Investment

A Forgotten Investment Worth Considering: Exchange-Traded Bonds – Wall Street Journal

Published

5 years ago

January 5, 2020

Harry Miller

A long-term senior bond from eBay is listed on the New York Stock Exchange.

Photo:

Beck Diefenbach/REUTERS

Eric Uhlfelder

Jan. 5, 2020 10:03 pm ET

With most Treasurys yielding under 2% and savings accounts yielding even less, individual investors are hard-pressed to figure out what to do with money they don’t want exposed to material market risk.

One viable alternative is bonds that trade on stock exchanges, known as exchange-traded bonds.

About $19 billion of these securities trade mostly on the New York Stock Exchange, with many investment-grade offerings generally yielding between 5% and 6%.

While tiny compared with the traditional $9.3 trillion corporate-bond market, exchange-traded bonds generally offer more transparency than traditional debt offerings. That’s because investors who buy them have the same ease of access to bid and ask information, current yield and limit orders they enjoy when buying and selling stocks, says

Kevin Conery,

fixed-income trading desk analyst at Piper Jaffrey.

Exchange-traded bonds also have other features that individual investors might find attractive.

These securities are issued in $25 bonds, compared with $1,000 for traditional corporate bonds. They pay interest on a quarterly basis versus corporate issues that pay semiannually. And because issuers can typically call exchange-traded bonds five years after their initial offering at par and any point thereafter, the yields are often higher than traditional corporate bonds issued by the same company.

Companies are willing to offer higher yields on exchange-traded bonds because the five-year call features gives them more flexibility to refinance debt if rates fall or eliminate it altogether if the money is no longer needed—something that $1,000 corporates can only do closer to maturity, if at all.

That five-year call feature also can reduce the overall volatility of these bonds (as long as they aren’t suffering from credit issues), especially after the call date has passed. The reason: Prices tend to trade close to par within a year or two of the call and anytime thereafter.

Consider the long-term senior bond of internet-auction giant

eBay Inc.,

which is listed on the NYSE under the symbol EBAYL. This investment-grade offering currently yields 5.59% and is trading at $27.

