Posts Tagged ‘Fixed Income’
Case for High-Yield Bonds (Advance)
What Are High-Yield Bonds?
High-yield bonds, otherwise known as “junk bonds”, are issued by organizations that do not qualify for “investment- grade” ratings by one of the leading credit rating agencies – Moody’s, Standard & Poor and Fitch Ratings.
Credit rating agencies evaluate issuers and assign ratings based on their opinions of the issuer’s ability to pay interest and principal as scheduled. From the table of credit rating definitions, bonds rated Baa or BBB and above are considered investment-grade securities. Bonds rated Ba or BB and below are high-yield bonds, and generally have default rates in a range of 2-8% per year.
These issuers are usually
1) Newer, emerging companies raising money for expansion
2) Older companies which have weak balance sheets and/or weak profits
3) Companies taking on large debts for acquisitions or leveraged buyouts
Stocks Likely to ‘Catch Up’ With Corporate Bonds
By David Wilson
Sept. 22 (Bloomberg) — Stocks offer greater value than bonds and are poised to “catch up” with a rally in corporate debt, according to Rod Smyth, chief investment strategist at Riverfront Investment Group LLC.
The difference in yield between corporates and 10-year Treasury notes has narrowed more quickly than the Standard & Poor’s 500 Index has risen since March. The yield comparison is based on a Moody’s Investors Service index of Baa-rated debt.
Since December, the yield gap has fallen to 2.9 percentage points from a peak of 6.2 points, according to data compiled by Bloomberg. This spread is near its lowest level since January 2008, when the S&P 500 was about 22 percent higher.
Spreads have narrowed so much that stocks have more room to rise than bonds, especially as earnings increase, it added.
Smyth isn’t the only strategist whose focus has shifted to shares. “Equities no longer look expensive relative to corporate bonds,” Andrew Garthwaite, a global strategist at Credit Suisse AG, wrote in a Sept. 18 report. He downgraded credit, or bonds, based on relative value.
Barry Knapp, a U.S. strategist at Barclays Capital, drew a similar conclusion last week. Stocks have more to gain from the economic recovery that’s now in progress, he wrote in a report dated Sept. 14.
Overlooked risk in Bonds.
The low interest rate environment that may have kept the financial system alive, but it really seriously hurt savers. I’m talking about real savers, not investors. People who place money in the banks every month trusting that at the end of their working life, they will have a comfortable retirement.
Last checked, you will get less than 1% on a 1 year fixed-deposit and that is for a minimum amount of around $10,000. With inflation at above 4% the last 2 years, many people who worked so hard to save money are desperate for yields now.
Is it any wonder that bonds and bond funds performed so well this year? Globally, investors sank over $40 billion into bond funds in August, an all-time high for a single month, and are on pace to break that record again in September. For this reason, Stocks Likely to Catch Up With Corporate Bonds
A few important points to note.
