Update to the End of the World

Two blogs ago, I ruminated about events that make people fear the end of the world.  I also observed that truly catastrophic events are very rare, and that planning for them is wasted effort.

In the world of bonds, such head fakes can be exceptionally lucrative.  The failure of the Western world to implode in 2008-9 led to historic buying opportunities in bonds. More recently, panic among the Chickens Little of the bond world led to some juicy opportunities in a number of dollar denominated European entities.   And, I'm pleased to report, reports of the death of the Euro zone are beginning to look premature as well.

Here is a tally of purchases I made earlier this year in response to the crisis:

Abbey National PLC 7.95% bonds of 10/26/29.  I bought $50,000 face amount at an average discounted price of 92.  They are presently trading around 110, for a paper profit of $9,000, or a 19% capital gain.

AXA SA 8.6% of 2/15/30.  I bent my rule of buying at a discount, because of the very high coupon, and bought $45,000 face amount for 1.08, or $48,600.  The yield to maturity of these bonds was still  over 7.75%.  They now trade at  118.5, a 9.5% capital gain on paper ($4,500).

Telefonica Europe B V,  8.25% of  9/15/30.  Again, due to the high coupon, I bought 25,000 face amount above part at 103.  They now trade at 106 for a small gain.

Telecom Italia 7.2% 7/18/36.  Recently bought a $40,000 face amount at 87.25.  These now trade at 97, for a $4000 paper profit, or 11%.

Telecom Italia 7.721% 06/04/38, face amount of $15,000 was bought very recently at 98.  The position is essentially unchanged.

What's next?  Again, who knows?  However, the price action of these bonds is telling me that the terror is receding, and these relatively juicy yields will sink further, resulting in larger capital gains.  So, will I cash out?  By now, you should know my answer.  In this day and age, yields pushing 8% are rare indeed, and I intend to hold onto these newer purchases.  Remember, my portfolio's yields are enhanced by maintaining roughly 25% margin.  With my margin cost at 1.25%,  these most recent bonds have an effective yield of 10%!  With interest payments arriving twice a year, that 10% compounds a bit.

Bottom line: as long as Ben B. keeps offering money for nearly free, this ride will go on.

Update: 5/13/13.  The ride continued, both as to rock-bottom margin costs and favorable price movement.

Abbey 7.95% of 2029 are now at $121.
AXA SA 8.6% of 2/15/30 are $129.51.
Telefonica Europe B V,  8.25% of  9/15/30 are $123.74.
Telecom Italia 7.2% 7/18/36 are $105.43.
Telecom Italia 7.721% 06/04/38 are $110.58.

In retrospect, the Euro-zone bond opportunity seems clear and easy.  I can attest that it  wasn't.  Folks, it's very hard to take action WHILE the end of the world is threatening.