Top 5 High Income Short Maturity Investment Grade Bonds


By Rom Badilla, CFA

August 17, 2012

Increase portfolio yields with these Financial Short Maturity Bonds

  • Investment Grade Ratings by Standard & Poor’s (AAA through BBB-)
  • Maturity is 3 years or less
  • These bonds are actively traded in two-sided markets (minimum bid and ask size of $5,000) to ensure liquidity
  • ZION 3.5% Matures September 15, 2015 but may be Called at 100 on every September 15 and March 15 starting in 2013 through Maturity. The Yield to Maturity is 3.44%. The Yield to the First Call is 3.26%.
  • Remaining bonds are Bullet Structures
  • Fixed coupon that pays semi-annually
  • U.S. Dollar Denominated
  • With 3-Year U.S. Treasuries yielding 0.42%, these bonds on average yield 279 basis points more

Information and quotes provided by Trade Monster’s Bond Trading Center

Break-Evens reflect the yield increase (which leads to a decline in price) required to offset the income earned per year. Break-Evens are calculated by dividing the duration from the yield.

To illustrate, Morgan Stanley 6.00% Coupon Maturing April 28, 2015 can withstand 59 basis points of an instantaneous increase in yield to offset the yield of 3.55% that is earned over the course of one year (3.55% Yield divided by 2.45 Years = 0.59% or 59 basis points).

In other words, if an investor purchased the bond at a yield of 3.55% and yields increased to 4.14% (3.55% + 0.59%), within a year’s time the investor will be flat and will have neither lost or gained. The bond is at the “break-even” level. If the yield increased less, then you will have gained as the income earned was higher than the decline in price. If the yield increased more, then you will have lost more in price than the income earned.

If you believe the Federal Reserve’s stated guidance that short-term interest rates will remain anchored through late 2014 which may be extended to beyond, then interest rates may stay low AND long enough to see these bonds perform.

Remember that as time progresses, income is earned and essentially pocketed while the duration or the price sensitivity diminishes. So any rise in yields will have less effect on the price as the maturity nears.

Break-Evens do not account for loss of principal in the event of default. Monitor credit ratings and perform due-diligence on companies to ensure credit-worthiness.

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The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.



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