The COVID-19 pandemic created a Blue Light Special in the the US corporate bond market, as many corporate bonds recently hit all-time lows. With
this as the backdrop, on March 26, 2020, BondSavvy presented six new corporate bond investment recommendations to subscribers during The Bondcast. We preview the details of these six corporate bonds later
in this blog post.
The well-known 'buy low, sell high' investing rule applies to corporate bonds, and we are seeing buying opportunities not seen in years. Due to recent record bond fund outflows, there has been forced selling of the corporate bonds held by bond funds and ETFs. Even certain bonds of Apple fell 30 points, which is remarkable given that Apple is one of the world's highest credit quality bond issuers, with over $200 billion of cash on hand.
The following charts show historical historical bond prices for three highly rated bonds:
Target 2.50% '26: CUSIP 87612EBE5
Apple: 3.45% '45: CUSIP 037833BA7
Apple 3.25% '26 CUSIP 037833BY5
Figure 1: Historical Corporate Bond Price Performance
Source: FINRA market data
While these three corporate bonds did not hit all-time lows, investors can see how significantly the COVID-19 crisis impacted corporate bond prices. As you would expect, the bonds with less time to maturity - Target '26 and Apple '26 - fell much less than the Apple '45 bond, as longer-term bonds can have significantly greater pricing volatility than shorter-dated bonds.
Over the last several days, many corporate bond prices have begun to recover. When prices fall so drastically, we like to see some level of recovery before recommending investors make new corporate bond investments. As an example, Bond 1 in Figure 2 below had traded in the low 90s several days before The Bondcast on March 26. We would have preferred to have been able to recommend the bond closer to the lowest price; however, there was significant bond price volatility over the last several weeks characterized by less-than-normal trading volume and a lack of live bid-offer quotes.
Our March 26, 2020 Corporate Bond Recommendations
BondSavvy presented six new corporate bond investment recommendations during the March 26, 2020 edition of The Bondcast, where we identified what we believe to be the best corporate bonds. In our eyes, 'best' means that the bond is priced attractively relative to similar bonds in the US corporate bond market and has an opportunity for capital appreciation and a strong total return.
A key advantage of BondSavvy recommendations vs. bond ratings issued by Moody's and S&P is that we tell you the specific bond to buy. We compare the prices and yields of thousands of individual corporate bonds to make a first cut as to which bonds present the strongest total return opportunities. We then review company SEC filings and earnings releases to understand the financial picture of each potential bond recommendation. We present our full analysis, which reviews the issuing company's business, capital allocation, momentum, and bond rating upgrade or downgrade likelihood. We then compare key credit metrics, recent financial performance, and amount of upcoming bond maturities to determine which corporate bond investments are the best relative value. View the Sample Edition of The Bondcast to see the level of detail we provide for each bond recommendation.
We made six new corporate bond recommendations on March 26, 2020. Please note that Bonds 2 and 3 are from the same issuer as are Bonds 4 and 5. In the case of Bonds 2 and 3, Bond 2 was due in approximately eight years and Bond 3 was due in nearly 30 years. Bond 3 offers much greater upside potential and a slightly higher yield; however, it will have greater pricing volatility as discussed above. We provided BondSavvy subscribers with two CUSIPs of the same issuer so each subscriber could decide which bond made the most sense for his or her portfolio. Note that BondSavvy does not provide individualized investment advice.
All six of our recommended bonds were rated investment grade by Moody's and S&P on our recommendation date. That said, Bonds 4-6 have lower leverage ratios than Bond 1, but Bond 1 has a higher credit rating since the issuer of Bond 1 is bigger and has a more diversified business. While we believe all of the issuers of our recommended bonds are good companies, the bond rating methodologies of Moody's and S&P can create opportunities where you can buy bonds such as Bond 4-6, which offer compelling yields and upside but with a reasonable level of credit risk.
Figure 2: Summary of March 26, 2020 Bond Recommendations
* Leverage ratios based on Q4 2019 SEC filings and are defined as the company's debt divided by its last 12 months' EBITDA.
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