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Thursday, December 29, 2022

Enjoy +8% on Quality Investment Grade Bonds

By Century Financial in 'Investment Insights'

Enjoy +8% on Quality Investment Grade Bonds
Enjoy +8% on Quality Investment Grade Bonds

*Trading in financial market carries risk and can result in loss of capital.
*This performance is only observed with historical backtests and not traded by the company.

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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.

Invest with as low as USD 1000
Highliquidity
Virtuallyzero risk

Why invest in these bonds?

Invest with as low as USD 1000

Investment grade-deemed relatively secure by credit rating agencies

Highliquidity

Relatively safer than equities

Virtuallyzero risk

Dollar denominated investments offering +8% yield

Invest with as low as USD 1000

Earn Stable income through coupons till next call date

Virtuallyzero risk

Quality Brand Names

What are Investment Grade Bonds?

Investment grade Bonds are those that have a high-quality rating by the credit rating agencies, namely bonds rated Baa3 (by Moody's) or BBB- (by S&P and Fitch) or above.

Credit ratings are extremely significant because they convey the risk associated with investing in a certain bond. An investment grade credit rating bonds indicates a low risk of a credit default, making them good fits for more conservative portfolios seeking diversification or income. (Refer to Appendix for further details)

Investment Grade Corporate Bonds

Issuer Name Ticker ISIN Fitch Rating Moody Rating S&P Rating Ask Price Yield to Worst (Mid) LQA Score Coupon Next Call Date Benchmark Rate Floater Spread (bps)
Bank of America Corp BAC US060505FL38 BBB+ Baa3 BBB- $89.4 8.6% 69 $5.88 15/03/2028 4.75% 293.1
JPMorgan Chase & Co JPM US48128BAN10 BBB+ Baa2 BBB- $86.6 8.4% 58 $3.65 01/06/2026 3.78% 285
Bank of New York Mellon Corp BK US064058AL44 BBB+ Baa1 BBB $81.0 9.5% 55 $3.75 20/12/2026 3.78% 263

Note:

  • Ask price as of 22/12/2022
  • The calculation of Yields does not consider transaction costs or holding charges
  • LQA score out of 100
  • The current coupon rate will remain constant untill the next call date which is minimum 3 years away. Post the call date, coupon rate would be the Benchmark 3 month US rate + Floater Spread

Why do Bonds look Alluring?

The latest projections show that the Federal Reserve expects the median year-end 2023 rate for the fed funds rate to be 5.1%, before being cut to 4.1% in 2024. This is a higher rate than previously indicated. However, investors are not convinced by the Federal Reserve's hawkish projections and have a good reason for their skepticism. At the end of last year, the Fed expected the upper limit of its fund's rate to be 1% at the end of 2022, but it ended up being 4.50%. The Fed now predicts that the rate will be 5.00% by the end of 2023. If the Fed underestimated rates at the end of last year, could it be overestimating them now?

With two-year U.S. Treasury yields already trading near 4.2% (down from recent high of 4.7%) and the ratesexpected to peak near 5%, that could mean that the opportunity to add low-risk bond ladders to your income strategy may not be there if you wait too long. Yields generally top much ahead of a fed pivot and fall considerably lower following the pivot. This is due to the fact that bets are placed by traders and market participants months before a fundamental event (like Fed pivot) occurs. Therefore, by the time the Fed pivot really happens, the market has already moved, and the surge in yields is over (or nearing completion).

Appendix

Bond Rating Scale

Bond Rating Scale

Terminologies

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Investment Grade rated signifies that the bonds relatively have a lower risk of default and receive higher ratings by the credit rating agencies.
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Perpetual Bonds: A perpetual bond is a bond with no maturity date. Most Perpetual bonds have a call feature, which allows the issuer to redeem the bond after a certain amount of time has elapsed.
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Yield to worst: Yield to worst is a measure of the lowest possible yield that can be received on a bond that fully operates within the terms of its contract without defaulting.
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Call Date: On the call date, the issuer has the right to redeem a callable bond at par, or at a small premium to par, prior to the stated maturity date.
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Yield to Maturity: The total return anticipated on a bond if the bond is held until it matures.
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LQA: A liquidity estimation. A higher number indicates lower bid-ask spreads.
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ISIN: A 12-digit alphanumeric code that uniquely identifies a specific security
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Coupon: Annual interest rate paid on a bond.
Risks and Assumptions for Back-tested trading strategies
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The risks and assumptions listed here are not intended to be an exhaustive summary of all the risks and assumptions involved.
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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.
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Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
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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.
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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.
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Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
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Unforeseen events can lead to variation in performance from the tested trading strategy.
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The tested result has been computed with price feeds available from Bloomberg.
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The testing environment has not considered transaction or any other costs.
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Trading indicators used for the purpose of testing has been provided by Bloomberg.
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The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg
Date: 22/12/2022

Arun Leslie John
Chief Market Analyst

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