Thursday, November 13, 2008 0 comments ++[ CLICK TO COMMENT ]++

How attractive are corporate bonds?

One of the ideas that I'm looking at is corporate bonds. How attractive are present yields compared to the past?

Bond investors typically look at spreads (against US Treasuries) to gauge risk and attractiveness. You can check out a spread graph from this post at Calculated Risk. I'm going to break the rules and ignore spreads for the most part. In fact it might be downright dangerous to look at spreads. I'm of the opinion that the US Treasuries might be in a bubble (prices high, yields low) so any spread against them will look wide. The threat of inflation in the future is real.

If I'm going to invest in bonds, it is better to look at raw yields. The following is a chart of Aaa and Baa corporate bond yields(thanks to CalculatedRisk for the idea of looking through the FedRes FRED database):

The spreads are extremely wide but the raw yield is not that high compared to history. The BBB bonds are simply at the level they were in 2000 (the forward 10-year inflation picture right now is similar to what it was in 2000 also--but note that the market doesn't think this and is assuming massive deflation.) I would really like to track down the junk bond yields (because that's the area I'm thinking of investing in) but I suspect they will also show a similar pattern.

The bond situation is similar to the equity markets. That is, valuations look really attractive compared to the last 5 or 10 years but they are nothing exceptional compared to the long term. This means that one doesn't have to rush. People have been calling the bottom in the equity markets all year long, and they will be doing a similar thing with the bond markets.


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