I'm looking at bonds from SallieMae, the student lending outfit. The Moody's rating is Ba3 non-investment grade. However, this seems to be driven more by the inherent leverage of the business model - which they have maintained long-term - rather than a decline in the quality of their assets. The bonds have the following yield to maturity at the following maturities:
Maturity YTM
3/15/30 - 9.231%
6/15/29 - 9.131%
12/15/26 - 8.181%
There's nothing apparently wrong with this business except, per the Moody's report "refinancing risk" and "uncertainty in deploying excess cash flow effectively."
To me, this seems like a rather low-risk junk bond with returns that will likely rival or exceed the stock market. Am I missing something?
Let's ignore the Ba3 rating for a moment, and take a step back.
The market knows about SallieMae. The market knows their bonds are currently yielding 8-9%. If other investors also believed this is a low-risk bond, they would take advantage by buying the bonds! In fact, they'd keep buying the bonds until the yield dropped to a point where they no longer considered it a good deal, maybe 3-4%.
So the question is, why don't other investors, people with significantly more money (billions of $), resources (multi-billion $ corporations behind them, with super computers), time (they're working on this 80 hours a week, it's literally all they do), and experience...why don't they agree with you?
Why is no one else taking advantage of this FREE MONEY opportunity? Why are the bonds currently yielding 8-9% instead of 3-4%? Do you think you know more, or can otherwise make better decisions than everyone else out there? To the point where you can have a non-related full-time job, come home, read a few pages of text on the internet while relaxing after work, and literally take money from people who are (frankly) much smarter than you?
Please, don't take this as a personal attack. These are the questions everyone should ask themselves before they consider making a move like this. Especially when dealing with bonds, as the bond market is twice as big as the stock market, and much more efficient.