Author Topic: Baa/BBB 6 month corporate bond 8.41%; run, or hurry and buy?  (Read 1384 times)

EchoStache

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Baa/BBB 6 month corporate bond 8.41%; run, or hurry and buy?
« on: November 21, 2022, 08:58:56 AM »
Building up my cash reserves higher than usual for a few reasons.  Currently in SPAXX at around 3.3%, likely to increase along with FFR.  I've been considering 6 month CD's or Treasuries for 4.5%, but not in a huge hurry since SPAXX will likely approach that yield with the next couple of rate hikes.

However, I saw a 6 month Baa/BBB corporate bond with 8.41% yield from Credit Suisse.  The high yield makes me think ooh ooh buy now, but also, oooh, why so high, maybe scary.

Thoughts?
« Last Edit: November 21, 2022, 09:06:54 AM by UltraStache »

FIPurpose

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Re: Baa/BBB 6 month corporate bond 8.41%; run, or hurry and buy?
« Reply #1 on: November 21, 2022, 12:41:09 PM »
It's high because that's where the yield curve is at at the moment.

US treasuries are at 4.5%
Agencies at 6%


Credit Suisse is at an all-time stock market low down -56% from 1 year ago. The extra 2% you get on that bond is the risk that Credit Suisse fails to pay it.

ChpBstrd

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Re: Baa/BBB 6 month corporate bond 8.41%; run, or hurry and buy?
« Reply #2 on: November 29, 2022, 07:24:05 AM »
I've also seem the fire sale on Credit Suisse bonds and looked into the company. It seems the Swiss bank suffered billions of dollars in losses in 2021 due to risk management failures with Archegos and Greensill. Clients are fleeing in a sort of slow-motion bank run, the bank is having liquidity problems, and they might report a $1.5 Billion loss just in this 4th quarter. That's not good considering we probably have a recession around the corner. Credit Suisse could have a Lehman or AIG moment soon, and their investment grade rating is definitely at risk.

Decent summary: https://www.thestreet.com/investing/credit-suisse-keeps-sinking

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"In short, Credit Suisse is starting to act like a bank that’s about to go under,” analyst Tom Essaye of the Sevens Report said in a recent note. 

I'm generally avoiding financial firms in my own bond shopping. If our location in the market cycle is pre-recession, as all indicators suggest, then banks have a lot more bad loan write-offs ahead. They could get much cheaper in the future. CSGKF stock is apparently down ~67% YTD.

FIPurpose

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Re: Baa/BBB 6 month corporate bond 8.41%; run, or hurry and buy?
« Reply #3 on: March 15, 2023, 10:30:31 AM »
I hope you did not end up buying those bonds on Credit Suisse.

EchoStache

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Re: Baa/BBB 6 month corporate bond 8.41%; run, or hurry and buy?
« Reply #4 on: March 16, 2023, 05:06:58 PM »
Ya Credit Suisse having drastically higher yields than any other company for months and months was raising a lot of red flags to me.  So no, I steered clear.  All my cash is in Ibonds and MMF(SPRXX).

MustacheAndaHalf

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Re: Baa/BBB 6 month corporate bond 8.41%; run, or hurry and buy?
« Reply #5 on: March 17, 2023, 06:23:27 AM »
However, I saw a 6 month Baa/BBB corporate bond with 8.41% yield from Credit Suisse.
U.S. Treasuries or bonds from Credit Suise?  If you're seeing those two as similar, I'd say you probably shouldn't buy individual bonds.

Yes, 8.4% is a high yield, but high yield bonds have another name - junk bonds.  There's some risk you're buying BBBBB bonds: (B)uy (B)onds (B)efore (B)ecome (B)ankrupt.

https://www.cnbc.com/2023/03/17/credit-suisse-timeline-how-years-of-turbulence-came-to-a-head.html

vand

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Re: Baa/BBB 6 month corporate bond 8.41%; run, or hurry and buy?
« Reply #6 on: March 18, 2023, 04:37:33 AM »
If you have to ask then you probably shouldn't - there's an element of unknown unknowns at the moment. Some of that is OPs own lack of knowledge, some of it is that we don't know what other skeletons are going to come out of the closet.

Personally I think if you want a play on Credit Suisse you should just buy the stock. 100-200% upside is easily possible, but so too is -100%. I like those odds better than 9% upside and -100% downside.

FIPurpose

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Re: Baa/BBB 6 month corporate bond 8.41%; run, or hurry and buy?
« Reply #7 on: March 18, 2023, 07:03:15 AM »
If you have to ask then you probably shouldn't - there's an element of unknown unknowns at the moment. Some of that is OPs own lack of knowledge, some of it is that we don't know what other skeletons are going to come out of the closet.

Personally I think if you want a play on Credit Suisse you should just buy the stock. 100-200% upside is easily possible, but so too is -100%. I like those odds better than 9% upside and -100% downside.

I'd say the 1 year upside might be 100-400% and the 3-5 year upside might be closer to 100-1000%.

I guess the play would be to buy it on the likelihood that it's bought up by another company at a decent price. Buy it at $2 a share today for a buyout at $3-5 in the next year.

Of course the companies looking to buy could audit it and find out it's really only worth 5-6 billion and you'd be down money.

vand

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FIPurpose

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Re: Baa/BBB 6 month corporate bond 8.41%; run, or hurry and buy?
« Reply #9 on: March 20, 2023, 05:33:51 AM »
Wow. Using a bond as a shield for stock investors. Really feels like they're getting away with that one on a technicality. They'll really have to discount future AT1 sales after that move. Or I wouldn't be surprised if the EU modifies the rules on that one.

ChpBstrd

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Re: Baa/BBB 6 month corporate bond 8.41%; run, or hurry and buy?
« Reply #10 on: March 20, 2023, 06:59:14 AM »
Wow! I've never heard of AT1 bonds, or heard of a situation where a detail was hidden in the bond prospectus saying this debt is subordinate to equity.

More details:
https://www.reuters.com/business/finance/credit-suisse-rescue-presents-buyer-beware-moment-bank-bondholders-2023-03-20/

According to the article, these bonds were trading on Friday (3 days ago) with yields in the teens or twenties. Clearly few people thought they could be written down to zero over the weekend. 

Now we need to think through second-order effects. Will a hedge fund go under? Will a pension fund get into trouble? Will the write-down lead to contagion / panic in the junk bond ecosystem?

FIPurpose

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Re: Baa/BBB 6 month corporate bond 8.41%; run, or hurry and buy?
« Reply #11 on: March 20, 2023, 07:48:39 AM »
https://www.bloomberg.com/news/articles/2023-03-19/credit-suisse-s-17-billion-of-risky-bonds-are-now-worthless?leadSource=uverify%20wall

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In a typical writedown scenario, shareholders are the first to take a hit before AT1 bonds face losses, as Credit Suisse also guided in a presentation to investors earlier this week. That’s why the decision to write down the bank’s riskiest debt — rather than its shareholders — provoked a furious response from some of Credit Suisse’s AT1 bondholders.

This article also has a graph on the debt they held ~30B in T1 bonds (which I assume are going to be paid in full) and about half that in AT1. But with the statements above being explicitly misleading investors, I can't imagine they get out of this without a massive lawsuit.

Stock holders only received 3B. So even then, AT1 bondholders are complaining about a 20% recovery? They're still losing massively even if they received that money.