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Published: August 11, 2010
In a former life, I worked as a manager and
analyst at IBM (NYSE: IBM) for almost 20 years.
During my time there, I was in charge of some pretty big budgets
-- some reaching nearly $100 million a year. But at a major
company like IBM, there are some even larger numbers in play.
Case in point: On Monday of last week, IBM sold $1.5 billion in
bonds. It was a good time to do it, too. According to The
Wall Street Journal, the three-year notes were issued with
an interest rate of just 1% -- barely above what similar
Treasuries pay.
But it's not news that companies are issuing debt now to fund
their business. Remember: rates are at record lows. If you think
you'll need the money, it's a great time to issue bonds.
However, it is news that IBM is doing it.
My former employer has an uncanny track record when it comes to
the timing of its debt offerings. IBM seems to know when
interest rates have hit lows, and issues debt just as rates are
about to ratchet back up. It happened in 1979... 1989... 1993...
1995... 1996... 2002... and 2009. It happens so frequently that
some investors use it as a signal for where rates are headed
next.
"They send the best signal in the market," says Jack Ablin, who
is the chief investment officer of Harris Private Bank in
Chicago.
Now, IBM's record isn't perfect. For instance, when the company
issued debt in 2009, it may have been a short-term low, but we
can see that rates have fallen even lower than they were back
then. But when you combine its history with some of the more
glaring facts that interest rates eventually have to rise --
they can't go much lower -- the case for learning how to protect
yourself from rising rates now becomes stronger.
Here's the situation: If you're an income investor, you
typically have a considerable amount of your portfolio in bonds
and other fixed-income vehicles. The steady prices and income
make them right up your alley. When interest rates rise,
however, it usually makes previously issued bonds fall in value
-- since investors can now lock in higher rates.
ForI can't say when rates will rise (even
with IBM's move). The Fed says they'll keep them low for an
"extended period." But I can say they will rise, and that's why
I'm looking now for ways to protect my real-money Daily Paycheck
portfolio.
So far, I've found some high-yield bonds that yield so much they
are unlikely to be impacted if rates rise slightly. I told you
about one of these a couple of weeks ago. [How
I'm Earning 8% From a Company Paying 0%] But I've also found
a
preferred stock -- with a twist -- to add to my portfolio.
This preferred -- issued by one of the major banks -- currently
pays close to 8%. The "twist" is that in 2013 the interest paid
on the preferred begins to float, paying
LIBOR plus about 4%. That means if interest rates rise, so
will my payments.
These sorts of securities are exactly what we need to protect
our portfolios from rising rates. You should, however, keep in
mind they are a double-edged sword. If rates stay low, then this
floating rate will fall come 2013. But I don't think that will
be the case.
As I mentioned a couple of weeks ago, the best place to begin
your search for these sorts of special securities is
QuantumOnline.com. If you're the type that loves to dig down
and research, it's a great resource.
We can't tell yet if IBM has called another bottom in interest
rates, but one thing is certain: It's better to start preparing
your portfolio for rising rates now than before its too late.
-- Amy Calistri
Editor
Stock of the Month
The Daily Paycheck
PS. If you want to hunt for exchange-traded bonds on your
own, check out QuantumOnline.com. Simply enter the ticker of the
company in the top right and then click on "Find All Related
Securities" on the subsequent page. If there are bonds
available, you'll see an entire list. |
