| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Good Buys in Bank Bonds |
Forbes.com - Nov 27, 2009 - by Emily Lambert
You can get a better return off the money you have at a bank. But you have to take some risk to get it.
Open an FDIC-insured money market account at Bank of America ( BAC - news - people ), put in $50,000 and you'll get all of 0.9% annual interest.
If you can stand some uncertainty about whether you'll get the money back, you can do a whole lot better than this. Lend the same 50 grand to the same bank over eight years and it could pay you 5.7% interest. The loan takes the form of an uninsured bond.
You're taking two risks on the BofA bond. One is that interest rates might shoot up between now and 2019. You'd take that same risk on a comparable Treasury note (now paying 2.95%). The other is that BofA goes bust. If that happens, you might get back only some, or none, of your principal.
The yields on uninsured bank paper aren't quite as good as they were earlier this year. But they are higher than usual. If you think the banking system will get back to normal, bank bonds are a buy.
Around the time Lehman Brothers ( LEHMQ - news - people ) went broke last year, yields on bank debt went through the roof. Investors who had the guts to buy at the time (or during another stock market low in March) have made a killing. The average yield spread on bank-issued bonds has fallen from 6.3 percentage points over Treasurys last December to 2.6 points recently. Even so, that's a 50% greater premium than they've averaged over the past decade. Similar bonds from industrial issuers, by contrast, are trading at roughly their average premium over the past ten years.
"The supersale is over, but there's still good value," says Mary Ellen Stanek, a managing director at Robert W. Baird & Co., a Milwaukee company that manages $66 billion. Stanek has been buying the debt of big banks, broker-dealers and insurance companies for four mutual funds she oversees, as well as for pension and endowment accounts.
Financial institutions still give a lot of investors the jitters, as the yields on their debt indicate. Stanek, who worked in her father's bank in McHenry, Ill. growing up, isn't worried. Since money market interest rates are low, she figures that bank lending margins are fat, and after the high jinks of the past year, the government is anxious to prevent any large institutions from failing. (It's noteworthy that the rescue of Fannie Mae ( FNM - news - people ) and Freddie Mac ( FRE - news - people ) left bondholders whole, although preferred-stock holders were pretty much wiped out.) What's more, argues Stanek, with credit the oxygen that financial institutions need to survive, their bosses will go to great lengths to maintain investment-grade ratings and keep bondholders happy.
"We wouldn't necessarily want to be stockholders in some of these companies," Stanek says.
If you buy Stanek's premise that bulge-bracket financial institutions are backed by strong government support, it's hard not to agree with her that their bonds are attractive. JPMorgan Chase's eight-year bonds, rated Aa3 by Moody's ( MCO - news - people ), traded as of mid-November at a yield of 4.8%, which is 1.6 points over yields on comparable Treasurys. Goldman Sachs ( GS - news - people )' A1-rated eight-year paper trades at a 1.9-point premium. Bank of America's eight-year bonds, rated A2 (that being one tick lower in credit quality than A1), fetched a 2.8-point premium. Citigroup ( C - news - people )'s nine-year debt, rated A3, gets a 2.9-point premium over comparable Treasurys.
With the Federal Reserve throwing money out of helicopters, inflation is clearly a risk. As a defense, Stanek suggests considering bank bonds with shorter durations. She likes Citigroup's 3.5-year debt, yielding 2.8 points above comparable Treasurys, and Goldman Sachs' bonds maturing in 3.5 years with a yield spread of 1.4 points. Goldman has come through the financial crisis relatively unscathed so far, notes Stanek: It managed to pay back its $10 billion in Troubled Asset Relief Program loans quickly and has less exposure to consumer borrowing than does Citi. Goldman's commercial real estate exposure could prove more nettlesome.
Corporate bonds, unlike stocks, mostly trade over-the-counter. The best way to get a good price is to buy a new issue directly from the underwriter, which charges all investors the same. Ask your broker for upcoming issues of bank debt, though you may not get much warning when it becomes available. Pricing on the secondary market is more opaque. Markups/markdowns are built into quotes and can be high. Before you buy, press your broker to disclose all costs for a round-trip into and out of the debt.
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