On March 11, 2021, BondSavvy presented six new corporate bond recommendations to its investment newsletter subscribers during The Bondcast, an interactive subscriber webcast. This fixed income blog post provides a preview of these new investment recommendations along with the key themes informing our investment decisions.
BondSavvy makes new corporate bond recommendations each quarter and when opportunities arise throughout the year. We believe the March 11, 2021 recommendations along with the other bonds we recommend this year will be among the best bonds to buy in 2021.
Figure 1 shows a summary of our March 11, 2021 bond recommendations. Subscribe to BondSavvy to learn the names and CUSIPs of our recommended bonds so you can add them to your bond portfolio. Please note that Recommendations 1 and 2 and Recommendations 3 and 4 are bonds of the same issuer.
Figure 1: Summary of BondSavvy's March 11, 2021 Corporate Bond Recommendations
Generate income, drive growth, and preserve capital
A significant advantage of corporate bond investing is that it can achieve three key investment goals: generate income, drive growth, and preserve capital. Investors in stocks, bond funds, and muni bonds can achieve one or two of these investment goals, but our individual corporate bond recommendations empower BondSavvy subscribers to achieve all three over the long term.
Price changes since March 11, 2021 pick date
For the first several weeks following our March 11, 2021 edition of The Bondcast, the prices of our recommended bonds remained very close to our pick date price. On May 14, 2021, our two investment grade corporate bond recommendations were within spitting distance of the pick date price. Bond Recommendations 1 and 2 have increased slightly, given oil price tailwinds, and Bond Recommendations 3 and 4 have fallen slightly.
Our goal is to maximize the total return of each investment recommendation over the time period we hold the investment. While our investment strategy is flexible on holding periods, we typically hold bonds anywhere from 4-6 months to 3-4 years.
Beginning January 2021, we took actions to reduce the market impact a small number of our previous recommendations had, as we discuss in the fixed income blog post "Our Impact on Corporate Bond Trading." We were pleased to see these actions enabled our subscribers to purchase our recommended bonds at or near our recommended prices.
Mix of high yield and investment grade corporate bonds
As we discuss in our How To Profit from Rising Interest Rates blog post, in periods of rising interest rates, our recommendations can be weighted toward high yield corporate bonds. We do this since high yield corporate bonds are typically not sensitive to changes in US Treasury yields. High yield corporate bonds have continued to perform well even as US Treasury yields rose sharply during Q4 2020 and Q1 2021.
We illustrate this phenomenon in Figure 2, which compares the performance of the L Brands 6.875% 11/1/35 bond (CUSIP 501797AL8), a previous BondSavvy high yield corporate bond recommendation, to its benchmark Treasury bond. The US Treasury '36 bond cratered in the wake of the US presidential election, higher government spending, and increased inflation fears. In contrast, L Brands' financial performance has been as solid as a rock, and the L Brands '35 bond price performance has reflected this.
Figure 2: L Brands '35 Bond vs. Benchmark Treasury Performance
May 12, 2020-May 12, 2021
Source: FINRA market data
High yield bonds are a big part of the best bonds to buy in 2021 story; however, given their continued strong performance, it can take an eagle's eye to identify high yield corporate bond bargains. Many, like this L Brands '36 bond, are trading well above par, which limits our upside.
Luckily, there still are bargains to be had in some long-dated investment grade corporate bonds. These bonds are among the most sensitive to rising interest rates, and many bonds of the world's greatest companies have recently fallen 20%. We have achieved some of our highest investment returns through recommending long-term investment grade corporate bonds priced in the 80s and 90s.
BondSavvy Subscriber Benefit
BondSavvy's 100% focus on individual corporate bonds enables us to identify investment opportunities across ever-changing market conditions. Get StartedBond picks such as Recommendations 5 and 6 may not pay off immediately; however, we do expect these bonds to recover their value at some point over the next two to three years. In spite of the low YTMs of these two bonds, if we can achieve 10-15 points of capital appreciation over the next two to three years, these would be successful investments given the very low level of credit risk each bond issuer has.
We discuss our comprehensive rationale for investing in long-term investment grade corporate bonds in our How To Profit from Rising Interest Rates blog post.
Focus on issuers with low leverage ratios
While the economy has made many positive strides over the last two quarters, we still have 10 million fewer people working in the US vs. pre-COVID-19. Further, while some industries such as technology, homebuilders, e-commerce, healthcare, and others have been buoyed by COVID-19, others are still in the midst of recovery.
The leverage ratios of our bond recommendations range from a low of 0.6x to a high of 3.8x. In 2020, as certain of our bond issuers fought through COVID-19 shutdowns, their leverage ratios soared. Retailers such as Macy's were able to survive because, prior to COVID-19, its leverage ratio was less than 2.0x. Its leverage ratio increased markedly due to store shutdowns; however, if its leverage ratio was 5.0x going into COVID-19, it would not have been able to escape Chapter 11.
Focus on issuers that have turned the corner from 2020
Bond Recommendations 3-6 were in industries that performed either exceptionally well -- or reasonably well -- during 2020. The issuer of Recommendations 3 and 4 saw its revenues and EBITDA slip 3% in 2020, but the others saw strong double-digit increases.
The issuer of Bond Recommendations 1 and 2, an oil and gas producer, did hit on some hard times in 2020. We were able to gain comfort with this issuer, as, even after a difficult 2020, its leverage ratio was still a reasonable 3.3x and the company has started to benefit from rising oil prices and costs it recently took out of the business.
