Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

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

© 2005-2019 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

6 Critical Money Making Rules