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This may turn into a purely hypothetical and academic discussion, but my question is:
How can we expect corporate bonds to behave if interest rates rise in coming years?

Obviously we hear daily of the threat of a "bond bubble"...My fear is the risk to my Bond-ETFs, but does this not apply more to conventional government bonds and less to high yield debt?

Is it not true that if prime and overnight interest rates rise, corporations would issue fewer bonds, (hopefully having taken advantage of the low interest rates now), essentially locking in the value of the existing corporate debt? Would it not take a very long time for competing corporate bonds to be issued at insane rates of 10-15% (and only then would there be a danger to the value of current High yield funds?) It seems to me that there are few threats to the current bonds that pay 7-10%, and that a government bond paying 2% is more likely to see a drop in principal as governments will keep issuing new bonds at higher rates in future higher interest climates. Is my rationale incorrect?

I'm trying to get a sense of how best to allocate my fixed income funds next year and beyond, and would appreciate any further commentary from anyone with an opinion (before I over-allocate into high yield debt "again"). :)
 

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I have no answer for you, but i have a question of my own. Where do you find corporate bond data/info from?
 

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How can we expect corporate bonds to behave if interest rates rise in coming years?
Depends on many factors, such as duration of the bond, the credit worthiness of the issuer, the spread of corporates over the benchmarks, etc.
In general, rising interest rates will cause prices of currently circulating bonds to drop (% drop depends on the duration) and yields to rise.
New bonds being issued will offer higher yields.
However, as long as you have a bond ladder and/or are holding bonds to maturity, you should be ok.
Obviously we hear daily of the threat of a "bond bubble"...My fear is the risk to my Bond-ETFs, but does this not apply more to conventional government bonds and less to high yield debt?
No, it applies to corporate debt as well.
In fact, as we witnessed during late 2008, corporate bonds correct a lot more and a lot faster than govt.
Is it not true that if prime and overnight interest rates rise, corporations would issue fewer bonds, (hopefully having taken advantage of the low interest rates now), essentially locking in the value of the existing corporate debt?
Mm...not really.
Companies have to rotate their debt.
They have to re-pay maturing debt and re-issue debt at higher interest rates.
Their borrowing costs get higher and there will be profit margin pressures.
Depending on the yield curve at that point, they will have to decide whether to issue a series of short term debt or issue long term debt.
Now is a great time for companies to issue long term debt at low coupon rates.
Would it not take a very long time for competing corporate bonds to be issued at insane rates of 10-15% (and only then would there be a danger to the value of current High yield funds?) It seems to me that there are few threats to the current bonds that pay 7-10%, and that a government bond paying 2% is more likely to see a drop in principal as governments will keep issuing new bonds at higher rates in future higher interest climates. Is my rationale incorrect?
Depends on what you mean by "very long time".
Things change fast these days.
In June 2008, the TSX was at its highest ever (> 15,000 if I recall).
Less than 6 months later, there was > 40% drop.
Very long time these days can be very short.
If hyperinflation takes off, that could be a matter of months before yields shoot through the stratosphere.
I'm trying to get a sense of how best to allocate my fixed income funds next year and beyond, and would appreciate any further commentary from anyone with an opinion (before I over-allocate into high yield debt "again"). :)
I suggest lock in the high bond prices now and start selling.
Then re-allocate to a bond ladder strategy.
Look into laddered bond ETFs like the ones offered by Claymore.
You could split your bond allocation between the govt. ladder and the corporate ladder.
DCA into those positions as you sell your regular bond funds/ETFs.

I think laddering is the best strategy now.

I have no answer for you, but i have a question of my own. Where do you find corporate bond data/info from?
I use my brokerage (iTrade) research sources and CanadianFixedIncome.ca
My brokerage publishes monthly bond commentary as well as regular research articles.
It is hard to find bond quotes circulating in the primary bond market.
CanadianFixedIncome.ca is about the only site I have been able to find.
 

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There is an interesting column by Suzane Abboud on page 18 of the November 2010 issue of MoneySense Magazine about bond ETF's and Closed-End Funds titled 'A bracing cure for limp bond yields' that some of you may find informative.

Her suggestions are XHY and XCB on the TSX and EMB, EMD, FAX, and PFL on the NYSE.
 

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This may turn into a purely hypothetical and academic discussion, but my question is:
How can we expect corporate bonds to behave if interest rates rise in coming years?

Obviously we hear daily of the threat of a "bond bubble"...My fear is the risk to my Bond-ETFs, but does this not apply more to conventional government bonds and less to high yield debt?

Is it not true that if prime and overnight interest rates rise, corporations would issue fewer bonds, (hopefully having taken advantage of the low interest rates now), essentially locking in the value of the existing corporate debt? Would it not take a very long time for competing corporate bonds to be issued at insane rates of 10-15% (and only then would there be a danger to the value of current High yield funds?) It seems to me that there are few threats to the current bonds that pay 7-10%, and that a government bond paying 2% is more likely to see a drop in principal as governments will keep issuing new bonds at higher rates in future higher interest climates. Is my rationale incorrect?

I'm trying to get a sense of how best to allocate my fixed income funds next year and beyond, and would appreciate any further commentary from anyone with an opinion (before I over-allocate into high yield debt "again"). :)
If you have an ETF-Bond then it is hard to say how it will effect as it depends how the manager is going to rebalance. But the effect in any case would be negative as the price of the bond will go down to reflect the new high interest rate. Having said that, if you have a big portfolio and you have a diversified corporate bond holding with a medium to short maturity then you will be fine if you wait till they mature.
 
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