Gyroscopic Investing

Everything I've read says that small fries like us should stick with bond funds and for corporate that's mostly what I've done. My dad has a guy who sells him munis and I've participated occasionally. I bought Google 10-year notes just for funsies in '11. Really wish there was a paper certificate for that so I could frame it and put it on my wall.

I don't really know how to analyze individual corporate bonds and I have read that because we don't buy a massive amount of bonds at once like the big players do, we lose a sizable amount in fees when we buy and sell. For these two reasons, I think bond funds are best.

But, does anyone buy corp bonds?

What are you looking for in your corporate bond purchases generally? I don't have any but I am curious about your thoughts.

Higher yield, I would imagine.

I've considered buying individual municipal bonds in my VP purely for the tax-free income stream but haven't pulled the trigger yet for similar reasons to dualstow's original post.

Higher yield, yes.
Outside of the pp, I own some 10-YR treasury notes in my vp, as well as a muni-bond fund.
I've also owned some bond funds that hold mostly investment grade paper. There's BIV (which also has some treasuries) and VCIT (intermediate term corporate), both from Vanguard. I guess I'm slicing and dicing, for the most part keeping treasuries in the pp and other bonds in the vp.
If the vp contains "money that you're willing to lose" (to risk), I would risk some of it for high yield.

I would probably stick with recognizable names like GE or Philip Morris (Altria), but I realize that's probably not good enough. I've never analyzed bonds very closely.

dualstow wrote: But, does anyone buy corp bonds?

They aren't worth it in general because they are too highly correlated to equity and don't hold up in risk off scenarios and then don't earn enough in risk on scenarios.  Especially high yield bonds.  And especially any kind of bond funds with a "perpetual duration".  Bond funds will not guarantee your princpal as will directly buying individual bonds, which can be done with as little as $1K at Fidelity.

The best way to play indvidual corporate bonds properly is to buy them discounted on the secondary market, so you get fantastic capital gains upside when they mature or are called at par.  The default rate is extremely low for both investment grade and high yield bonds; so it is investor oversentiment that drives them way below and above par.  The problem is such advisory services cost a boatload of money each year, so you need a mega-huge dedicated portfolio to keep the expense ratio reasonable.  Last time I looked, one such service cost $2500 a year.

Also, current "yield chasing" conditions have pretty much priced out any discounted bonds below par.  This is not the time to invest in them.  I have a little arbitrage indicator for when its time to load up on high yields vs Treasuries and it has been consistently near or in the overvalued zone since December 2009.

Thanks, MG. Very helpful.

My family has a guy who picks munis for my dad, but my dad has never gotten back to me when I ask how much the fees are. Basically, he doesn't care, as long as the gravy train ride continues. (Dangerous, I know. I'll probably post about that at Bogleheads).

MachineGhost wrote:(Individual corporate bonds) aren't worth it in general because they are too highly correlated to equity and don't hold up in risk off scenarios and then don't earn enough in risk on scenarios.

If the default rate is low, though, don't people just buy them with a plan to hold them to maturity and ignore whether or not they move in step with stocks?

dualstow wrote: If the default rate is low, though, don't people just buy them with a plan to hold them to maturity and ignore whether or not they move in step with stocks?

I really have no idea.  But if you're buying a bond with a lower yield than Treasuries and a duration longer than 5-7 years, you're making a bet on inflation not going up.

MachineGhost wrote:

dualstow wrote: If the default rate is low, though, don't people just buy them with a plan to hold them to maturity and ignore whether or not they move in step with stocks?

I really have no idea.  But if you're buying a bond with a lower yield than Treasuries and a duration longer than 5-7 years, you're making a bet on inflation not going up.

Isn't the point that the yield should be higher? I don't know what would be the point of buying a bond that's both riskier and lower-yielding than treasuries. If such a thing existed at all, something is probably quite wrong.

Pointedstick wrote: Isn't the point that the yield should be higher? I don't know what would be the point of buying a bond that's both riskier and lower-yielding than treasuries. If such a thing existed at all, something is probably quite wrong.

Humans are very stupid.

Right, the yield is definitely higher than treasuries because they're riskier.
The two things I bought for fun, Google notes and GE bonds, had/have a higher yield than treasuries with comparable maturity dates.

