Investing in corporate bonds for income


The U.S. stock market has had a great run this year with the Standard & Poor’s 500 Index (SPX) and Dow Jones Industrial Average (DJIA) up about 27% and 24%, respectively. Less noticed has been the white-hot corporate bond market.

A steady, if unspectacular, economic recovery and near-zero interest rates have prompted companies to raise capital in the bond market. Sales of investment grade bonds are well above last year’s, according to Dealogic.

Chart source: Dealogic

 Sales of high yield bonds with low credit ratings (otherwise known as junk bonds) are tracking the elevated levels seen in 2012.

Chart source: S&P Capital IQ/LCD

Bond investors are apparently unconcerned about interest rates spiking (generally a negative for bond prices) anytime soon. The market consensus is the Fed may start tapering back its $85 billion a month in bond purchases in December or early in 2014, but that it will be some time before the central bank actually starts raising rates.

Some 34% of economists recently surveyed by Bloomberg believe the Fed may begin reducing bond purchases at this week’s meeting, while 40% of those canvassed predicted a tapering in March.

Meanwhile, the spread between U.S. corporate bonds and Treasury bonds is at the lowest point since 2009.

Chart source:

Chief financial officers, sensing a great opportunity, have raised billion this year at attractive rates. Verizon (VZ) raised $49 billion in a bond offering in September. Apple (AAPL) raised $17 billion earlier this year, while Microsoft (MSFT) and Johnson & Johnson (JNJ) have sold billions worth of corporate paper as well.

Looking for a way to invest in corporate bonds? In October, John Gerard Lewis, who manages the Covestor Stable High Yield portfolio, sold all of his holdings of mortgage real estate investment trusts (mREITs). He currently allocates about 10% of the portfolio into the Guggenheim BulletShares 2014 High Yield Corporate Bond ETF (BSJE), which yielded 2.91% on December 16.

DISCLAIMER: The investments discussed are held in client accounts as of November 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.