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Hidden Bonds

Select exchange-traded bond issues

AT&T 5.625% Global Notes | TBC

Aegon 5.10% Subordinated Notes | AEFC

Due: 12/15/2049

Due: 8/1/2067

Initial call date: 12/15/2024

Initial call date: 8/1/2023

S&P credit rating: BBB

Yield to initial call date*: 4.62%

Yield to initial call date*: 3.22%

Price

Yield

Price

Yield

6.0

$28

7.0

$28

$26.16

4.85%

5.5

6.5

5.0

6.0

$27.66

5.12%

4.5

5.5

4.0

5.0

2018

’19

’20

2018

’19

’20

2018

’19

’20

2018

’19

’20

eBay 6.00% Notes | EBAYL

Assured Guaranty Municipal Holding 6.875% | AGO-B

Due: 2/1/2056

Due: 12/15/2101

Initial call date: 3/1/2021

Initial call date: 12/19/2006

S&P credit rating: BBB+

S&P credit rating: A

Yield to initial call date*: 1.81%

Yield to initial call date*: -5.52%

Price

Yield

Price

Yield

$28

7.0

$28

6.41%

6.5

5.59%

$27.08

6.0

$27.00

5.5

5.0

2018

’19

’20

2018

’19

’20

2018

’19

’20

2018

’19

’20

AT&T 5.625% Global Notes | TBC

Aegon 5.10% Subordinated Notes | AEFC

Due: 8/1/2067

Due: 12/15/2049

Initial call date: 8/1/2023

Initial call date: 12/15/2024

S&P credit rating: BBB

Yield to initial call date*: 3.22%

Yield to initial call date*: 4.62%

Price

Yield

Price

Yield

$28

7.0

6.0

$28

$26.16

4.85%

6.5

5.5

6.0

5.0

5.12%

5.5

4.5

$27.66

5.0

4.0

2018

’19

’20

2018

’19

’20

2018

’19

’20

2018

’19

’20

Assured Guaranty Municipal Holding 6.875% | AGO-B

eBay 6.00% Notes | EBAYL

Due: 2/1/2056

Due: 12/15/2101

Initial call date: 3/1/2021

Initial call date: 12/19/2006

S&P credit rating: BBB+

S&P credit rating: A

Yield to initial call date*: 1.81%

Yield to initial call date*: -5.52%

Price

Yield

Price

Yield

$28

7.0

$28

6.41%

6.5

5.59%

6.0

$27.08

5.5

$27.00

5.0

2018

’19

’20

2018

’19

’20

2018

’19

’20

2018

’19

’20

AT&T 5.625% Global Notes | TBC

Aegon 5.10% Subordinated Notes | AEFC

Due: 12/15/2049

Due: 8/1/2067

Initial call date: 12/15/2024

Initial call date: 8/1/2023

S&P credit rating: BBB

Yield to initial call date*: 4.62%

Yield to initial call date*: 3.22%

Price

Yield

Price

Yield

6.0

$28

7.0

$26.16

4.85%

5.5

6.5

5.0

6.0

5.12%

4.5

5.5

$27.66

4.0

5.0

2018

’19

’20

2018

’19

’20

2018

’19

’20

2018

’19

’20

eBay 6.00% Notes | EBAYL

Assured Guaranty Municipal Holding 6.875% | AGO-B

Due: 2/1/2056

Due: 12/15/2101

Initial call date: 3/1/2021

Initial call date: 12/19/2006

S&P credit rating: BBB+

S&P credit rating: A

Yield to initial call date*: 1.81%

Yield to initial call date*: -5.52%

Price

Yield

Price

Yield

7.0

$28

7.0

6.41%

6.5

5.59%

6.0

$27.08

$27.00

5.5

5.0

2018

’19

’20

2018

’19

’20

2018

’19

’20

2018

’19

’20

Aegon 5.10% Subordinated Notes | AEFC

Due: 12/15/2049

Initial call date: 12/15/2024

S&P credit rating: BBB

Yield to initial call date*: 4.62%

Price

Yield

6.0

$28

$26.16

4.85%

5.5

5.0

4.5

4.0

2018

’19

’20

2018

’19

’20

AT&T 5.625% Global Notes | TBC

Due: 8/1/2067

Initial call date: 8/1/2023

S&P credit rating: BBB

Yield to initial call date*: 3.22%

Price

Yield

$28

7.0

6.5

6.0

5.12%

5.5

$27.66

5.0

2018

’19

’20

2018

’19

’20

Assured Guaranty Municipal Holding 6.875% | AGO-B

Due: 12/15/2101

Initial call date: 12/19/2006

S&P credit rating: A

Yield to initial call date*: -5.52%

Price

Yield

$28

7.0

6.41%

6.5

6.0

$27.08

5.5

5.0

2018

’19

’20

2018

’19

’20

eBay 6.00% Notes | EBAYL

Due: 2/1/2056

Initial call date: 3/1/2021

S&P credit rating: BBB+

Yield to initial call date*: 1.81%

Price

Yield

7.0

$28

6.5

5.59%

6.0

5.5

$27.00

5.0

2018

’19

’20

2018

’19

’20

*Yield to Call is the annualized rate of return based on a call happening upon the first call date. For bonds that have already passed that date, the figure is a net yield based on an immediate call, which can occur within three months or less. NR = not rated

Sources: quantumonline.com; Bloomberg; FactSet

By comparison, a traditional 4% coupon bond from eBay that matures in 2042 trades at 99.54 (or $995.40 per bond) and yields 4.14%. And while individuals can make any size purchase of exchange-traded bonds, there is a minimum online bid of 10 corporate bonds, or $9,954.

With many online major brokerages having eliminated trading fees, exchange-traded bonds can be bought and sold without cost. However, because these bonds are thinly traded, investors need to use limit orders to ensure efficient pricing.

Some caveats

Barry McAlinden,

a fixed-income strategist at

UBS

Global Wealth Management, cautions investors not to mistake the ease of buying exchange-traded bonds with reduced need for due diligence.

