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Corporate Bond Investment Returns Through September 30, 2017

Steve Shaw's investment-grade corporate bonds are up 11.14% through 9/30 compared to 3.15% for the world's largest bond ETF.  Learn how he did it by reading this blog post.

Investment-Grade Corporates Up 11.14%

The corporate bonds I own have achieved strong returns through September 30.  Investment-grade corporate bonds performed especially well, increasing 11.14% compared to 3.15% for the iShares AGG ETF, the largest bond ETF.

Note that these returns do not include the four new bonds I purchased right before hosting The Bondcast on September 26.  Click here to view these new recommendations.

The strongest performer is the Jefferies 6.500% '43 bond. Jefferies, a subsidiary of publicly traded Leucadia National Corp., is a full-service investment bank with a well-diversified business. I bought the bonds January 19 at 103.50, and they were priced at 114.25 on September 29. Factoring in capital appreciation and interest received and accrued, the year-to-date return on the bonds is 14.46%. The below chart shows the year-to-date returns for my investment-grade corporate bond portfolio compared to the iShares AGG ETF:

(1) The Jefferies and Discovery Communications bonds were both bought on January 19, 2017.  I bought the other bonds in 2013 and 2016.

You'll hear many people say that investment-grade corporate bonds move in tandem with interest rates, but the Jefferies investment shows why this is not always the case.  The bond matures in 26 years in 2043, so the comparable Treasury is the 30-year Treasury bond. The 30-year Treasury has ticked down slightly from 3.04% on January 19 to 2.86% on September 29, but this modest reduction in rates is not what drove a nearly 11-point increase in the value of the bond.

Rather, when I made the investment, these bonds had a yield to maturity of 6.2%, which was a premium to where comparable bonds were trading. This made the bond a good value relative to other bonds. With the Jefferies bonds, I saw an opportunity to invest in a well-run company with a strong franchise and in an industry that was positioned to do well in 2017.  These factors, along with where the bond was priced, provided a compelling opportunity for a strong total return on this investment.         

High-Yield Corporates Up 5.91%

While my high-yield portfolio has outperformed the world's largest high-yield ETF, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), I haven't had a breakout performer like last year's 54.4% annualized returned achieved with my Toys R Us 10.375% '17 investment. The Cablevision 5.875% '22 bond has been the best performer, returning 10.49%. It was still trading at a discount to par (97.50) at December 31, 2016 and was priced at 103.50 on September 30. I bought this bond on December 8, 2015 at 79.25 and it has achieved a 23.0% annualized return.

I did invest in a clunker early in the year: Ruby Tuesday 7 5/8% '20, which returned 0.31% from when I bought the bonds in January to when I completed selling the position on July 17. Ruby Tuesday's business has been struggling and its stock has been trading around $2.00 for some time. I bought the bonds at a blended price of 97.81 with an 8.3% yield to maturity. At the time, it was a good yield relative to other bonds in the market, but they weren't trading at enough of a discount and presented little upside, which is why I sold the bonds in July.

Lesson Learned: Nearly every high-yield investment has some hair on it.  That said, given all that was going on with Ruby Tuesday -- lackluster performance, CEO musical chairs, an ongoing 'strategic alternatives' process, a micro-cap $2 stock, and a small $222 million bond issuance size -- required the bonds to be trading in the 80s or low 90s for this investment to have made sense.

The following chart compares my high-yield corporate bond investment returns to the iShares iBoxx $ High Yield Corp Bond ETF (HYG):