Tuesday, March 31, 2009

Are Corporate Bonds a Screaming Buy?

I've had two "screaming buys" since I've started EconomPic. The first was on October 9th, with my post Muni Close-end Funds SCREAMING Buy? Since that date, the muni close-end fund I was tracking is up more than 40%.

The second screaming buy was on November 11th, titled Are Convertible Bonds a "Screaming Buy"? Since that date, convertible bonds are up 6%, significantly more than equities.

What this shows is two-fold:

  • My screaming buys are batting 1000
  • I'm lucky
Please keep in mind that there are no guarantees in this world (especially when that information is from a blog) BUT, with the price of corporate bonds implying default rates on investment grade rated bonds anywhere between 6-10% and those on high-yield corporate bonds between 30-40% (the wide range allows for a plug figure for recovery given default - the more money you get back given default, the less it will impact the pricing of a security), compared with the historical defaults below... corporate bonds are my next SCREAMING BUY.

EconomPic is far from alone on this call. In fact, Aleph Blog goes one step further:
At a time like this, I reissue my call to sell stocks and buy corporate bonds, even junk bonds. When the advantage of corporate bond yields are so large over the earnings yields of common stocks, there is no contest. When the yield advantage is more than 4%, bonds win. It is more like 6% now, so enjoy the relatively stable returns from corporate bonds.
A real threat I see in the short-run is that cheap investments CAN (and often DO) get cheaper. In addition, a lot of corporations are issuing new debt into an illiquid market, increasing the likelihood of short-term volatility. In the longer run a legitimate threat is the duration risk associated with corporate bonds (i.e. the likelihood of interest rates rising).

Overall, I am invested at a ratio of ~70% investment grade / ~30% high yield via an assortment of close-end funds trading at a discount. For the record I do not shy away from risk, so my recommendation would be to tone down the high yield exposure if you are more risk averse.

I hope I'm still be batting 1000 when I offer my next "screaming buy".

Source: Moodys