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Traditional analysis of common stocks uses a wide array of financial ratios to measure value. One of the ratios most often discussed is the dividend yield on a stock. In this note we explain why the dividend yield ignores credit risk. We show that a credit-adjusted dividend yield provides much greater insight to the likely dividend return to common stock investors. Using the example of General Electric Company (GE), we show that the long-term credit adjusted dividend ratio is 2.94%, not the commonly quoted 3.40%. The credit-adjusted dividend yield allows investors to compare dividend yields on companies of wildly varying credit risk on an apples to apples basis.

Conclusion: A dividend yield is a forecast, not a promise, and investors need to know the probability that the forecast will come true. The bond market provides the information we need to dramatically improve on the traditional dividend yield as a measure of potential return.

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This analysis is a fresh look at General Electric Company, one of the most complex conglomerates in the world. General Electric filed for a spin-off of its consumer credit card unit in March, a long-anticipated move. How does the bond market view General Electric and its key subsidiary General Electric Capital Corporation in light of the spin-off? We answer that question in this note.

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Projected one month bill rates surged upward this week along the full forward curve out to ten years. Forward 1 month T-bill rates are now projected to peak at year-end in 2020 at 4.05%, up from a 3.86% peak projected last week. This is the second consecutive implied peak in one month bill rates, something not seen for a few years. The impact of the peak can be seen very dramatically in the three dimensional graph of Treasury yield movements (below) and Treasury and mortgage forward rates. The forecast shows projected 10 year U.S. Treasury yields rising steadily to 4.23% in 2024. Projected 15 year fixed rate mortgage yields in 2024 show a rise from an all-in cost of 3.557% today to 5.935% in 2024. We also present three potential scenarios consistent with the implied forecast that represent alternative paths for interest rates.

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On March 31 in the U.S. bond market, there were 29,320 bond trades in 4,959 non-call fixed rate corporate bond issues representing $9,708,182,308 in notional principal. Which 20 trades were the best trades of the day, and how do we decide the answer to that question? Today, we answer those questions for bonds with maturities of 10 years or more at the request of many investors.

Conclusion: We find that 64 bond issues met our trading volume criterion of $5 million or more. The best-value non-call senior fixed rate bond trades with maturities of 1 to 5 years on March 31, 2014 were issues by these firms 

  • HESS CORPORATION (HES), 2 issues
  • SUNCOR ENERGY INC. (SU), 2 issues
  • SAFEWAY INC. (SWY), 2 issues (see note below)

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Projected one month bill rates dropped by more than 0.30% in 2020 to 2024 in a delayed response to comments last week by Fed Chairman Janet Yellen. This is the first implied peak in one month bill rates for a few years. The forecast also shows projected 10 year U.S. Treasury yields rising steadily to 4.056% in 2024. Projected 15 year fixed rate mortgage yields in 2024 show a rise from an all-in cost of 3.507% today to 5.97% in 2024. We also present three potential scenarios consistent with the implied forecast that represent alternative paths for interest rates. These scenarios are consistent with a multi-factor rate model benchmarked in 52 years of U.S. history, discussed below. Here are the highlights of this week’s implied forecast:

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