 and 6 showed how BondSavvy subscribers were able to purchase the High Yield Bond 1 and 2 recommendations at prices very close to the recommended price. In addition, there was very little pricing volatility during the day. This held true even due to the significant volume increases for High Yield Bonds 1 and 2.
Investment grade corporate bonds trade off the credit spread to the bond's benchmark US Treasury, the Treasury bond or note that has a similar maturity date to the specific corporate bond. As a result, as US Treasury yields move up and down during the trading day, the YTM of the investment grade moves as well, which results in movements of the corporate bond's price.
Since Treasury yields can be volatile, it's common for there to be corresponding volatility in long-dated investment grade corporate bonds. With that said, even with Investment Grade Bond 1 trading between 89.50 and 90.50 for most of the day on September 10, 2021, the average customer-buy trade had an execution price of 90.10 compared to the 89.85 recommendation price.
Figure 7: Investment Grade Bond 1 Customer-Buy Trading Activity -- Four Days Leading up to Recommendation and Four Days After Recommendation
* Recommendation price includes 0.1-point markup on our recommended market price.
Investment Grade Bond 2 Market Impact Analysis
Investment Grade Bond 2 had similar pricing activity to that of Investment Grade Bond 1, where prices increased slightly in the first part of the day and then moved closer to the recommendation price later in the day. While there weren't a significant number of customer buy trades on September 10, 2021, it was still a 27x increase vs. the average daily volume for the four days leading up to our Pick Date. As with Investment Grade Bond 1, the average customer buy trade was executed approximately 0.30 points higher than the 104.48 recommendation price.
Given the large size of this bond's issuance, we don't believe it was BondSavvy's subscribers who drove a market price increase in this bond. Instead, we believe it was primarily volatility in the US Treasury market that moved the price of this bond throughout the trading day.
Figure 8: Investment Grade Bond 2 Customer-Buy Trading Activity -- Four Days Leading up to Recommendation and Four Days After Recommendation
* Recommendation price includes 0.1-point markup on our recommended market price.
Investment Grade Bond 3 Market Impact Analysis
Investment Grade Bond 3 saw the largest increase in price from our Pick Date, 93.46, to the average customer buy execution price on September 10, 94.17. As shown in Figure 9, this bond had rallied two points from September 7, 2021 until our Pick Date, which we believe was primarily driven by the 30-year Treasury yield falling from 1.99% to 1.90%. That upward price movement continued during September 10, as the bond was trading between 94.00 and 94.50. This bond issuance was less than $1 billion, so there was a greater opportunity for BondSavvy subscribers to impact the price of this bond, but, given the relatively low volume compared to our high yield bond recommendations, we believe the more likely cause was Treasury market volatility and, potentially, small movements in the bond's credit spread.
Figure 9: Investment Grade Bond 3 Customer-Buy Trading Activity -- Four Days Leading up to Recommendation and Four Days After Recommendation
Why Subscribe to Bondsavvy
When bond prices are high, bond selection becomes even more important. The world's largest investment grade corporate bond fund, the $37.5 billion iShares LQD ETF, holds approximately 2,500 bonds that, on November 2, 2021, had a weighted average price and YTM of 112.36 and 2.46%, respectively. Making new investments into this fund now is a bad idea given the high prices and low yields of its bond holdings.
A better alternative is investing in a select portfolio of individual corporate bonds, where investors can still find bonds at compelling values that can outperform. This is BondSavvy's bread and butter, and it's why, through July 30, 77% of our recommendations achieved investment returns higher than the iShares LQD and HYG ETFs. Investing in overpriced bond funds with hidden trading costs puts the investor in the passenger seat and lowers investment returns.
Many investors go the bond fund route because they believe it's easier to invest in bond funds than individual bonds. We make bond investing simple and profitable by narrowing down the corporate bond universe to a small number of recommendations that can outperform the market.
1a Volume increase reflects the increase in the number of customer-buy trades from (a) the average of the four trading days leading up to the September 9, 2021 Pick Date to (b) September 10, 2021, the day immediately following the Pick Date.
1A customer-buy trade occurs when an end investor, such as a retail investor or a bond fund, purchases a bond from his broker-dealer.
2Average execution price on September 10, 2021 excludes three customer-buy trades where there was a markup of at least 0.5 points. We excluded these trades since the price increase reflects a markup an investor was charged that exceeds the typical 0.1-point markup of bond e-trading venues such as Fidelity.com and E*TRADE.