Corporate Bonds Not Worth the Risk

Includes: CLY-OLD, JNK, LQD
by: Doug Carey
Just two years removed from a near complete meltdown of our financial system there are five year corporate bonds barely yielding above 2%. US Bancorp and Bank of New York five year bonds are trading at a yield of 2.3% and 2.31%, respectively. So let me get this straight. I am being paid only 0.3% above treasuries with the risk that inflation will eat away all of my return or worse and I am assuming the issuers won’t default in that time frame. Looked at another way, my cumulative yield over treasuries for five years is about 1.5%. This means that the market is assigning a cumulative probability of default over those five years of about 1.48% relative to treasuries. It’s an even worse deal when you take into account income taxes.
The risk/reward ratio of corporate bonds is incredibly low and complacency is shockingly high given what has happened over the past three years. With the VIX hovering around 17 it becomes obvious just how complacent the market has gotten. In the face of this complacency I would much rather be in short-term treasuries or bank CDs and wait for yields to be high enough to make investing in corporate bonds worth my while.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.