Corporate Bonds May Be the Ticket
Right now, there is a bit of jitters with regard to corporate bonds. The specter of recent bankruptcies makes potential bond holders nervous that they won’t receive their money back. However, for those who are willing to take a chance, it might be time to get back into corporate bonds. Here is what Jeff Rose, CFP, says about corporate bonds at Good Financial Cents:
Perhaps most importantly, Corporate Bond valuations still look attractive and the investment thesis of investors being paid to wait is still very much valid. At a 2.5% yield advantage to Treasuries, investment corporate bond yield spreads are still 1.0% above the historical average. The 2.5% yield advantage is more impressive considering a 10-year Treasury yield under 4%. The yield advantage creates a high hurdle for government bonds to outperform
If you really have the stomach for it, Rose offers this information on high yield corporate bonds:
In the high yield market, the current yield spread of 9.1% remains well above the 5.5% average. Defaults continue to rise in the high yield market, with Moody’s forecasting defaults to peak at 12% in the fourth quarter, while S&P has forecast a peak default rate of 14% for the first quarter of 2010. While alarming on the surface, the estimates have come down over the past couple of months, and investors are looking past the peak toward a decline in default rates in 2010.
Clearly, there is some hope there to make a little bit better yield with corporate bonds by adding them to your portfolio. You can even look into emerging market bonds if you want a little international diversity in your bond portfolio. However, it is important to realize that you take on additional risks. These bonds have higher default rates, and you run the risk of losing your principal.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.
September 1st, 2009 at 12:54 pm
[…] used to be that corporate bonds were considered as safe as government Treasuries, but they had higher yields. Since the financial […]