Managers are convinced of this: it is time to start focusing on “discount” bonds, those securities launched by public issuers, such as BTPs, by companies, corporate bonds, or by transnational issuers such as the European Investment Bank or the World Bank currencies from emerging countries with good prospects for economic recovery. “Discount” bonds take this name because they are traded on the secondary market – where all operators, both public and private, can freely buy or sell – below the rate, that is, below the issue and redemption value, “says Paolo Barbieri, director specializing in fixed income at Valori Asset Management is an independent asset management firm with offices in Milan, Switzerland and Luxembourg.
What factors determine “discounting”?
But why are the market prices in some bond issues lower than the subscription price and redemption value? “This happens because at the time of issuance these bonds, which are mostly medium-long-term, had very low coupons due to the market conditions at the moment. 10-year bonds issued in 2020 or 2021 hardly have a coupon above 1-1.5%. Now that the market rates are around 4.5%, those bonds, of excellent quality, are still priced below the market, which drops below the rate until the total return equals the return of other coupon issues as high, ”explains Barbieri.
In the table we find a selection of dozens of securities of “corporate”, public (Btp) and transnational (Bei) issuers that have this characteristic. Except two. The bond issued by Porsche, has a five-year term and 4.5% coupon at 101 and the state railway bond maturing in 2033, also at 4.5% coupon which is trading just below 99.27. “Porsche Bonds, although they do not have a rating, are comparable to a triple B security (maximum security) and offer a lot for a 5-year term, corresponding to a class minimum of just €1,000. The Ferrovie dello Stato share, like the majority of corporate bonds, has a minimum investment of 100 thousand euros », the manager confirms. All securities in the table, from public or private issuers, have a very high rating of at least three times B and for this reason they are defined as “investment grade”, due to their degree of security.
Why buy “discount” shares?
But why buy securities “at a discount” compared to other issues that are dealt at par (or even higher) and at a higher coupon given that the yield for your types of securities is roughly in line with the same values? “The opportunity to buy the securities listed below is given by the fact that at the moment in both Europe and the United States we are approaching the peak of interest rate increases. From the beginning of next year in the United States and in the second half of 2024 in Europe, interest rates should begin to slowly decrease, and this provides great money-making potential for holders of “discounted” securities, the director adds. On the basis of simple financial arithmetic equations, in fact, a 10-year bond that has already been issued and traded in the market gains about 7 percentage points in the capital account for every 1 percentage point of decline in market interest rates (and vice versa it loses it if rates were going up). Thus, in the coming years, holders of long-term securities will, in addition to the current coupon yield, be able to earn a multiplier of 7% for each drop in price point. Of course, this is a profit on paper, and it is only achieved by selling the security when conditions are favorable. On the other hand, at their normal expiration, you will only have a refund at par.
Triple A in currencies of emerging countries
in the detailed table for courier From Valori Asset Management, with the exception of the two company issues mentioned above, all of the securities on offer have a high potential for capital gains when prices fall. “The maximum of this effect can be seen in the two supranational issues of the European Investment Bank denominated in the Brazilian real and the Mexican peso which now offer a yield of close to or greater than 9%. If we take the case of Brazil, where rates are currently at 13.25% with inflation down to around 3%, we would expect a rate cut of about 3 basis points resulting in double-digit gains in equity prices. The same goes for Mexican currency bonds. The interesting aspect of these issues is that there is no sovereign risk, given that the issuer is supranational with a triple A rating and the only risk is the exchange rate. But precisely as a result of lower inflation, we expect gains on these fronts as well, ”concludes Barbieri.
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