Bank of America’s (BAC) stock is not the only thing up significantly since the start of the year. Its bonds are as well. Despite intermediate to long-term Treasury yields rising thus far in 2012, Bank of America’s bonds have seen yields plunge as their spread over Treasuries has contracted in a big way.
Two examples are the following:
Bank of America’s senior unsecured, non-callable, 5.875% coupon note, maturing January 5, 2021 (CUSIP: 06051GEE5), closed 2011 with an investor buying at a price of 95.262 (6.581% yield-to-maturity) on December 30. As of February 3, 2012, this note is bidding 104.914 (5.179% yield-to-maturity) and asking 105.247 (5.133% yield-to-maturity). A customer buying this note today would pay a price 10.48% higher than the last trade of 2011 and would receive a yield-to-maturity 144.8 basis points lower than just five weeks ago.
Bank of America’s subordinated, non-callable, 6.50% coupon note, maturing September 15, 2037 (CUSIP: 060505DL5), closed 2011 with an investor buying at a price of 86.282 (7.735% yield-to-maturity) on December 30. As of February 3, 2012, this note is bidding 94.534 (6.959% yield-to-maturity) and asking 96.091 (6.824% yield-to-maturity). A customer buying this note today would pay a price 11.37% higher than the last trade of 2011 and would receive a yield-to-maturity 91.1 basis points lower than just five weeks ago.
Despite the fact that comparable Treasury yields are up (price down) since the start of the year, Bank of America’s bonds have rallied significantly in price. The question for investors in BofA corporates is what to do now.
If you bought Bank of America notes with the intention of holding to maturity, chances are you will do nothing with your position. For those investors who bought the notes as a trade, the easiest money has been made. While a further contraction in the spread is certainly not out of the question, there are three reasons to consider taking profits now:
1. Until investors can be completely sure that all skeletons from Countrywide Financial’s closet have been dealt with, it might be difficult for Bank of America’s notes to see much more contraction in the spread to Treasuries.
2. If investors see further strength in employment and ISM data in the months ahead, Treasury yields might rise (prices decline). At some point, this will likely drag BofA debt with it (yields rise, prices decline).
3. With Europe’s financial woes far from being solved, it seems appropriate for the bonds of the world’s largest banks to maintain some type of risk premium relating to Europe. This could also prevent much further contraction in the spread to Treasuries for BofA bonds.
Disclosure: I am long CUSIP 06051GEE5.
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