T-Bones in a Yield Starved World

T-Bones in a Yield Starved World

By Julien B. Booth

August 19, 2016

I hope this note finds you doing well.

Interest rates remain at all-time lows, or negative in the case of Europe/Japan, and the economic cycle is getting long in the tooth.

Our recent thoughts: 46-Acre Enlightment

In a world with excessively high valuations on stocks, bonds, loans, and collectibles (h/t G. Tom, MD), we like to make our clients/friends aware of pockets of opportunity in the fixed income markets where they might not be familiar. After the most recent surge in bond/stock prices we have been actively reducing market-type risk – our destination for these funds has often been Floating Rate Notes issued by the large U.S. banks.

Our view on bank stock prices remains quite negative (net interest margins-profitability decline in low rate world), but we believe the Floating Rate notes are money-good and provide compelling yield for the credit risk assumed.

An example (not a recommendation):

8.0% Bank of America Floating Rate Security

5.5% Yield to the call date in January/2018. 4.7x the current 5 year US Treasury. Floats +363 to Libor after Jan 2018 if not called.

*QDI eligible = taxable equivalent yield of approx. 7.1%. You must go deep into high yield territory for this level of yield.

Many of the large banks offer similar securities. Yields of this magnitude with quality are hard to find. I hope you find this information useful.

Our research on BAC is attached for reference – See here. Once again-not a recommendation to purchase, but what may represent a compelling alternative for the yield hungry.

As usual, thank you for investing with Forest Capital! For additional information on portfolio positioning, please contact Forest Capital directly at jbooth@forestcapital.net.