Bobby Bonilla Day Is An Annual Reminder That Fixed-Income Investments Are Worthwhile

I’ll show you the Bronx!  Bobby Bonilla famously said that to a Mets beat reporter in 1992 as a way of demonstrating a toughness he had learned in city streets.  Bobby clearly learned a thing or two about financial analysis in his childhood days in the Boogie Down Bron-ixxx, as well.  I am writing this column just on the other side of the Whitestone Bridge (which connects The Bronx and Queens) and only a mile or so from the home field of the New York Mets, Citi Field.  A little local knowledge is helpful, and it is also a reminder that today, July 1st, is Bobby Bonilla Day.

In 2000, the Mets wanted to rid themselves of Bonilla and his $5.9 million salary, so they agreed to a deal that would pay him that $5.9 million with an imputed interest rate of 8% over 25 annual payments each July 1st beginning in 2011 and ending in 2035.

From the New York Post.

The 10th annual Bobby Bonilla Day is upon us, during which the 57-year-old former outfielder — who retired from baseball in 2001 — will collect a check for $1,193,248.20 from the team he disappointed during two separate stints. The Mets owed Bonilla $5.9 million when they released him after the 1999 season, and agreed to defer the payments through 2035 — at 8 percent interest — largely because the Wilpons had been told their account with Madoff would produce annual profits of at least 10 percent.

Bonilla’s decision to accept deferred compensation from the Mets teaches us two important investing lessons:

1. Locking in above-market yields has been a value-creating strategy for the past 35 years as U.S. Treasury note yields have steadily declined during that period.
2. Chasing manager performance and ignoring volatility is the worst mistake an equity investor can make.  If the Wilpons were not such buffoons they would have understood that NO ONE could produce double-digit gains in all market environments, as Bernie Madoff had fraudulently claimed to be able to do.

So, Bobby Bonilla Day is an annual reminder of the infinite wisdom of the power-hitting third baseman/outfielder and the colossal stupidity of his former employers.

FLUSHING, NEW YORK - MARCH 26: A New York Mets fan stands outside a closed Citi Field on March 26, 2020. Citi Field is empty on the scheduled date for Opening Day March 26, 2020 in Flushing, New York. Major League Baseball has postponed the start of

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In agreeing to defer the money he was owed, Bobby and his agent, Dennis Gilbert, were implicitly betting that long-term interest rates would decline.  As this chart from the St. Louis FRED database indicates, that bet has paid off for more than a generation.

Stock investors, and I am one, have moments of market-timing remorse, but there has been no such volatility in the market for long-term bonds.   There are no crashes.  And there aren’t even in any chart movements that resemble peaks and valleys.  It has been a one way trade since 1985.

So, that’s nirvana for a bond investor.  Fixed-income investors, and Bobby implicitly is one, are getting capital gains as well as high coupons, as the market reprices existing higher-coupon fixed-income securities to account for lower current interest rates.  The biggest risk Bobby was taking was that interest rates would skyrocket between 2000 when the deal was agreed and 2011.  That would have lowered the implied principal value of Bobby’s bond, but, in fact, just the opposite occurred.

In April 2000, just before the start of that baseball season, the 10-year U.S. Treasury note was yielding 6.23%.  In April 2011 that figure was 3.32%.  So, Bobby made a wonderful trade AND missed out on the 2008-2009 stock market implosion and the 2001 Tech Bubble Burst, to boot.  The U.S. government has never missed a payment on a security, and despite their problems with Madoff, the Wilpons and the Mets, to my knowledge, have never missed one either.

But, wait, couldn’t Bobby have taken the $5.9 million as a lump sum in 2000, put it all in Amazon AMZN shares and have hundreds of millions of dollars now?    No.  In April 2000, Amazon was trading at $67 and in April 2011 Amazon was trading at about $180.  Amazon has never paid a dividend, so the total return calculation is the same as the price appreciation.  Amazon investors averaged 10.59% annually for those 11 years.  So, not a huge difference versus the 8% Bobby was earning without any risk, and Bobby could have bought as many AMZN shares as he wanted with the $1,193,248.20 payments he has received every July 1st since 2011.

But that misses the biggest point.  Implicitly, Bobby’s bond is worth much, much more than its value at issuance.  So, Bobby has made a capital gain on his deferred payment stream as well as his annual income.

The average yield for a U.S. Treasury in April 2000 was 6.23%.  Because that rate had nearly halved by 2011, the implied value of Bobby’s bond was much much higher than we he “bought “ it, which would have been at par ($100.00).  So, a 6.23% 35-year bond (with 25 years remaining) would have been worth $153.94 in April 2011, by my calculations.   So, for the 11 years before he started receiving payments, Bobby was actually making about 5% per year in capital gains in addition to the (imputed) 8% annual coupon.  Bobby’s 13% annualized economic return for 2000-2011 well exceeded what he would have earned by owning Amazon—or the broad market indices—while shielding him from stock market volatility.

What is Bobby’s bond worth now?  A quick exercise in bond math shows that an 8% coupon bond with a par value of $100 and 15 years remaining should be selling at $204.00 today.

That’s a lesson on the value of fixed-income securities and the relative value of payments that are scheduled versus capital gains that can be ephemeral.  But what of the Wilpons?  Why didn’t they realize that no entity could ever produce returns like Madoff did?  If they had known that they would have never deferred any contract, and yet, according to Dennis Gilbert , Bobby actually receives payments from TWO separate deferred contracts from the Mets, and other players, such as Bernard Gilkey and Darryl Strawberry get them, as well.

Nobody outside the family could explain that, but their inscrutability is what makes them the Wilpons, I guess.

By Jim Collins, Contributor