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Monday, November 09, 2020

Bond with the Best

تم إعداد هذا المنشور من قبل سنشري للاستشارات

Bond with the Best
Bond with the Best
The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.

The historically low interest rates we are seeing in 2020 is showing no sign of abating with 30- US Treasury yields near 1.6% and 10 years yields less than 1%. Recently, the Federal Reserve reiterated that the Fed Funds rate would probably remain near its current level at least through 2023. This extreme low-rate environment presents challenges for fixed-income investors, particularly for those who were looking to earn a high-income yield from their investments. While there is no silver bullet solution, investment grade bonds can help bond investors navigate through these difficult waters.

Investment grade bonds are typically issued by companies with strong balance sheets and sound cash flow. While the risk of default is greater than with Treasuries, investment-grade bonds are still considered reasonably safe from default. However, its important to remember, there's no such thing as a free lunch – and these investments can also experience losses – but historically speaking, bonds have been more stable than equities and are often added to the portfolio to provide it with some stability.

Additionally, Fed Chairman Jerome Powell, has discussed about the need for more monetary and fiscal stimulus, opening the door for a change in monetary policy. US Federal Reserve currently purchases about $120 billion worth of bonds and the Fed Chairman has stated that they might change the composition, duration, size or the life cycle of the program to provide more stimulus. This kind of implies that more long-term bonds will be purchased, and this could be bullish for bonds. Mentioned below are list of investment grade non-callable bonds diversified across different sectors and yielding more than 4%.

List of Investment Grade Bonds diversified across different sectors
Name Ticker Industry/Sector Last Price Mid YTM*% Coupon% S&P Rating Moody's rating Fitch Rating Maturity Maturity Type Currency
MARATHON OIL CORP MRO 6.6 10/01/37 Oil Company-Explor&Prodtn 106.32 6.12 6.6 BBB- Baa3 BBB- 10/1/2037 AT MATURITY USD
KOHL'S CORPORATION KSS 7 1/4 06/01/29 Retail-Regnl Dept Store 111.15 5.79 7.25 BBB- Baa2 BBB- 6/1/2029 AT MATURITY USD
KINDER MORGAN INC/DELAWA KMI 7.45 03/01/98 Pipelines 128.37 5.68 7.45 BBB Baa2 BBB 3/1/2098 AT MATURITY USD
UNION CARBIDE CORP DOW 7 3/4 10/01/96 Chemicals-Diversified 135.74 5.47 7.75 BBB- Baa2 BBB 10/1/2096 AT MATURITY USD
HALLIBURTON CO HAL 7.45 09/15/39 Oil-Field Services 130.50 5.04 7.45 BBB+ Baa1 WD 9/15/2039 AT MATURITY USD
BOEING CO BA 6 7/8 10/15/43 Aerospace/Defense 126.85 4.98 6.875 BBB- Baa2 BBB- 10/15/2043 AT MATURITY USD
REYNOLDS AMERICAN INC BATSLN 8 1/8 05/01/40 Tobacco 140.90 4.88 8.125 BBB+ Baa2 BBB 5/1/2040 AT MATURITY USD
FEDERAL EXPRESS CORP FDX 7.6 07/01/97 Transport-Services 157.99 4.72 7.6 BBB Baa2 WD 7/1/2097 AT MATURITY USD
HASBRO INC HAS 6.35 03/15/40 Toys 121.96 4.67 6.35 BBB- Baa3 BBB- 3/15/2040 AT MATURITY USD
AT&T INC T 6.65 12/15/95 Telephone-Integrated 143.23 4.61 6.65 NA NA A- 12/15/2095 AT MATURITY USD
DARDEN RESTAURANTS INC DRI 6 08/15/35 Retail-Restaurants 115.57 4.50 6 BBB- Baa3 BBB- 8/15/2035 AT MATURITY USD
WESTERN UNION CO/THE WU 6.2 11/17/36 Finance-Credit Card 119.90 4.43 6.2 BBB Baa2 WD 11/17/2036 AT MATURITY USD
GENERAL MOTORS CO GM 6 1/4 10/02/43 Auto-Cars/Light Trucks 130.77 4.43 6.25 BBB Baa3 BBB- 10/2/2043 AT MATURITY USD
HSBC USA INC HSBC 7.2 07/15/97 Banks 160.51 4.41 7.2 BBB+ A3 A- 7/15/2097 AT MATURITY USD
GENERAL ELECTRIC CO GE 5 1/2 04/15/36 Diversified Manufact Op 112.86 4.30 5.5 BBB+ Baa1 BBB 4/15/2036 AT MATURITY USD
*YTM-Yield to Maturity

Risks & Assumptions

The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
Unforeseen events can lead to variation in performance from the tested trading strategy.
The tested result has been computed with price feeds available from Bloomberg.
The testing environment has not considered transaction or any other costs.
Trading indicators used for the purpose of testing has been provided by Bloomberg.
The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg

Arun Leslie John
Chief Market Analyst

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