In general I'd avoid buying individual corporate bonds unless you plan to hold them strictly for income and have no intention of trading them. That said I've seen some exceptions where they were a good buy. One of the best speculative plays I ever saw was during the darkest days of the crash of '08 when everyone thought all three of the big auto makers were going under. Their bonds were trading as basically bankrupt securities. My dad looked around and made a calculated gamble that there was no way all three were going under and that of the three Ford was in the best shape. He loaded up on 40 year (!) Ford Motor bonds for pennies on the dollar. The bonds are non-callable and he is getting something north of 70% interest on them.

I am still sick with envy

Ad Orientem wrote: In general I'd avoid buying individual corporate bonds unless you plan to hold them strictly for income and have no intention of trading them. That said I've seen some exceptions where they were a good buy. One of the best speculative plays I ever saw was during the darkest days of the crash of '08 when everyone thought all three of the big auto makers were going under. Their bonds were trading as basically bankrupt securities. My dad looked around and made a calculated gamble that there was no way all three were going under and that of the three Ford was in the best shape. He loaded up on 40 year (!) Ford Motor bonds for pennies on the dollar. The bonds are non-callable and he is getting something north of 70% interest on them.

I am still sick with envy

Wow. What a trade! It's amazing looking back on the dark days of the crisis. Plugging your nose and buying during a financial panic is extremely difficult in practice.

Buying a corporate bond fund over individual bonds comes at a cost of giving up control over the credit quality, the duration, the discount below par and the yield.  No corporate bond fund I've ever seen has got all their ducks in a row.  The edge to the small investor is you can play those issues that don't have the liquidity that bond funds require.  I'm not suggesting buying some junk like GE at 99 to par for a .5% yield for 30 years.  That is a mistake on many fronts, but that is what corporate bond funds do.

FYI my General Electric bond pays 4.75%. Eleven years to go if I want to hold on.

It's like this: I've never owned any individual bonds except those which were bought for me before I took control of all investments in my name. The firm sold all the bonds and then turned the stocks over to me. And, I just wanted to see what it felt like to purchase a bond or a note. Since then (since the Google note and the GE bond), I've only bought treasuries. (My vp does still have bond funds).

However, I'm still curious.

About 5 years ago I bought a lot of individual corporate bonds.  They were mostly issued by REIT's and utilities.  Many of them I bought at substantial discounts.  I wish I had bought more.  After a few years I started to sell them all, as the yield to maturity on most wasn't very much.  I made some nice interest and even nicer capital gains.  I don't see any out there worth buying now.  Every once in a while I look at what is out there and I am not impressed.  Those were the first individual corporate bonds I ever bought.  I would buy some again, if I thought the risk/reward was right.  I do still have some money in corporate bonds funds (VCLT, BCOIX, MWTRX & OSTIX).  I used to have a lot of CD's, but as they matured and new ones weren't paying very much, I have put most of that money in corporate bond funds.  I have had mixed results.  Some I haven't owned very long.  I have done the best with VCLT, a Vanguard ETF.
Norm

Thanks, Norm. I have VCIT in a retirement account, similar to your VCLT but intermediate.
Did you read a particular guide on evaluating bonds, or did you just look at the yield and a few other numbers and make a quick decision?

Did you read a particular guide on evaluating bonds, or did you just look at the yield and a few other numbers and make a quick decision?

I have invested in common stock of REIT & utilities for quite some time and have followed the major names.  When I saw some that I was very familiar with selling bonds at what I considered large discounts I jumped in.  For example on 4/16/09 I bought 8 of O's (Realty Income, a retail REIT) bonds at a deep discount for $ 74.75 per $ 100. The coupon was 5.95% and the maturity date is 9/15/16 (cusip # 756109AJ3). They were discounted to yield almost 11% to maturity! I sold them on 6/10/10 for $ 106 per $ 100, because at that time the YTM was "only" about 4.8%. On 10/2/12 (the last time I looked closely) those same bonds were selling for about $ 114.19 or about a 2.18% YTM.  I only wish I had bought a lot more of them back then.  I had also bought bonds of the following REIT's around then (BXP, HCP, SPG, others I can't remember), although I didn't do quite as well with them.  I had also bought some  Weyerhaeuser bonds (cusip # 962166AQ7) with a coupon of 7.5%.  They were the only ones that I held to maturity, because I didn't get them at a discount and they never sold at much of a premium.  They matured just a few days ago.  Unfortunately those days are long gone, and I wouldn't be a buyer of corporate bonds now.
Norm