Corporate Bonds: Steer Clear Right Now but Buy on Weakness

By Eric Roseman

In late 2008 I made the compelling case for high quality investment-grade bonds. In 2009, high-grade debt has gained 16.4%, according to the Dow Jones Corporate Bond Index compared to 18.6% for the S&P 500 Index, including dividends.

Cash is now trash. At least that’s what the market is telling investors since March. The appeal of near zero percent money is forcing Mom and Pop out of T-bills and into bond funds, and to a lesser extent, stock funds. Fixed-income funds continue to attract the bulk of total mutual fund sales this year as investors lunge for safety and income. Recently this month, Bill Gross of PIMCO – the world’s largest bond fund complex – raised his allocation to Treasury bonds.

But is cash really trash?

That depends on your view of the global economy and the prospects for corporate earnings. Ultra loose monetary policy might be a strong argument for throwing liquidity out in favor of risk. Nobody wants to earn nothing on their cash balances. Yet with deflation at 1.5% the real adjusted return on cash is closer to 1.6% right now – not a bad alternative for those investors worried about a double-dip recession in 2010 and another steep stock market decline.

Corporate bonds, however, should be avoided at this time until a correction or back-up in yields occurs. The entire spectrum of non-Treasury securities has rallied sharply since March with barely any profit-taking; at some point, corporate bonds will take a brief hit and that’s when I’ll resume my purchases.

Comments

[coldcall:]

Problem is selective investment grade corp bonds still offers yields far more attractive than gov bonds, and while prices may fluctuate i dont see a crash in corp bond prices unless the equity rally took off afresh.

People talk about all the cash on the sidelines but i think a lot of it is sitting in high grade corp bonds, its been and remains amongst the safest calculated risk investment with a reasonbale ROI, considering present circumstances.

Sep 27 08:49 AM

[Walt/frustr...:]

I dont understand how a junk bonds can be so attractive, like JNK for instance. It is headed for the moon, or can one lose one's shirt ?. I've been watching it for a while and it boggles my mind. Can anyone explain ?.

Sep 29 10:21 PM