As equity indexes continue to get slaughtered, investors have regained some appetite for corporate bonds and the exchange traded funds (ETFs) that track this type of debt.
Corporate bond yields have dropped dramatically over the past three months and the spread between investment-grade corporate bonds and U.S. Treasury bonds of comparable maturity has started to diminish. In early December, this spread was close to 6% , and on Feb. 17, it narrowed to 4.7%, states David Bogoslaw of Business Week.
These bonds are so attractive that even Warren Buffett has taken a bite of the pie by gobbling up $250 million of Tiffany’s (TIF) Series-A 2009 and Series-B 2009 Senior Notes. So why are they so attractive? Here are a few reasons:
- The absence of the forced selling by hedge funds and mutual funds that made both stock and debt investors skittish
- Companies are returning to the credit market- Dupont (DD) was able to sell $900 million of debt with yields that were 3.13% over comparable Treasuries and Cisco Systems (CSCO) was able to sell $4 billion of notes for a small premium over Treasuries
- The Fed’s promise to purchase $100 billion of government agency debt and $500 billion of agency mortgage-backed securities and the FDIC’s Temporary Liquidity Guarantee Program are giving the bonds somewhat of an insurance policy
- Large size debt issues boosts liquidity in the secondary market and bolsters confidence in the corporate bond market
Although the corporate bond spreads have narrowed, they are still wide by historical standards. As soon as the credit markets and economy rebound, these spreads will most likely further tighten. Another thing to keep in mind, is that the availability of credit to the corporate market remains limited to those that are at the top of the credit ratings ladder.
If you want to gain exposure to this market, you might want to consider the iShares GS $ Investment Grade Corporate Bond Fund (LQD), it has a yield of 5.61%, is up 7.4% over the last three months.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.