Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Some Corporate Bonds Looking Better than U.S. Treasuries

Interest-Rates / Corporate Bonds May 05, 2009 - 02:50 PM GMT

By: Money_and_Markets

Interest-Rates

Best Financial Markets Analysis ArticleNilus Mattive writes: I think Mike Larson did a great job outlining the dangers of longer-term U.S. Treasury bonds in his past two Money & Markets columns. And like Mike, I continue to believe there is more pain ahead for that category of bonds.


Sure, we will probably see a time in the future when yields are juicy enough to make these bonds a good call. In fact, as a reader recently said on my blog,

“[When long-term Treasuries] go up into the mid- to high-single figures? Start buying. And if they go nuts like they did in the Carter years? Sell everything else you have and buy them!”

You’ll get no argument from me there. Along with holding solid dividend stocks for the long term, I think buying Treasuries during periods of high interest rates is one of the smartest moves an investor can make.

But we’re not there yet. And that’s leaving a lot of yield-hungry bond investors wondering what to do right now.

In a previous column, I told you how laddering can help you build a safer portfolio. And I’ve also been singing the praises of inflation-protected bonds such as TIPs.

But today, I want to mention that I am also starting to see some interesting buys in the corporate bond markets …

Why Some Investment-Grade Bonds Are Looking Attractive

So-called “investment-grade” bonds are those that carry ratings of BBB or higher from S&P and Baa or higher from Moody’s.

Now, I’ve said it before, but it bears repeating again — credit ratings are not a guarantee that something isn’t going to explode on you. Just ask anyone who bought highly-rated mortgage-backed securities and collateralized debt obligations a year or two ago!

And even if you accept that investment grade bonds are more creditworthy than most, there’s still one more major risk … the fact that a prolonged recession could punish all companies, even the very strongest.

That’s a valid worry, especially with some forecasts calling for more defaults in 2009 than we saw during the height of the Great Depression.

At the same time, when I survey the landscape, I am starting to see some decent risk-reward scenarios.

For example, I am an unabashed fan of Vanguard’s low-cost funds, and when I look at the firm’s Intermediate-Term Investment Grade bond fund (VFICX), I am intrigued.

The official description says the fund invests primarily in investment-grade bonds with an average maturity of 6.3 years.

But that really doesn’t tell the whole story:

  • At the end of February, 22.6 percent of the fund’s holdings held the highest rating of Aaa …
  • Another 50 percent had at least one ‘A’ in their rating …
  • And because of a big sell-off, the fund’s current yield is right around 6 percent (with a paltry expense ratio of .21 percent)

I consider a 6 percent yield from extremely high quality bonds a pretty good deal.

No, that’s not a barn-burning return by historical standards. In fact, the average yield from 10-year Aaa-rated bonds was north of 9 percent from the mid-1970s through the beginning of the 1990s.

But if the choice is good income from a reasonably safe portfolio of corporate bonds vs. FAR less from Treasuries, I think I’d go corporate at this point in time.

Note that I would prefer to go with the intermediate-term bonds rather than the longer-dated variety that you will find in funds like Vanguard’s Long-Term Investment Grade fund (VWESX).

Again, that’s because rates should rise from here, and there’s no reason to go farther out on the interest rate curve than you have to.

You could also sort through the individual bond markets and find some pretty tasty offerings, many issued by companies you know well.

But in my opinion, that is a task that should be undertaken only if you’re extremely knowledgeable and have a sizeable amount of money to invest in a diversified list of names. Otherwise, you run the risk of one or two defaults ruining your entire portfolio.

In most cases, a low-cost fund from a reputable investment firm is the better choice.

And If You’re Really Aggressive, You Might Also Find Some Gems in the Junk Department!

Let me be very clear on this: Junk bonds are extremely risky, especially with today’s credit conditions. I would never advocate putting much of your portfolio in these assets … ever.

In fact, they should be looked at more like very aggressive stocks rather than conservative bonds.

Still, it’s interesting to note that many junk bond funds are providing very big yields right now, too.

Again, sticking with Vanguard, you’ll see that the firm’s High-Yield Corporate bond fund (VWEHX) is yielding about 11 percent. And you’ll get that with a very low expense ratio of 0.25 percent.

Vanguard Hi Yld Corporate Fd

If you take a look at a chart of this fund, you’ll see just how quickly investors ran from this category of fixed-income investments back in late 2008. The reasons are obvious — a worsening economy, imploding stock prices, frozen credit markets, etc.

But I’m left wondering if all the current — and potential future — pain is already baked into the cake now. For someone looking for big yields, junk may very well turn out to be hidden treasure!

Again, the risk is high … but at a time when long-term Treasuries are handing out very little and looking even riskier, putting a little faith in corporate bonds might be the better choice for the bond portion of your portfolio.

Best wishes,

Nilus

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in