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Author: imdajunkman Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35367  
Subject: CPI-Linked Interest Rate Derivatives Date: 7/19/2006 7:12 PM
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markr33,

There are so many threads running right now that I can't keep track of what has been said to whom about what, and some interesting stuff is getting buried. So I've repeated our exchange below, because I'd like to pursue it. I tried to find SLM, but came up empty. But just now I varied a search I use for bond offering lists and came up with several such CPI-linked derivatives, plus others.

Issue: Slm Corp Ednotes Book Entry Floating/Variable Coupon - Monthly Reset,12Mo%change in CPI-U+215bps, reset mo, but in no case <0%.1st cpn 4.95%

I am definitely NOT saying that anyone should look at these things. They scare me. But they do exist, and some of this board's members might be able to evaluate them properly and be able to manage their risks.

If anyone wants to find them, relax the restriction on “SP/Moody” to “All” and set “Max coupon” to “zero”. This is the simplest of searches, but it's one I've never used before. Normally when I'm looking for zero corporates (which I do buy), I restrict the rating to triple-AAA. So I've never encountered zeros that were derivatives before and, maybe, more are coming onto the market lately as Wall Street's whiz kids churn out increasingly sophisticated products.
-------------------------


I wrote: I did a search, and you seem to have had the lead on the discussions of ISM, which amounts to a fairly complex interest rate derivative. Its yield didn't depend on understanding the business of the issuer, but on broad economic factors (where my crystal ball is no better than anyone else's).

markr33 replied: They aren't all that complex. In fact, the way I look at them, they are very similar to TIPS, have a fixed rate and a variable rate derived from monthly CPI changes. The main things that attracted me to them are:

* They are traded on a regular exchange and therefore only cost $8 to purchase or to sell (essentially any amount)
* They have a higher effective fixed rate than TIPS
* Because of the low cost of trading, they can be traded (and I have once taken advantage of certain inexplicable inefficiencies between 2 similar issues resulting in a nice profit)

The only ones that trade on a regular exchange that I am aware of right now are ISM, OSM, and JSM.

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17597 of 35367
Subject: Re: CPI-Linked Interest Rate Derivatives Date: 7/20/2006 8:09 AM
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junkman, you got a cusip on the note you found?

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17600 of 35367
Subject: Re: CPI-Linked Interest Rate Derivatives Date: 7/20/2006 10:08 AM
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you got a cusip on the note you found?

Sallie Mae has lots of notes that are CPI-linked (or that are fixed or linked to other benchmarks). You can find a list of all their issues here -

http://www.salliemae.com/salliemae/investor/slmadebt/extracts/debtinfo.txt

These are the 2 issues I mentioned earlier -

78442P403 20050328 20170315 SLM MTN CPI 03/15/17 200,000,000.00
78442P601 20060117 20180116 SLM MTN CPI 01/16/18 75,000,000.00


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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17602 of 35367
Subject: Re: CPI-Linked Interest Rate Derivatives Date: 7/20/2006 12:27 PM
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Yeah, I own the 2.05% over CPI bond (ISM). It trades very strangely (selling off today over 1% even though TIPS are up in price). I couldn't find a 2.15% over CPI bond, though, so I asked for the CUSIP.

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17603 of 35367
Subject: Re: CPI-Linked Interest Rate Derivatives Date: 7/20/2006 12:47 PM
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Yeah, I own the 2.05% over CPI bond (ISM). It trades very strangely (selling off today over 1% even though TIPS are up in price). I couldn't find a 2.15% over CPI bond, though, so I asked for the CUSIP.

I also own it and am also perplexed by the way it trades. Sometimes it trades with TIPS, and sometimes opposite, and sometimes it hardly trades at all. But I am more perplexed at how ISM and OSM trade relative to each other, being almost identical issues, from the same issuer, with the same rating, etc.

The ISM and OSM (and JSM fixed rate) are exceptions and are apparently the only tradable $25 face bonds from Sallie Mae. The rest of their bonds (what they call edNotes) only trade as regular bonds in units of $1000. For me, it is much much much (an order of magnitude) less expensive to trade these $25 face bonds than to trade "real" $1000 face bonds from Sallie Mae.


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Author: KenAtPcs Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17611 of 35367
Subject: Re: CPI-Linked Interest Rate Derivatives Date: 7/20/2006 7:45 PM
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I also own it and am also perplexed by the way it trades. Sometimes it trades with TIPS, and sometimes opposite

I think today's action (in which ISM, for example, lost a bit over 1%), might have been due (at least in part) to SLM. SLM was down over 4.5% today, after earnings were announced.

My $0.02. I really haven't been paying attention to how ISM or OSM has been trading, but I looked today because of brewer12345's & your posts.

Ken

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17613 of 35367
Subject: Re: CPI-Linked Interest Rate Derivatives Date: 7/20/2006 8:17 PM
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<<I also own it and am also perplexed by the way it trades. Sometimes it trades with TIPS, and sometimes opposite>>

I think today's action (in which ISM, for example, lost a bit over 1%), might have been due (at least in part) to SLM. SLM was down over 4.5% today, after earnings were announced.


I don't think SLM earnings played much of a role at all. In fact, the almost equivalent issue OSM rose a bit today (JSM also rose a bit), while ISM fell a bit!

These trade very thinly and erratically and when compared with SLM have what appears to be little correlation (at least visually on a comparison graph). Because of the thin trading, the closing price isn't necessarily very meaningful, for example, the last 3 trades today at 22.15 were in volumes of 200 each trade.

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Author: KenAtPcs Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17614 of 35367
Subject: Re: CPI-Linked Interest Rate Derivatives Date: 7/20/2006 8:31 PM
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I don't think SLM earnings played much of a role at all. In fact, the almost equivalent issue OSM rose a bit today (JSM also rose a bit)

Ha! Thanks, Mark, I think that definitely ends that theory. :-)

Ken (definitely not as smart as he thinks ... and he doesn't think he's very smart at all! ;-)

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