Blogs & Comment

Cheap corporate bonds

Corporate bonds are looking like bargains as a result of record tumbles in prices this year. Spreads over government bonds have also widen to record levels. Of note:

  • Baa-rated corporate bonds in the U.S. yield close to 8% and recently reached a record spreadof 5.5% over 10-year Treasuries, far surpassing the previous highof 4% set in November of 1982 (series goes back to 1962)
  • junk bonds in the U.S. are having their worse year in history with a drop in price of about 25%; they now trade with an average yieldaround 19%, for a 1,500 basis-point premium over 10-year Treasury notes.

Of course, corporate-bond defaults are poised to ramp up as the recession deepens. Currently near a 3.5% rate for U.S. corporations, the defaults are likely on their way up to the historical norm of 8% to 10% for recessions if not beyond.
But one could argue that the stunning drops seen in corporate bond prices this year have pretty well discounted the specter of rising defaults. Or, if an investor is more of a conservative type, they could watch the bonds carefully and jump in buying on the dip that occurs when the first big defaults hit the headlines. By the way, previous downturns in 2002 and 1990 in corporate bonds were followed by gains of 28% and 39% the next year, noted Barons recentlyin an article.
Exchange-traded funds (ETFs) covering this sector include:
iShares iBoxx $ High Yield Corporate Bonds (HYG ) SPDR Lehman High Yield Bond(JNK ) iShares iBoxx $ Investment Grade Corporate Bonds(LQD ) PowerShares High Yield Corporate Bond Portfolio(PHB)