Why Bonds Are a Good Buy Today

March 27, 2009

Currently, many corporate bonds, particularly those in the financial field, are offering double-digit yields, while the Dow Jones Corporate Bond Index is just above 7 percent. 

But yield is hardly the whole story. The prices of corporate bonds have been beaten down as a result of the credit crunch and concerns about the health of the economy. The differences in yields between Treasuries and most other bonds are higher than they have been since the 1930s.

Bonds of high-quality firms normally yield one to two percentage points more than US Treasuries to compensate investors for added risk. Now, spreads between corporate bonds and Treasuries have hit about 4 percentage points, a trend stimulated both by a rush to the safety of government issues and a drop in demand for corporates on fear that the companies issuing them may not make good on their debt.

Since late last year, the prices of corporate bonds have fallen sharply because investors have been worried about the ability of firms to pay back their debt. But money managers believe that the risk in these bonds is far less than that in stocks, so on a risk-adjusted basis, these are better buys.

 "Bonds have one-third the volatility of stocks," says Mark Kiesel, head of investment-grade bonds at Pimco. "I can earn 7% to 10% on corporate bonds and take one-third the risk of stocks." Bargains also abound among tax-free municipal bonds.

At the same time, the surge in stocks in the past few weeks, while pronounced, still leaves the major indexes well off their highs for 2009, and the past two days have seen the market wobble.

The Investment Manager Outlook, a quarterly survey of investment pros conducted by Tacoma, Wash.-based money manager Russell Investments, found 67 percent of managers bullish on corporate bonds and 61 percent bullish on high-yield bonds in general. Both categories were more popular than stocks.

According to the Russell Survey, within stocks, fewer managers are now optimistic about U.S. stocks than just a few months ago. Only 57% of the managers believe that the stock market is undervalued, compared with 72% in December.

**This is for information purposes only. This is not a recommendation.