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Bad economy gives corporate bonds big returns, but big risks

CHICAGO — Returns of 8 percent or better are hard to find in this grim economy. But they are there for the taking — in corporate bonds. Investors who have lost faith in stocks' near-term prospects and are fed up with government bonds' minuscule yields have been scooping up the bonds of cash-needy companies at a brisk pace in recent weeks. Results so far have rewarded such moves, especially among those with an appetite for extra risk in their bonds. While the Standard and Poor's 500 stock index fell 8.4 percent last month, the Barclays' index of high-yield or junk bonds rose 6 percent.

Let the bond buyer beware, however. Even if you stick to higher-quality bonds, an investment with a staid and reliable image can be as stomach-churning as the stock market if you don't choose companies well.

"For investors that like to take a little bit more risk, the corporate bond market represents a great opportunity," said Doug Kreps, managing director at Fort Pitt Capital Group, a Pittsburgh money management company.

Investors can be blinded, he said, to the potential downside: losing most or all of your money if the company defaults. Anyone who bought Bear Stearns or Lehman Brothers bonds can attest to that.

Experts advise investing in corporate bond funds rather than individual bonds so your money isn't riding on the fate of a small number of companies.

Companies issue bonds to drum up financing for large projects and procure cash, which is in particularly tight supply during the recession. They pay higher interest rates than government bonds because of the added risk investors must take on in backing a single company.

Investors typically receive semiannual interest payments and then the full face value of the bond when it matures, anywhere from one to 30 years.

Yields have been much higher than usual since late fall because they've been needed to persuade skittish investors to buy the issues.

It has worked. U.S. corporations sold more debt in December ($108 billion) and January ($90 billion) than in the previous six months combined, according to data tracker Dealogic.

Art Shenkin, an investing buff from Greenwood Village, Colo., has dabbled in corporate bonds over the years and knows an opportunity when he sees one. The 76-year-old retired accountant recently bought $70,000 worth of Goldman Sachs bonds with an almost unheard-of yield of 7.65 percent.

But Shenkin is wary of delving any further into the corporate bond market. As the holder of $130,000 in Ford Motor Co. bonds, he was sweating out that company's alarming nosedive until the bonds matured last month.

"Everything is so risky these days," he said. "You never know at any given moment which company is going under."

Risk or no, savvy investors can't help but be tempted by the recent corporate offerings.

The big attraction has been the eyebrow-raising spread, or the difference between what investors can get on corporate bonds vs. the yield on risk-free Treasuries.

While acknowledging the strong upside, fixed-income analyst Salvatore Reres of Thomson Reuters calls the current situation "a market for the brave."

"With companies like Lehman Brothers failing and all-American companies like Ford looking like they might fail," he said, "do you really want to be betting that a company's going to be here in 10, 20, 30 years from now?"

Top bond funds

Here

BondAssets1-year return5-year return Reannualized returnAverage credit quality
PIMCO Total Return D (PTTDX)$132.3

billion
1.94 percent4.86 percentAAA
American Century Diversified Bond Inv (ADFIX)$1.2 billion4.01 percent4.53 percentAAA
ING PIMCO Core Bond S2 (IPCTX)$3.1 billion-0.3 percent4.53 percentAAA
TCW Total Return Bond I (TGLMX)$2.7 billion-0.04 percent4.40 percentAAA
Managers Fremont Bond (MBDFX)$1.1 billion-2.28 percent4.16 percentAAA
are some top-rated corporate bond funds as screened by Morningstar. These

taxable funds have the highest average credit rating (AAA) and no loads, and require a minimum initial investment of $2,500 or less. Note: Bond funds offer added safety over individual company bonds, but sacrifice some profit potential.

BondAssets1-year return5-year return Reannualized returnAverage credit quality
PIMCO Total Return D (PTTDX)$132.3

billion
1.94 percent4.86 percentAAA
American Century Diversified Bond Inv (ADFIX)$1.2 billion4.01 percent4.53 percentAAA
ING PIMCO Core Bond S2 (IPCTX)$3.1 billion-0.3 percent4.53 percentAAA
TCW Total Return Bond I (TGLMX)$2.7 billion-0.04 percent4.40 percentAAA
Managers Fremont Bond (MBDFX)$1.1 billion-2.28 percent4.16 percentAAA
BondAssets1-year return5-year return Reannualized returnAverage credit quality
PIMCO Total Return D (PTTDX)$132.3

billion
1.94 percent4.86 percentAAA
American Century Diversified Bond Inv (ADFIX)$1.2 billion4.01 percent4.53 percentAAA
ING PIMCO Core Bond S2 (IPCTX)$3.1 billion-0.3 percent4.53 percentAAA
TCW Total Return Bond I (TGLMX)$2.7 billion-0.04 percent4.40 percentAAA
Managers Fremont Bond (MBDFX)$1.1 billion-2.28 percent4.16 percentAAA

Bad economy gives corporate bonds big returns, but big risks 02/07/09 [Last modified: Saturday, February 7, 2009 3:31am]
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