Dear Mr. Berko: 

I have $130,000 sitting in my money market account earning less than 0.25 percent. My broker has recommended that I put some of this money in Puerto Rican tax-free bonds that yield more than 10 percent, as well as taxable bonds from several South American countries and from various other foreign countries with even higher yields. I can afford a moderate amount of risk, but I’d appreciate your looking over the enclosed list and helping me pick out some issues you think are the safest in the bunch. And if you have any other suggestions on how to get better than 10 percent safely, I’d appreciate your recommendations, too. 

R.P., Rochester, Minn.



Dear R.P.:

Are you that desperate? I don’t speak Balochistanian, Venezuelan, Swahili, Sinaloan, Kashmiri, Elbonian or Kosovan. And though those governments’ officials will be enriching themselves at the public trough for decades to come, I doubt their bonds will survive that long. The Venezuelan bonds, maturing in 2033 and yielding 29 percent, should make a few more interest payments before they default. Then I’m as certain as rain that in the following few years, American bondholders (including major U.S. banks and large mutual funds) will demand that the U.S. government confiscate Venezuelan assets to reimburse them for their inevitable investment losses. The only names on that list with better than a 50-50 chance of survival are the Puerto Rican municipals. There are two reasons: an enormous U.S. business presence in Puerto Rico and the Obama administration’s belief that Puerto Rico is a strong candidate for statehood. Though I don’t object to a speculative $10,000 investment in this Puerto Rican junque, I suggest you purchase it through one of the large discount brokerages or a firm that trades on the New York Stock Exchange. This outfit you’re working with is a schlock house with bond markups that are big enough to choke a python. Meanwhile, burn that list.

To improve the survivability of your speculative bond portfolio, I suggest that you invest only in bonds that will come due in less than four years. Keeping short maturity dates is how many high-yield junk bond mutual funds have been able to post double-digit returns in the past couple of years. The following list of short-maturity issues will give you an idea of what to look for:

Dendreon 2.875 percent (not rated) bonds, maturing in January 2016, trade at $660 per $1,000, with a 25 percent yield to maturity. Dendreon Corp. (DNDN-$2.74) is a $300 million-revenue biotech company with no earnings, a negative book value and a negative cash flow. It has been public since 1992.

J.C. Penney 6.75 percent bonds, maturing in October 2015 and rated CCC-, trade at $910 per $1,000 face value and have a 12 percent yield to maturity. J.C. Penney Co. Inc. (JCP-$6.42), a $12 billion-revenue retailer, has an $8.70 book value and a negative cash flow, and it may not be profitable for a while.

Harrah’s 10.75 percent bonds, maturing in February 2016 and rated CCC-, trade at $810 per $1,000 face value and have a yield to maturity of 22.04 percent. Harrah’s, now known as Caesars Entertainment Corp. (CZR-$21.15), has well-known money-losing casinos in Las Vegas and Atlantic City.

Global Geophysical Services Inc. (GGS-$1.47) is an unprofitable $300 million-revenue provider of seismic solutions to the oil and gas industry. The 10.5 percent bonds, rated B-, mature in May 2017, trade at $781 per $1,000 face and have a 20.02 percent yield to maturity. GGS has a $1.62 book value and a $78 million cash flow.

Toys R Us is a privately held, barely profitable retailer. Its 10.375 percent bonds, maturing in August 2017, trade at $819 per $1,000 face value. They are rated CCC and yield 16.2 percent to maturity.

All those bonds have an infinitely better chance of survival than those long-maturity foreign issues. They are just a few names of the many publicly traded short-term junk bonds. If your broker doesn’t have a ready list, he can locate hundreds of issues by perusing the portfolios of the many junk bond funds that own those and similar issues. If he doesn’t have the wherewithal to do that, his firm’s bond department probably has a ready list of high-yield short-term bonds from which he should be able to give you some recommendations.