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.

Journal Report

Insights from The Experts
Read more at wsj.com/fundsreport

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Economy

S&P/TSX gains almost 100 points, U.S. markets also higher ahead of rate decision

Published

3 days ago

September 13, 2024

Anne Joseph

TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.

“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.

In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.

The S&P/TSX composite index closed up 93.51 points at 23,568.65.

While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.

Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.

But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.

Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.

“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.

“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.

A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.

It would also be “counter to what they’ve signaled,” he said.

More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.

“That’s going to be more important than the size of the cut itself,” he said.

In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.

“Here, the labour situation is worse than what we see in the United States,” he said.

The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.

The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.

The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.

— With files from The Associated Press

This report by The Canadian Press was first published Sept. 13, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

S&P/TSX composite down more than 200 points, U.S. stock markets also fall

Published

1 week ago

September 6, 2024

Anne Joseph

TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.

The S&P/TSX composite index was down 239.24 points at 22,749.04.

In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.

The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.

The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.

The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.

This report by The Canadian Press was first published Sept. 6, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

S&P/TSX composite up more than 150 points, U.S. stock markets also higher

Published

3 weeks ago

August 29, 2024

Anne Joseph

TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.

The S&P/TSX composite index was up 171.41 points at 23,298.39.

In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.

The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.

The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.

The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.

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

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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