Wednesday, August 5, 2009

Corporate Bonds Rockin'

Corporate bonds (investment grade and high yield) are on a tear, up 12% and 40% respectively year to date. How do those figures compare to recent history? Very well.

Annual and cumulative returns of investment grade and high yield corporate bonds are shown below. On an annual basis, we can see that both are on or near record pace, but what I found amazing was how well they've tracked one another over that 20 year time frame cumulatively.

That got me thinking... what would happen if you were to allocate only to investment grade or high yield corporate bonds based upon which was cumulatively underperforming, at the end of each year, since 1989 (i.e. a mechanical method to swap from rich to cheap).

Lets call that the "EconomPic Method". Looking below, we see the EconomPic Method significantly outperformed, returning 600% vs 350% and 370% for investment grade and high yield over the past 20 years (that's more than 10% annualized growth). Compared to the total cumulative return of the S&P 500 during that time period (including dividends) we see outperformance of the EconomPic Method with significantly (understatement) less volatility.

Data mining? Of course! But interesting none-the-less.

Source: Barclays