BondSavvy presented five new corporate bond investment recommendations during the June 5, 2020 edition of The Bondcast. This blog post provides a
brief preview of each corporate bond recommendation and today's corporate bond investing environment. Click here to subscribe and view the details of these recommendations and all previous BondSavvy
investment recommendations. You'll also be the first to learn our new corporate bond recommendations for as long as you subscribe.
The Current Bond Market Environment
Corporate bond prices hit their lows right around March 19, 2020. As we showed in this blog post, no corporate bond was immune from the downturn, as even bonds issued by Apple, one of the world's 10 highest-credit-quality borrowers, fell sharply. Then, on March 23, 2020, the Federal Reserve announced the creation of two bond-buying credit facilities to ensure credit markets would 'stay open' and that companies would be able to access credit at reasonable rates. We estimate this could lead to $650 to $700 billion of corporate bond purchases by the Fed, providing a significant near-term tailwind for many individual corporate bonds.
The two Fed facilities are: (i) the Primary Market Corporate Credit Facility ("PMCCF") for purchases of new bond and loan issues and (ii) the Secondary Market Corporate Credit Facility ("SMCCF") for purchases of individual corporate bonds and ETFs trading in the secondary market. The US Treasury is contributing a total of $75 billion in equity to the combined facilities and the Fed, in turn, is lending to a special vehicle that will make the bond and loan purchases. Depending on the credit quality of the purchased bond or loan, the Fed's loan will be up to 10x the amount of equity contributed by Treasury. Please see summary terms below:
Figure 1: Overview of PMCCF and SMCCF
While the creation of the PMCCF and SMCCF has buoyed corporate bond prices, the amount of bonds and loans purchased by the Fed credit facilities has been limited. Per a May 28, 2020 Federal Reserve report, as of May 19, 2020, the PMCCF was not yet operational, and the SMCCF only had loans outstanding of $1.3 billion.
Our New Corporate Bond Recommendations
Since the Fed established PMCCF and SMCCF, corporate bond credit spreads have fallen, causing many corporate bond prices to increase. This has been a tailwind for corporate bonds we have previously recommended; however, it has limited the number of new corporate bond buying opportunities. During the March 26, 2020 edition of The Bondcast, we were able to recommend investment-grade corporate bonds that had compelling yields and opportunities for capital appreciation. Click here to view the investment returns achieved by these bonds and our prior bond investment recommendations.
While industries such as retail and travel have begun to recover from the April depths of the COVID-19 crisis, for our June 5, 2020 edition of The Bondcast, we only recommended bonds issued by companies in 'essential services' industries. While certain of our bond issuers have seen recent downturns in business, it's to a lesser degree of severity than seen in other industries.
We recommended five bonds issued by three different companies. Since many companies issue multiple corporate bonds, it's BondSavvy's job to identify which of a company's bonds are the most compelling buying opportunities. In certain cases, we will recommend two bonds issued by the same company so BondSavvy subscribers can have a choice between bonds with shorter- and longer-dated maturities. When possible, BondSavvy prefers to recommend bonds trading at (sometimes large) discounts to par value; however, as many corporate bond prices have increased since late March 2020, corporate bonds still trading in the 70s and 80s were generally issued by companies with credit metrics or business trends with which we were not comfortable. The issuers of our recommended bonds all had leverage ratios less than 4.0x and, when compared to bonds issued by companies of similar financial profiles, we believe provide a compelling risk-return dynamic with opportunities for strong total returns.
Figure 2: Summary of June 5, 2020 Corporate Bond Recommendations