My limit order triggered.
music selection: “Insane In The Brain” — Cypress Hill
I originally bought L Brands 6.875 coupon bond with 1NOV2035 maturity on 3SEP2019. I paid 85 cents on the dollar for 8 bonds or 6,800. I also paid 8 dollars in commissions and 189.44 in accrued interest for total out of pocket of 6,997.44.
I was confident from the beginning that the company had a strong brand, sufficient cash flows, and a long runway in China from its local ladies undergarments brand(s) there. It was just a matter of time before the market caught on that the bond CUSIP 501797AL8 is “money good” and the bond traded at or around par. I have had a good till canceled limit order in place at par (100.0000) for some time. Today, it cleared the market, probably on some flight to safety regarding Wuhan Corona-virus and its market impact.
I paid 8.75 in commissions and fees and collected 142.08 in accrued interest. During my holding period, I collected one coupon bringing my total proceeds to 8,408.37. That is a profit of 1,410.93 on 6,997.44 capital at risk or 20.16%. With the trade in force only 150 days, the annualized return is 49.06%.
This is how I hope to do more investing in the future. The bond market has a lot more dislocations that are exploitable by a retail investor than the equity or options markets. There is by definition less risk (since you are higher in the capital structure), and the returns can be eye-popping. Unfortunately, the high yield space is a very difficult place to trade right now. There is some irrational euphoria in a market with too much debt. The spread on high yield versus the 10 year Treasury remains near historic lows (this will end badly for a lot of pensioners who were tempted to “reach for yield”.)
The market will turn though and the spread between Treasuries and high yield will shoot well back over 1,000 basis points. It will be like shooting fish in a barrel at that point.
Devour your prey raptors!