No. of Recommendations: 3
"The question of when to harvest windfall cap-gains on bond positions has now arisen."

I just recently sold 36966RW28 (GE Capital) for this reason. Now selling basically at par (vs purchase at 80c/dollar) means too much risk/return for me.

"It’s going to be all but impossible to put that money back to work in bonds any time soon at equivalent rates of return."

Having read the other comments to your post, I now understand how you are using YTM, but I would encourage you to look at the "YTM from Now" (as others have called it), which accounts for the current market price, not what you paid for it. Looking at what you paid can make the decision emotional, and may not result in the best investment financially.

I did some quick math on "yield from today" on your table and find one strange thing: The Time Warner bond looks weird. I haven't validated the data (didn't look up the prospectus for the bond), but if it's truly 0-coupon and no other benefits, why do you still have it when you can outperform it using bank CDs?

Ignoring that, let me look specifically at the next lowest YTM of your bonds: Caterpillar 04/15/18. By my math, the current yield to maturity is 4.6% (Yield from now)

Caterpillar is A-rated, and it's roughly a 10-year bond, so the statistics are about 3% bankruptcy rate in those 10 years. That means you're being paid 10-20bp for bankruptcy risk (It starts at about 20, but I'm skipping the detailed math that decreases it due to recovery rate and interim dividend payments)

A risk-free 10-year rate (FDIC insured CD and/or Treasury note, whichever is better) looks something like 3.8%. Therefore, your risk compensation for that bond (which is accounting for - among other things - the uncertainty in bankruptcy rates you've referred to in other posts [is the person lucky or good]) is ~50-60bp, which is pretty close to historical averages for A-rated bonds. (This confirms Les' statement that the gravy is gone from the investment)

So you've captured a move from financial crisis mode back to roughly historical average.

So to me, this would come back to:
(A) Where do we go from here?
(B) What precisely is this bond to you?

(A) You can hold to maturity, with the bankruptcy risk and potential opportunity cost from high future interest rates.

If you sell, as you know, there are other questions: Since the premium delta to AA or AAA rated bonds isn't large, the main way to get further principal appreciation is for the risk free rate to fall (Historical data: for anyone interested in seeing how the current rates compare to the past)

If you take out the $1047 and put it in a 10-year CD, you may end up with $10 (roughly 90 days interest) penalty if you break out of the CD early to redeploy the money elsewhere. That means you give up $8/yr in yield by switching to a CD, with potential for $10 penalty. If it sits idle for 3 years, and you buy back the exact same bond with the same rating and risk premium, you end up needing 10-year risk-free interest rates to go up ~0.6% in those 3 years to break even.

Pretty much what that tells you is where the market thinks interest rates are going (nowhere fast). Not that I'm telling you anything you can't see from the 2 year treasury bond (now about 0.7% yield)... The danger comes from the difference between perceived inflation and real inflation (the risk you can transfer to the government by buying TIPS rather than treasuries). If the market is wrong, is it more likely to be wrong low or high? Does it matter (if you have a bond ladder, I would assert it doesn't matter as much)?

(B) I view my portfolio in 3 groups (foundation, aggressive, speculative).

If this is foundation, there's no reason to abandon it. It's at historical average, and if you have a good bond ladder, it's a great part of that foundation. (I assume the 10+ year average maturity shown is only a portion of your portfolio and you have a bunch of shorter maturity items where there isn't premium that created a large enough % P/L to appear in your table)

If it's aggressive, it may come back to being aggressive somewhere else at a later time (my GE Cap bonds were part of my 'aggressive' portfolio, so the fact that I captured great return in the last year and only have just over 5% yield going forward resulted in a sale).

I will assume Caterpillar doesn't classify as speculative, as my MBIA bonds might. :)

"...such as selling of any bond trading at a premium to par because that premium will disappear as maturity approaches"

This is only important if the bond is callable or if current income (generally good with bonds priced at a premium) vs. total return is relevant to your investment situation.

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