Own Junk Bond Mix.

[Zaiga]

Hey guys!

what do you think about the following idea:
Buying 20 different country bonds (short term up to 1 year) from different countries.
All of them in the higher risk / higher coupon area (+5% and denomination in US Dollar). All trading below 100%.
Not from defaulted countries, but on the higher risk side. Africa, Asia and so on.

And waiting until the bonds mature. Buy new one again, rinse and repeat.
Risk of a country default would be max 5% to the bond portfolio.

If you ask, why it can't be reproduced with an ETF?
Because ETFs roll over into new bonds without waiting until the maturation, and they are missing of getting back the full "mark down".

Any ideas?

Thank you!

Example:

ÄGYPTEN, ARABISCHE REPUBLIKDL-MED.-TERM NTS 2018(23)REG.S Bond | Markets Insider

ÄGYPTEN, ARABISCHE REPUBLIKDL-MED.-TERM NTS 2018(23)REG.S (XS1775617209) - All master data, key figures and real-time diagram.

markets.businessinsider.com

 

[Martin Everson]

Any ideas?

As a bond investor myself I would say don't do this.

20 different bonds is nowhere near not enough to lower your default risk in your portfolio especially among the lowest tiers of junk bonds. You would need a global portfolio of at least 1000 junk bonds to be successful which is not feasible for average person outside of use of a Fund.

If you ask, why it can't be reproduced with an ETF?
Because ETFs roll over into new bonds without waiting until the maturation, and they are missing of getting back the full "mark down".

Sorry but an ETF or Mutual Fund is way to go.

Otherwise feel free to speculate with just 20 junk bonds - you might get lucky and it all works out if you pick higher rate junk debt. But risking a massive haircut in a default situation while chasing a 5% gain is not worth it to me.

"The bond investor is the smartest guy in the room". So up to 1 year maturity the market will have priced in everything. If your buying below par, especially deep below par with months to go your playing with fire. In a rising interest rate environment junk bond issuers have to rollover their debt by issuing new junk bonds at a much higher interest rate to pay of the old bond holders. Many may not be able to do that due to the risk free yield on US treasuries plus investment grade bonds offering higher yields.

P.S Would love to know how your strategy works out anyway.

 

[Zaiga]

As a bond investor myself I would say don't do this.

20 different bonds is nowhere near not enough to lower your default risk in your portfolio especially among the lowest tiers of junk bonds. You would need a global portfolio of at least 1000 junk bonds to be successful which is not feasible for average person outside of use of a Fund.



Sorry but an ETF or Mutual Fund is way to go.

Otherwise feel free to speculate with just 20 junk bonds - you might get lucky and it all works out if you pick higher rate junk debt. But risking a massive haircut in a default situation while chasing a 5% gain is not worth it to me.

"The bond investor is the smartest guy in the room". So up to 1 year maturity the market will have priced in everything. If your buying below par, especially deep below par with months to go your playing with fire. In a rising interest rate environment junk bond issuers have to rollover their debt by issuing new junk bonds at a much higher interest rate to pay of the old bond holders. Many may not be able to do that due to the risk free yield on US treasuries plus investment grade bonds offering higher yields.

P.S Would love to know how your strategy works out anyway.

Thank you for your input!

So far it was just an idea, but the bonds should be exclusively government bonds (without buying the highest trash countries).
I was looking up to the last defaults by country:

List of sovereign debt crises - Wikipedia

en.wikipedia.org

It's not that many over a period of 20 years. And 20 bonds bcs there aren't actually that many countries available with high interest rate bonds denominated in USD.

So that was the idea, nothing more. As it's really hard to invest into anything nowadays.

 

[JohnnyDoe]

Post the list of those 20 bonds here. You should also have a look at the fine print of each bond, but it doesn’t seem a bad (although risky) idea.
If you or someone for you has time, a Montecarlo simulation would help to visualize the risk of ruin.

 

[Martin Everson]

And 20 bonds bcs there aren't actually that many countries available with high interest rate bonds denominated in USD.

But many of those sovereign junk bonds are USD Eurobonds. Have a look at the ISIN and see if it begins with "XS". Typically they start from minimum $200,000 allotment and there after increments of $1,000 or so. So you are looking at minimum $4m investments in your strategy potentially.

As it's really hard to invest into anything nowadays.

I agree. But research is everything and it seems you are willing to ask and find out the downside rather than plunge right in and get your a*s handed to you like I have seen others do .

 

[Zaiga]

Post the list of those 20 bonds here. You should also have a look at the fine print of each bond, but it doesn’t seem a bad (although risky) idea.
If you or someone for you has time, a Montecarlo simulation would help to visualize the risk of ruin.

I will, but first I need to figure out if it's even feasible.

But many of those sovereign junk bonds are USD Eurobonds. Have a look at the ISIN and see if it begins with "XS". Typically they start from minimum $200,000 allotment and there after increments of $1,000 or so. So you are looking at minimum $4m investments in your strategy potentially.



I agree. But research is everything and it seems you are willing to ask and find out the downside rather than plunge right in and get your *** handed to you like I have seen others do .

That's a good point!
Sure I am extremely rarely investing into something, most of the time it's just ideas sharing and looking if they are "workable" or not.
True most of them are XS, interesting if it's possible to find enough smaller bonds.

 

[Zaiga]

So the XS most likely kills the idea. Or are there any brokers offering to buy fractions?

 

[Martin Everson]

Or are there any brokers offering to buy fractions?

WiseAlpha offers fractional bonds but their choice is very limited and I don't think they offer any sovereigns. Also its for accredited investors only now. There is also Bondblox but never looked into how that works or what they offer. Bonds can be extremely complex instruments especially if they are of the convertible kind. I would not want to personal add a fractional layer of trading to it.

Also problem with Eurobdonds and adding fractional layer is your limited by custodian (i.e Euroclear or Clearstream). If you do want to sell the bond early they will still impose the 200k minimum. So not sure what broker is doing in background to settle with you a sell of a smaller amount.