lorddarley

What to Buy: Debt

I agree only slightly with this article. No one should buy a corporate bond without reading the indenture. You have to know its call, subordination and default provisions. Take call provisions, for example. Unless the bond is deeply in the money, you (the investor) take all the risk. If rates decrease, you lose the bond to a call. If rates go up, you are a reluctant owner until maturity.

The great advantage of bonds (not available to the average person) is that if you buy enough of them, you do get a significant say in the terms of any bankruptcy. If that's your hope, it's better to be with an activist manager than to try to do this on your own with a few thousand (or million) to invest.

It does not take a crystal ball to know that in the next few years that rates will go up significantly. The US government is borrowing huge amounts on a short term basis, and even buying back its long bonds to borrow more on the short end. Although it criticizes consumers who opted into flukey mortgages, the US is the ultimate ARMS borrower, refinancing long debt with short debt for the quick satisfaction of temporarily suppressing long rates.

Is that the environment in which to commit long term money to any bond? No way, except for a quick an nimble speculation.

Long-termers should stay in cash, and start buying the stocks of great companies which are on sale. If you want to play with bonds, wait two years and you will get munis at 8-12%, because state and local governments have no way of catching up with their debts and unfinded pension liabilities.

LordD