GMAC Smartnotes - Smart or Dumb?
Barrons has had a couple of favorable mentions of GMAC Smartnotes in its weekly interest rate column. I've been tempted ...
... by the higher yields but am leery of GM's perilous financial condition. Clearly GM's long term future is going to be problematic. Its products aren't that great and it has huge unfunded health care and pension liabilities.
However some savvy bond fund managers are looking at short term GM paper - in particular the GMAC Smartnotes. These are still rated Baa2 by Moody (this is kind of like having a fico score of 600 or so). There are notes that mature in less than 2 years that have a Yield to Maturity of around 7%.
GM will probably be able to pay its bills for the next two years. Even factoring in commission one gets a pretty good return compared to a money market or CD in exchange for taking a teeny weeny little piece of risk. The longer bonds are clearly pretty risky. Over time as GM is forced into refinancing shorter term debt that comes due at higher and higher rates it may be pushed into a 'death spiral' as debt service overwhelms its earning capacity.
I don't have the necessary scratch right now to meet my broker's purchase minumum on these so my thinking about this is kind of moot. If I was going to buy I would put them in a deferred account. I wouldn't ever put a lot into a single issue.
Reaching for yield right now is probably the wrong thing to do. Buying junky bonds (even short term junky bonds) is risky. But so is letting inflation erode the purchasing power of cash.
-fg
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May I ask what the minimum amount for your broker was? Thanks.
I think it was about 10k - note that you can get 1 yr CDs now over 4% and that the fed funds rate will be close to 4% by year end (if you believe the futures market).
-fg
Get GMAC Demand Notes, works like a Money Market and is currently at 3.85% annual (and going UP). No commissions or hidden fees and way less risky than Smart Notes :). See http://www.demandnotes.com.
T
I purchased about $30K in smart notes over the last couple of days. Average yield is about 9% with the notes expiring at various dates in 2007. Either I'm really clever or very stupid. We'll find out in 2 years...
