BondSavvy founder Steve Shaw's investment-grade corporate bonds are up 11.14% through September 30, 2017 compared to 3.15% for the world's largest bond ETF. Learn how he did it by reading this fixed income blog post. Please note that these investment returns are for bonds Steve owned prior to BondSavvy making its first set of corporate bond investment recommendations on September 26, 2017. View our corporate bond returns page to see the returns our recommendations have achieved.
Investment-Grade Corporates Up 11.14%
The corporate bonds Steve owns have achieved strong returns through September 30, 2017. As show in Figure 1, investment-grade corporate bonds performed especially well, increasing 11.14% compared to 3.15% for the iShares AGG ETF, the largest bond ETF.
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. Steve bought the bonds January 19, 2017 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%. Figure 1 shows the year-to-date returns for Steve's 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 Treasury yields is not what drove a nearly 11-point increase in the value of the bond.
Rather, when Steve 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, Steve 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 Steve's high-yield corporate bond portfolio has outperformed the leading high-yield corporate bond ETF, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), it hasn't had a breakout performer like last year's 54.4% annualized returned achieved with his 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. Steve bought this bond on December 8, 2015 at 79.25, and it has achieved a 23.0% annualized return.
Steve did invest in a clunker early in the year: Ruby Tuesday 7 5/8% '20, which returned 0.31% from when he bought the bonds in January to when he 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. Steve 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 Steve 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 had the opportunity for a more compelling investment return.
Figure 2 compares Steve's year-to-date 2017 high-yield corporate bond investment returns to the iShares iBoxx $ High Yield Corp Bond ETF (HYG):