[Hue]

Has anyone been taking a look into high yield coporate bonds in this environment?

I wouldn't invest my entire nest egg into one bond, but the Ishares ETF HYG or the SPDR equivalent JNK, have extremely high yields (~13%) and are quite diversified.

Of course there will be defaults since we are talking junk bonds, but in this environment, where many people have been scared out of the equity market AND the corporate bond market, this might be the time to stock up on some beefy yield.

With everyone piling into the security of government bonds and blue chip bonds, the yields have been driven further and further down to the point where they'll be hard pressed to beat inflation down the road.

Further to that, we now have the ratings agencies (Moody's, S & P), who were burned badly with their mortgage ratings, now jumping in the opposite direction and are turning ultra conservative. I think this could indicate that some companies are possibly being unfairly downgraded.

Obviously junk bonds aren't for everybody, and obviously there is risk as with any investment. But in my opinion, investors in these funds are being fairly paid for the risk that they inherit.

Anyways, I'm just wondering if anyone else has had the same thoughts?

 

[Brad911]

I wouldn't say that investors are piling into blue chip bonds - many are still yielding 7%+ and that will easily beat inflation.

James Hymas, who I consider to be a very well educated individual on fixed income investing, commented in a recent post I wrote on Corporate Bonds.

His suggestions for newbies to corporate fixed income made a lot of sense to me and something I took to heart very quickly in my own research and portfolios.

 

[SimpleCanuck]

I've also been thinking about bonds lately. My in-laws have been wondering about theirs, too.

First of all, bonds make up only a small portion of my portfolio, 10-15%. Second, I don't expect much from my bonds--I want them to beat GICs. Since everyone is holding their breath right now, I don't think it's much of a buying market for bonds. But I like the way midcaps are poised to take advantage of thawed liquidity, assuming it is is actually forthcoming. I wonder if there aren't too many falling giants in the largecaps to make buying wise. I'm inclined to let the thawing begin and the pruning continue until the end of the year and reassess my bond holdings then.

 

[Robillard]

I wouldn't lose sight of the fact that some of those high yields are justified in this economic environment. Those yields are by no means guaranteed. In addition to the risk of default, there is also the lesser risk of credit rating downgrade. Those yields are effectively pricing in the risk of a further spike in yield.

Nevertheless, if you can get away from the credit rating issue, I think this is an attractive environment to be investing in high quality corporate debt. When the current economic mess is over, (and an end is practically an inevitability, though no one knows when it will come) the credit spreads between corporate bonds and government bonds will diminish and corporate bond prices will rise.

 

[infomercialscams]

Hello..

A Corporate Bond is a bond issued by a corporation. It is a bond that a corporation issues to raise money in order to expand its business. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date..
Sometimes, the term "corporate bonds" is used to include all bonds except those issued by governments in their own currencies. Strictly speaking, however, it only applies to those issued by corporations. The bonds of local authorities and supranational organizations do not fit in either category......]
Thanxxx

 

[Peggy]

Corporate Bond Rates

Can anyone help me? I am 5-10 years from retirement and have most of my RSP in bank stocks. I recently sold a European (blue chip companies) fund as I felt I would be retired by the the time it rebounded! to par with my purchase price let alone go above. I am very unhappy with my portfolio manager. My philosophy is when times get tough- work harder for your clients- and they not.
I have asked them to find me a fixed income investment for the proceeds from the sale of the mutual fund. I now don't trust their ability to find me a 'good' corporate bond/municipal bond/GIC??/or some fixed income investment with the best return out there. I feel I need to help them do their job as I am loosing confidence in their doing the job well. Is there a web site that compares corporate bonds? How do I find out what bonds are out there? I am not interested in the risk associated with junk bonds.

 

[stardancer]

I am a small investor on about a level 1 1/2 for knowledge. Although I rely on my financial planner to guide me according to my risk level, stage of life, etc, he expects me to do my homework. We meet 2-3 times a year as his office is about 3 hours away, and each time he gives me a task to do or decide on. So it's not just a matter of sitting back and letting him do all the work; it's also about my learning and becoming more precise. But then, maybe I lucked out when choosing a planner.

 

[Robillard]

Peggy,
Unfortunately, it is difficult to come across public information on investment grade bonds, or any grade of bonds for that matter. Unlike publicly-traded stock, which trade on exchanges and for which public information is readily available in newspapers and on the internet, almost all bonds trade in the over-the-counter market between dealers and information is not publicly available. There is no one central organization that tracks bond prices/yields. I think most discount brokers provide some means of viewing some of the more widely traded bonds on the market, but this is the tip of the iceberg.

The problem Peggy, is that there are thousands of bond issues on the market, and you are not very clear on what you mean by a "good bond". What are investment needs at this point? Are you more intent upon preserving capital and generating a steady return (i.e. safety)? Or are you more intent upon maximising your return subject to certain quality constraints (i.e. growth)? Just because a bond has a low yield doesn't necessarily make it a bad bond, so long as it suits your needs. Likewise, a high yielding bond is not necessarily a good bond since its issuer is much more likely to default or be downgraded.

Instead of asking your advisor to find a specific issue, or set of issues in which to invest your money, it might be best to figure out the characteristics of the fixed income investments you want first, such as minimum credit rating threshold and maturity requirements. Then you should consider what sort of strategy you want to follow. One strategy you could follow would be to buy a series of bonds with laddered maturities (each bond issue has a later maturity date) starting from the date you intend to retire. That way each year you have another bond maturing, and you continue to generate coupon payment income. This also works well with the RRIF redemption requirements.

 

[gemma119]

Great answer Robillard, what do you think of the Claymore CBO etf of laddered corporate bonds and do you think 5% is achievable for the future?

 

[Robillard]

gemma119,
I'm not terribly familiar with CBO.TO or any of the Canadian ETFs for that matter. I did have a peek at the fund's profile on Claymore's website though. Given the yields at which 5-7 year corporate bonds are currently trading, a continued return of 5% is certainly possible, though it depends upon which securities become part of the relevant index when the "current ladder rung" securities mature. Right now, bank bonds are trading at a bit of a premium because Canadian banks are considered to be pretty safe issuers or short term debt. Some are trading at yields in the 3.5%-4.5% range. So if further bank issues become part of the relevant index (which is fairly likely since financials make up 46% of the index in this case), and the fund acquires these bonds at a less than 5% yield, then the 5% return of the ETF may not be sustainable in future because the average yield the fund earns from its bond holdings will then be below the 5% threshold five years down the road.

The future yield of the fund will also depend upon changes in interest rates. If credit conditions continue to improve, and the Bank of Canada manages to keep interest rates low for the next year, then bond yields on issues maturing 5 years in the future could decline further, and lower the future return of the ETF.

So, I'm sorry for the ambiguous answer. There are just a lot of uncertainties out there. In summary, whatever the ETF is yielding right now, should persist into the near future, but the longer term return of the fund depends upon the yields at which the fund acquires the issues that become part of the index.