Corporate Bonds & Bond Flipping

[FloridaDad]

I was curious to see how many people are actively managing investment grade corporate bonds vs bond funds in their IRAs. In my circumstance, I have been investing the bond side of my 65/35 portfolio in individual bonds. Here are my parameters and logic:

1. Yield to Worst and Coupon: Between 4.3-7% with an average of 5.9%. I look at this as the "floor" in terms of downside risk. The worst I will do (obviously living with the risk of an unlikely default) is about 5.9%. The coupon rates are between 4.25-7.5%, all bonds are non-callable before maturity date.
2. Maturity dates: My maturities span 2019-2023 with most of them maturing 2019-2020. This matches my need to start deriving income.
3. Flipping and reinvestment strategy: I have seen some nice appreciated gains in the neighborhood of 5-7% on individual bonds in the past 6-12 months. I look at appreciation as "house money" in a way, and I will typically "flip" (sell) a bond when it gets to that sweet spot of 6% appreciation and buy another one. I have flipped dozens of bonds in this manner. I take that money and rebalance between equities and have also purchased a few additional bonds, keeping my 65/35 ratio.
4. Net yield on corporate bonds have been about 11% in the past 8 months.
5. My bonds are spread across segments from energy to retail, etc.
6. I have only been actively managing the bond side of my portfolio in this manner for the past 12 months, so I am a newbie in this domain.

I'm curious to know people's opinions on my strategy through the following questions:

1. Do you pursue a similar strategy with corporate bonds?
2. Do you consider bond flipping when appreciation hits a target number part of your bond strategy?
3. Am I thinking about the YTW properly in terms of investment risk?
4. I find actively managing my bond portfolio to actually be more interesting and rewarding than equities and wish I started this years ago. Does anyone else feel the same way? I feel like the bank loaning companies money, for some weird reason that intrigues me. I typically do a good deal of research before buying one of these bonds including looking at a company's balance sheet and FCF.

Thanks for your insights!!
FDad

[dividendman]

I don't have answers to your questions but I'm interested in to how you actual purchase individual corporate bonds without getting ripped off by the bond desk spreads, how do you do that?

I'm pretty ignorant when it comes to individual bonds and how to purchase them. If you have any pointers to some info you use I'd love to take a look.

[forummm]

Personally I wouldn't buy individual bonds because the point of bonds is safety and by not having diversity, you are giving up some of that safety.

[Bajadoc]

If you made 11% in the bond market in the last 8 months you don't need advise from anyone. How did you do that?

[Shor]

If you're lucky enough to still be holding bonds with coupon rates above 5% then they've been doing awesome.
From what I've seen, any new issues coming out are down at the 3-4% interest, which means you're getting bonds on the secondary market for less than the original value. Typically there's some reason or another people would take a loss on a bond.
 Usually it's because the long term prospects of the bond are in question. Is the underlying business okay? What is the credit rating of these companies?

The only other issue to be aware of is that if interest rates do rise, this can push the "value" of your bonds down (not necessarily bad, just that there are other bonds out there with better price to rate / risk). In this case, it simply means that your recourse is to either sell at a loss, or hold till maturity, not a bad problem to have. I think a lot of the bond gyration in the market that occurs is due to minute indicators from the Feds about interest rates, but the actual act hasn't really come around, so prices keep going back and forth on this point.

With that in mind, where are you finding coupon rates of 7%? What broker do you use? My broker only allows investment grade bonds so there's nothing higher than 4.5% except on the exceptional distressed bonds that show up once in a while.

[DavidAnnArbor]

I believe you can buy individual bonds on Fidelity. Fidelity has created some kind of a bond marketplace.

[Financial.Velociraptor]

I'll probably get internet facepunches for posting this here but, meh:

I have allocated about 7% of my taxable account to trading individual high yield bonds.  When the credit rating on a bond drops, lots of institutional holders are no longer able to legally continue holding the bond.  They have forced hands in selling and you can get real bargains.  The default rate on "B" rated high yield issues is historically about 4-1/4 percent and historical recovery in bankruptcy runs about 40%.  So there are lots of bonds that are on average worth 97 cents on the dollar in expected value but sell for 50 to 70 cents on the dollar. 

You have to be a little more picky with "C" rated issues but there can be bargains there too.  Historical default rate is about 27% for that credit grade and the same 40% average recovery rate applies.  So the expected value is about 84 cents on the dollar.  I've gotten some bonds where I think the collateral is worth 50 to 60 cents on the dollar for under 30 cents on the dollar.  A number of them have been able to refinance or sell assets allowing the price of the bond to double or more so I've flipped. 

I had a recent bankruptcy (prepackaged) go through and I ended up with shares in the reconstituted debt free company.  I'm showing a gain of about 33% on that investment (purchased December '15).  I have three more that are trading for under 10 cents on the dollar and I expect to roughly break even upon BR/liquidation.  I have a limit order open to dispose of the shares for a gain but liquidity is very low.  I might wait for some time.

It's not for the rent money but you can do well in individual bonds if you take the time to read some Q's and assess the value of collateral.

I'm at IB.  Commissions run between 1 and 6 dollars per bond and the minimum lot size is 2 bonds.  They show the real time bid/ask and take good till canceled limit orders so you don't get raped by the bond desk.  I always stink bid my bonds since I'm on the lookout for a distressed seller.