Bonds are on fire. I hopped into the bond market with both feet at just the right time.
Anyone who reads my posts from time to time probably knows that I jumped into the bond market with both feet during the second half of 2008 and early 2009. The credit markets were so fouled up that I hadn't seen opportunities like the ones that were out there in years. There were tons of bonds out there for major, blue chip that were in relatively decent financial shape and had tons of assets that sported reasonably short maturity dates (around 7 years or less) and double digit yields at a time when the rates on Treasuries, savings accounts, and CDs were as low as I have ever seen them.
Even though I deployed the majority of my available cash at the time I saw these great deals, I am still adding to my investment account on a regular basis so I frequently run searches for the available bonds to see what sort of yields are out there. I have noticed that the opportunities that I saw several months ago just aren't there today. I'm glad that I pulled the trigger when I did. Despite the fact that the rate on 10-year Treasuries has steadily risen from around 2.5% when the Fed announced that it was going to start buying them to its current 3.12%, the yields to maturity on corporate bonds have been steadily falling.
While this is bad news for investors who are looking to scoop up some of those juicy yields, it is very good news for the economy. It means that the credit markets are functioning much more normally. Companies that were unable to sell bonds at reasonable rates a couple of months ago have access to capital today. The most amazing part is that corporate bonds are rallying in the face of two of the largest bankruptcies in ages, Chrysler yesterday and possibly General Motors very soon.
This rally in bonds is not just for the "investment grade" (HA, whether a company's debt is investment grade or not is just based upon the opinion of the buffoons at the ratings agencies...but the ratings matter to Mr. Market so you have to pay attention to them) bonds, but for junk bonds as well. Junk bonds posted their best single month ever in April, climbing 9.4%. Prior to last month, the best monthly return for junk bonds was 8.68%, which happened back in February 1991. Despite a worsening economy and a number of corporate bankruptcies, junk bonds have risen 15% YTD.
I knew that the yields that I was seeing out there were out of whack. After years of underestimating the risk of default and providing investors with paltry yields, Mr. Market went full circle and was now overestimating the risk. Some of the bonds that I scooped up expire soon, while others don't mature for a number of years. A lot can happen with interest rates between now and then, but I am content to sit on the investments that I made and enjoy their near (some over, some a little under) double digit yields until then.
Of course, by investing in bonds when I did, I missed out on a huge rally in the stock market. Having said this, I think of myself as more of a longer term investor than a trader. Short-term trading has never been my area of expertise. This probably negatively impacts my CAPS score somewhat. Oh well. Given the fundamentals, I would be absolutely shocked if this rally in the major indices sticks. If I'm right, these phantom capital gains that many investors are sitting on in stocks will disappear, but my juicy yields and real interest payments will stick around for a while. If I'm wrong, it doesn't really matter because I am not short anything in real life and very few things here in CAPS.
Junk Bonds Rally
Corporate Credit Markets Headed for Best Month Since December
Bond Market Says ‘What Credit Crunch?' With Record Europe Sales