High Yields from an Investment You’ve Never Heard About
February 20, 2019
The mini-bond is a type of security that Wall Street has done a terrible job of explaining, let alone pitching to investors.
But right now, with all of the stock market volatility and risk, mini-bonds are exactly what you need in your portfolio.
They are, as the name implies, bonds that are small in denomination. Traditional bonds, from Treasuries to corporate, municipal, mortgage and other bonds, are denominated in $1,000 face values and usually sold in $10,000 lots, or greater.
Mini-bonds are issued with face values of $25. That makes it easier for individual investors to buy and own them, and they’re more like common stocks in this respect.
In addition, bonds mostly trade over the counter among bond traders, while mini-bonds are listed on various stock exchanges.
In fact, mini-bonds are listed and are traded much like preferred stocks. This is what makes them even more obscure for investors because they are hiding in plain sight in the preferred share listings.
To search for and buy them, you will need to know their symbols, their Committee on Uniform Security Identification Procedures (CUSIP) numbers or their International Securities Identification Number (ISIN).
Why Do Mini-Bonds Exist?
The main reason that mini-bonds exist is to enable companies to raise capital from individual investors beyond their traditional institutional lenders. This helps to broaden their bond owner base and can work to help reduce the cost of issuance, as well as the cost of borrowing.
Another reason is that banks and financial firms will take advantage of a market opportunity to buy traditional bonds and place them into a trust, which in turn issues mini-bonds that are really just traditional bonds broken down into smaller pieces.
The Risks & Rewards
The risks of mini-bonds are similar to those of traditional bonds. Credit of the issuer is the cornerstone.
I got my start in the financial markets as a banker and bond trader. And my mantra from those days remains: If I wouldn’t lend money to a company, I’m not going to buy their stock or their bonds. The same goes for mini-bonds.
After credit risk, there’s also interest rate risk. Bonds are open to changes in yield. And the longer the maturity, the greater the price movement and the greater the yield movement.
But the reward of mini-bonds is that they tend to be much more stable in price during market yield movements overall.
Also, because they’re relatively obscure, the yields tend to be higher for mini-bonds than for the full-sized bonds.
The downside: They don’t trade much. Investors tend to buy them and hold them rather than trade them. That means rather than just placing a market order, investors should use a limit near the ask price when placing the trade.
In addition, most mini-bonds usually come with call dates (i.e., the issuer can buy them back at a specific price after a specific date), which are factored into my recommendations.
Mini-Bond Deals Right Now
The following are three mini-bonds that look like deals right now. I suggest that you spread your investment across all three for liquidity and ease of buying them at the right prices.
JMP Group (JMP) is an institutional financial firm that offers brokerage, investment banking and asset management services. It has a large client base of brokerages, banks other financial firms, funds and some very wealthy individuals, such as family offices.
The JMP mini-bond I’m interested in is the 7.25% 11/15/27 Series D under the symbol JMP.D, with a CUSIP of 466273109. The next call date is November 28, 2020 at a price of $25.00. It is a buy under $25.00 in a tax-free account.
Cowen Inc. (COWN) is an old-line financial firm that has been a stalwart of Wall Street for many years. In my earlier career, I would do business trading with the firm without issue.
Its 7.75% 06/15/33 Series L mini-bond trades under the symbol COWN.L, with a CUSIP of 223622804. It has a call on June 15, 2023 at $25.00. It is a buy under $25.00 in a tax-free account.
US Cellular (USM) is a wireless phone company known for its no-nonsense, inexpensive plans. It is majority owned by Telephone & Data Systems (TDS), which is a major operator of wireless communications networks around the US.
Its 6.95% May 15, 2060 Series A mini-bond trades under the symbol UZA, with a CUSIP of 911684405. It has a call starting on March 22, 2019 at $25.00, which limits the upside for this issue but should provide nice income for a while. It is a buy under $25.00 in a tax-free account.