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Subject:  Re: Revising Howard’s Scanning Rule Date:  2/28/2012  2:29 AM
Author:  howardgt Number:  33748 of 35575

I’d suggest that the cutoff-price could be bumped up to 60 as an easy way to avoid bonds that probably offer more grief than reward.


That’s probably true, but from my experience, I’ve found that bonds in the 50’s have offered me some of my best risk/reward results. I’ve bought many bonds (with attractive CY’s) in the 50’s that have struggled, but so far managed to keep paying their coupons. I especially like high-coupon bonds selling in this price range. An example of what I’m talking about is Realogy 12-3/8’s of ’15. I bought this issue for 56.5 and my interest-adjusted cost is now down to 27.6. The bond is currently marked at 90 and still paying the high coupon. Overall, I’ve had very good results buying bonds in the 50’s and I’ve had very poor results from my purchases below 50.

I’ve come to the conclusion that market-price is a very good indicator of a bonds chances of default...Better than agency ratings or YTM. In fact, in my junk world, I interpret “Price-Ratings” something like this :)

< 50 likely to default
50-59 hanging on by their finger nails
60-69 high risk of default
70-79 probably will survive