4 USD bonds to buy ahead of Fed cuts

The first rate cut of the post-inflation era by the Fed is almost taken for granted. The decision will be made on Wednesday, September 18. Until the end of August, two options were in play: a reduction of 25 bp or 50 bp. Now the first option seems to have prevailed.

The Fed Monitor Tool, which photographs the trend of Fed Fund futures, leaves little room for the 50 bp hypothesis. Of course, last-minute surprises cannot be ruled out.
In this context, the market is looking at two movements:

• that of the Treasuries yield curve, which seems to be giving the first timid signs of normalization, after years of inversion;
• that of the trend of ultra-long maturities prices, which investors are monitoring with a view to a rebound in the coming months, after a period of strong decline.

1. The case of Treasury 2051

It is the most followed title in this perspective. The T-Bond 2% 2051 is the longest in absolute terms among the US government bonds listed on the Italian Stock Exchange. These are the characteristics:

• Isin US912810SZ2
• cut 1,000 USD
• maturity 15/8/2051
• duration (sensitivity to rates) of 18.5, a significant value.

The current price between 66 and 67 USD is entering a very interesting area. From the lows of October 2023 at 54 USD it has already achieved a good performance. However, there is still considerable room to return to the average prices of 2022. It had started the year at 100 USD, and then dropped - thanks to the rise in Fed rates - to 65 USD in December, a value aligned with the current one.

Some hope that a reverse upward trend of the same size will therefore open up, but the upward trend will likely be less directional. The stock’s liquidity is excellent, with a bid-ask spread on Tlx of 15-20 bp.

2. The alternative of the corporate Apple

• Wanting to diversify and focus on corporate issues with a good rating there is the option of a bond with a slightly shorter maturity than Apple, 3.75% 2047:
• Isin US037833DG20
• cut 2,000 USD
• maturity 11/13/2047
• duration (sensitivity to rates) of 14.2, a less significant value than that of the previous Treasury given the higher coupon.

Before analyzing its prices, it should be noted that Apple has an AA+ rating, equivalent to that of S&P for the US government issuer. In the latter case, other agencies maintain the AAA but a negative outlook is almost generalized, which could turn into a downgrade in the next twelve months. Apple should instead maintain the current rating. Its 2047 is quoted at 86.5 USD, with a gross yield of 4.7% and a bid-ask spread of 40-50 bps.

3. Petrobras and the highest coupon

With Apple, the focus is on high-quality corporates, but the market also offers more profitable alternatives in terms of coupons, logically with a lower rating. This is the case of the Brazilian state oil company Petrobras (BB, therefore high yield), which has always been closely followed by Italian investors.

Excluding the 5.5% 2051, which is not very liquid, the longest issue is the 6.75% 2050:

• Isin US71647NBG34
• cut of 2,000 USD
• maturity 3/6/2050
• duration (sensitivity to rates) of 11.5.

In this case, the price rises, approaching parity. The stock is trading at 99.2 USD, with a yield of almost 7%. In the case of Petrobras, it is important to consider that the price is not only affected by the Fed rate factor but also by political and economic events related to the company.

This determines greater volatility, which has been recorded several times in recent years. The stock is moving at an interesting level from a graphical point of view, beyond which we can hypothesize movements up to 110 USD. This extra-long USD is suitable both for cashier positions, interested in the coupon component, and for trading positions on short and medium maturities.

4. There is also Italy with 4% 2049

We highlight it immediately: in this case, the cut is very high and therefore the stock is especially suitable for professional investors. The issuer Italy has been active in the USD bonds sector for a long time but on the extra-long maturities front it is only present with two titles. Of which the most significant is the 4% 2049:

• Isin US465410BZ07
• cut 200,000 Usd
• maturity 10/17/2049
• duration (sensitivity to rates) of 13.7.

The high cut penalizes it in terms of trading but not liquidity. The market spread is around 90-100 bp, which for a government bond with a 200,000 lot is acceptable. The price at 79-80 USD takes it back to the summer of 2022 when a downward spiral due to the rise in rates was about to end. The rating is the same as that of Btp (BBB) with a stable outlook.

Which one to choose? It depends on the time horizon

Of course, the list could continue, also expanding to other geographical areas. The four securities taken into consideration differ in rating, coupon, and therefore price.

Those aiming for a quick rebound in prices must logically prefer higher durations. Those with a more conservative and therefore long-term vision, taking advantage of low prices and interesting coupons, have more alternatives that should be seized with a view to diversification.

There is uncertainty about the trend of the dollar against the euro, which the current weakness makes an opportunity to be carefully evaluated.

DISCLAIMER The information and considerations contained in this article must not be used as the sole or main support on the basis of which to make investment decisions. The reader maintains full freedom in his or her investment choices and full responsibility in making them, since only he or she knows his or her risk appetite and time horizon. The information contained in the article is provided for information purposes only and its disclosure does not constitute and should not be considered an offer or solicitation to the public to save.

Original article published on Money.it Italy 2024-09-12 11:29:05. Original title: 4 bond in dollari da comprare prima del taglio tasso Fed. Uno è italiano