“While their returns and ostensible safety can be enticing,” says Mr. McAlinden, “there are many variables that need to be considered before investing and special caveats that may come into play during difficult times.”

Among the things investors need to consider:

Bond interest is taxed as ordinary income. For higher-income households, this is going to be a much higher rate than the up-to-20% rate at which qualified dividends from common and preferred stock dividends are taxed. As such, tax-deferred retirement accounts might be an ideal place to hold these bonds.

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More Hidden Bonds

More elect exchange-traded bond issues

Medallion Financial 9.00% Notes | MFINL

Entergy Louisiana 5.25% Series First Mortgage Bonds | ELJ

Due: 4/15/2021

Due: 7/1/2052

Initial call date: 4/15/2021

Initial call date: 7/1/2017

S&P credit rating: NR

S&P credit rating: A

Yield to initial call date*: x

Yield to initial call date*: -1.70%

Price

Yield

Price

Yield

6.0

$28

10.0

$28

$25.99

$26.17

4.99%

5.5

8.5

5.0

7.0

4.5

5.5

5.57%

4.0

2018

’19

’20

2018

’19

’20

2018

’19

’20

2018

’19

’20

Seaspan 7.125% Senior Notes | SSWA

Prudential Financial 5.70%

Junior Subordinated Notes | PRH

Due: 10/30/2027

Due: 3/15/2053

Initial call date: 10/10/2020

Initial call date: 3/15/2018

S&P credit rating: NR

S&P credit rating: BBB+

Yield to initial call date*: 4.08%

Yield to initial call date*: -3.46%

Price

Yield

Price

Yield

$28

9.0

$28

7.0

$26.07

$25.95

8.0

6.5

6.67%

5.51%

7.0

6.0

5.5

5.0

2018

’19

’20

2018

’19

’20

2018

’19

’20

2018

’19

’20

Entergy Louisiana 5.25% Series First Mortgage Bonds | ELJ

Medallion Financial 9.00% Notes | MFINL

Due: 7/1/2052

Due: 4/15/2021

Initial call date: 7/1/2017

Initial call date: 4/15/2021

S&P credit rating: A

S&P credit rating: NR

Yield to initial call date*: -1.70%

Yield to initial call date*: x

Price

Yield

Price

Yield

6.0

$28

10.0

$26.17

$25.99

4.99%

5.5

8.5

5.0

7.0

4.5

5.5

5.57%

4.0

2018

’19

’20

2018

’19

’20

2018

’19

’20

2018

’19

’20

Seaspan 7.125% Senior Notes | SSWA

Prudential Financial 5.70%

Junior Subordinated Notes | PRH

Due: 10/30/2027

Due: 3/15/2053

Initial call date: 10/10/2020

Initial call date: 3/15/2018

S&P credit rating: NR

S&P credit rating: BBB+

Yield to initial call date*: 4.08%

Yield to initial call date*: -3.46%

Price

Yield

Price

Yield

$28

9.0

$28

7.0

$26.07

$25.95

8.0

6.5

6.67%

5.51%

7.0

6.0

5.5

5.0

2018

’19

’20

2018

’19

’20

2018

’19

’20

2018

’19

’20

Entergy Louisiana 5.25% Series First Mortgage Bonds | ELJ

Medallion Financial 9.00% Notes | MFINL

Due: 7/1/2052

Due: 4/15/2021

Initial call date: 7/1/2017

Initial call date: 4/15/2021

S&P credit rating: A

S&P credit rating: NR

Yield to initial call date*: -1.70%

Yield to initial call date*: x

Price

Yield

Price

Yield

6.0

$28

10.0

$25.99

$26.17

4.99%

5.5

8.5

5.0

7.0

4.5

5.5

5.57%

4.0

2018

’19

’20

2018

’19

’20

2018

’19

’20

2018

’19

’20

Seaspan 7.125% Senior Notes | SSWA

Prudential Financial 5.70%

Junior Subordinated Notes | PRH

Due: 10/30/2027

Due: 3/15/2053

Initial call date: 10/10/2020

Initial call date: 3/15/2018

S&P credit rating: NR

S&P credit rating: BBB+

Yield to initial call date*: 4.08%

Yield to initial call date*: -3.46%

Price

Yield

Price

Yield

$28

9.0

$28

7.0

$26.07

$25.95

8.0

6.5

6.67%

5.51%

7.0

6.0

5.5

5.0

2018

’19

’20

2018

’19

’20

2018

’19

’20

2018

’19

’20

Entergy Louisiana 5.25% Series First Mortgage Bonds | ELJ

Due: 7/1/2052

Initial call date: 7/1/2017

S&P credit rating: A

Yield to initial call date*: -1.70%

Price

Yield

6.0

$28

$26.17

4.99%

5.5

5.0

4.5

4.0

2018

’19

’20

2018

’19

’20

Medallion Financial 9.00% Notes | MFINL

