Thanks to a better-than-expected earnings season, investors are increasingly willing to accept some risk. The average “junk” rated company is not distressed anymore, meaning yields have fallen to less than 10% above the benchmark Treasury bond, say Annelena Lobb and Rob Copeland for The Wall Street Journal. Yields on higher-quality corporations are also sharply lower.
As yields fall, bond prices rise. What’s the case for corporate bonds now?
- Corporate bonds are appealing to investors who want to hedge their bets, as they can serve as a cushion against the unknown conditions for the future of the market.
- The defense? Even if the default rate on high-yield corporate bonds hits the projected 14% rate by the end of 2009, returns from the junk that survives would more than offset the default-related losses, says one market executive.
- The overall health of companies is improving, with 285 companies on a watchlist versus 290 in June and a record 300 in April, Matt Krantz for USA Today reports.
- Investor appetite is ripe for corporate bonds. U.S. companies raised $903 billion year-to-date, up from $548 billion at the same time last year.
- iShares iBoxx $ High Yield Corporate Bond (HYG): up 16.2% year-to-date
- iShares iBoxx $ Investment Grade Corp. Bond (LQD): up 4.6% year-to-date
- SPDR Barclays Capital High Yield Bond (JNK): up 22.7% year-to-date
For more stories about corporate bonds, visit our bond category.
For full disclosure, Tom Lydon’s clients own shares of LQD.
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.