Getting very intrigued by corporate bonds
I haven't played around in the corporate bond world in a long time. Years ago dabbled around in low rated corporates, just above junk status...but I finally decided that the rates that they were paying just weren't juicy enough to justify buying them. Flash forward to today and interest rates on corporate paper has absolutely exploded. I actually found myself strolling around the Schwab bond search tools yesterday for the first time in a loooong time.
I realize that corporate defaults had hit a historic low and they most certainly will rise, but many of the bonds out there are currently priced below their likely recovery rates, pay huge interest, and in the event that they actually make it to maturity offer a double in only a couple of years. In many instances buyers of certain corporate paper are now being more than adequately rewarded for taking some risk. I have been seriously thinking about making several small bond bets on companies that Mr. Market is freaking out about that I believe have a good chance at surviving. By spreading around the risk, even if one or two do go belly up, the money that I recover from them plus the doubles on the rest of the companies should provide for some hefty returns.
Interestingly Bloomberg published an article on this very subject this morning:
`Armageddon' Loan, Bond Prices Keep Debt Investors on Sidelines
According to this article, investors are being given a "once in a lifetime opportunity" to buy corporate paper as the prices of loans rated below investment grade have slid to a record low 66.1 cents on the dollar. At this price, investors are "virtually guaranteeing investors get their money back, based on historical recovery rates, according to data compiled by Standard & Poor's."
People are selling in fear and hedge funds are bring forced to liquidate their bond positions. Corporate bond prices have fallen to an average of $0.799 on the dollar on average from $0.94 as recently as the end of August. About 90% of the corporate paper market trades with junk bond yields.
Bonds are priced as though corporations will go bankrupt at the highest rate since the Great Depression. I have already stated that while I believe we will enter a long recession that the government will print enough money to prevent us from experiencing anything even close to another depression.
Now since I think that interest rates are headed higher, I won't be purchasing any bonds with long maturities, but I have been sniffing around those with huge yields that mature in a year or two.
Returns on "Bonds" are getting juiced up