While long term bonds become a more expensive and less attractive investment every day, short term corporate bonds are providing a compelling risk/reward. The iShares Barclays 1-3 Year Credit Bond ETF (CSJ) (see chart below) invests in high grade corporate bonds. It is currently paying a monthly distribution of $0.2073, which compounds up to a 2.4% yield. While you’re not going to retire on this, as an alternative to short dated treasuries or other very short dated paper it looks pretty attractive. Corporate profits are strong so the odds of an investment grade company defaulting over this time period seems quite low. And the Fed is likely to keep short term rates anchored close to 0% indefinitely.
JPMorgan recently revised their estimated date of a tightening in the Fed Funds rate to 2Q12, almost two years from now. By contrast, longer dated bonds appear increasingly risky. With a duration of around 8, ten year treasuries would only need to rise in yield by 33 bps for the drop in price to wipe out a year’s income. Short term corporate bonds offer almost the same yield with less risk.
Disclosure: Long CSJ