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A Fixed Income War Story

This new issue came my way yesterday, and it's something of a watershed event. I haven't seen a 4.00% yield on a four year maturity for an investment grade (BBB S&P) piece in some time, at least since the COVID crisis began. At long last, the tide has turned.

Back in February, bonds issued by GM Financial would have only gotten you 3.05%, with a longer maturity. Quite a move in a short time.

Old hands will recognize this issuer as the successor to the legendary General Motors Acceptance Corporation, or GMAC. Once one of America's largest banking institutions in its own right, it fell victim to the massive restructuring the of the auto industry in the wake of the Great Financial Crisis of 2008.

Which leads us to our war story. When the crisis hit. the Federal Reserve responded by lowering rates to zero.

There was little yield to be had for my income dependent clients, and I had to get creative. Which leads us to GMAC. The firm, like most lending institutions, was effectively back stopped from default by the Federal government during that time. The rating on the bonds were just single "B," and the yield reflected it: short dated notes were yielding at, or even over double digits, because they were, after all, "junk" and we were in the middle of an economic crisis, but the market didn't seem to acknowledge they had what amounted to the full faith and credit backing of the United States government.

While I was stocking client portfolios with these bonds, II thought I was the only person in the world who realized this was going on until I saw a column by Bill Gross of PIMCO, the largest fixed income shop in the world, telling everyone what a lay-up this was.

But there is some intrigue here.

"Pimco also made a bet on GMAC, the struggling finance arm of General Motors (GM, Fortune 500), reasoning that Washington would not let the lender fail for fear of crippling the U.S. auto industry. "We tried to move ahead of the government," says Gross, "to purchase assets before we believe they will have to." (CNN, 3/30/2009)

According to an archived article in the New York Times, however, Mr. Gross' advocacy for not nationalizing the assets of the failed banks (promoted by Paul Krugman and Nouriel Roubini) may have had something to do with that outcome.

"Much to the amazement of many people on Wall Street, the Federal Reserve, which declined to comment, still allowed GMAC to become a bank holding company and the government later guaranteed all of its debt, meaning that Mr. Gross’s GMAC bonds would be worth 100 cents on the dollar when they mature." (Treasury's Got Bill Gross on Speed Dial- NY Times 6/20/2009)

And that is precisely what happened. However, it worked out very well for the taxpayer as well as the bondholders. The Treasury made over $2.4 billion once it sold its final stake in "Government Motors."

To this day, I still look for opportunities like this. It could be in busted preferreds, or unresearched corners of the market. But looking back, that was some feast.

The GM Financial company referenced above has nothing to do with the old GMAC, it should be noted. GMAC became Ally Financial, but it is a completely different kind of operation, more like a Capital One than a captive lender of an auto giant.

*Not an offering to sell securities.


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