Due: 4/15/2021

Initial call date: 4/15/2021

S&P credit rating: NR

Yield to initial call date*: x

Price

Yield

$28

10.0

$25.99

8.5

7.0

5.5

5.57%

4.0

2018

’19

’20

2018

’19

’20

Prudential Financial 5.70%

Junior Subordinated Notes | PRH

Due: 3/15/2053

Initial call date: 3/15/2018

S&P credit rating: BBB+

Yield to initial call date*: -3.46%

Price

Yield

$28

7.0

$25.95

6.5

5.51%

6.0

5.5

5.0

2018

’19

’20

2018

’19

’20

Seaspan 7.125% Senior Notes | SSWA

Due: 10/30/2027

Initial call date: 10/10/2020

S&P credit rating: NR

Yield to initial call date*: 4.08%

Price

Yield

$28

9.0

$26.07

8.0

6.67%

7.0

6.0

5.0

2018

’19

’20

2018

’19

’20

Sources: quantumonline.com; Bloomberg; FactSet

Some of these securities are junior subordinated debt, meaning they have a lower-priority claim against assets if a company goes into bankruptcy. While senior bonds can’t miss payments without triggering a default, junior subordinated debt can typically defer interest payments for up to 10 years without doing so. That said, such deferrals are rare. As UBS’s Mr. McAlinden explains, “Such a deferral would wreck any firms’ plans to access capital markets going forward.”

If investors are hoping to benefit from the bond rally—due to additional interest-rate cuts—they shouldn’t count on it. Piper Jaffrey’s Mr. Conery explains such a price rise is only likely if there is at least 3.5 years before the bond is callable. “Prices of bonds with shorter call dates will likely trade closer to their call price,” says Mr. Conery, regardless of minor changes in interest rates.

Maturity rates

Still, the hunt for yield is leading some investors to take on principal risk.

The municipal-bond insurer Assured Guaranty Municipal Holdings (AGO-B) A-rated 6.875% ultralong-term exchange-traded bond is trading at $27.50 and can be called anytime with 20 days’ notice. While the current yield of 6.36% looks enticing, a call at this price would result in a 10% capital loss. To break even, new investors would need the bond to remain outstanding for at least a year and a half.

Because the aforementioned eBay bond trades well above par, its effective annualized yield would be reduced to 1.81% if the company calls the security a year from now—its initial call date. (See table.) Effective yield will rise the longer the bond remains outstanding as investors receive more quarterly payments.

Maturity dates also are important, especially if that date stretches into the next century. The longer the maturity date, the more volatile pricing can be, especially when interest rates move. Pricing is based on yield and credit spreads over equivalently termed Treasurys.

Not all exchange-traded bonds are rated. That could mean the company is confident that its issue will be well subscribed to without a rating, but it also could indicate a company that doesn’t want to pay for a mediocre grade.

Quantumonline.com maintains a free database to help investors get started understanding the exchange-traded bond market.

Mr. Uhlfelder writes about global capital markets from New York. He can be reached at reports@wsj.com.

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This report by The Canadian Press was first published Aug. 29, 2024.

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August 5, 2024

Harry Miller

The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.

The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.

Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.

The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.

Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.

Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.

Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.

Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.

The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.