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Getting very intrigued by corporate bonds



October 17, 2008 – Comments (4)


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 


4 Comments – Post Your Own

#1) On October 17, 2008 at 8:40 AM, dwot (28.81) wrote:

I am sure if you do good research you can find some deals.  I'd say the biggest problem is ensuring those short maturities can be paid.  Way too many just roll debt over and the ability to refinance is where the potential crisis lies.

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#2) On October 17, 2008 at 8:55 AM, MarketBottom (28.50) wrote:

The only profit left in bonds is from the present 1.5 percent rate to 0 percent. As the depth of the worldwide crisis unfolds, fear will force money into hard assets and government securities. Equity markets worldwide are doomed as capital is reclaimed by world central banks. There is no longterm place to put money other than government bills. Ultimately the price for the dramatic loose money policy will be stagflation and rising interest rates to curb it. Only traders will survive.

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#3) On October 17, 2008 at 10:08 AM, XMFSinchiruna (26.55) wrote:

Don't do it, Deej!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Please... don't do it.

I don't care how attractive the yield, it won't keep up with the hyperinflation that's coming down the pipeline. Worse yet, countless companies that may look like bargains today will cease to exist as this depression advances to the scary stages.

Please... don't do it.  :)

Buy gold instead. It's also likely to double in a year or two, carries no risk of outright loss, and is guaranteed to prevebt losses from inflation.

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#4) On October 17, 2008 at 11:39 AM, TMFDeej (97.48) wrote:

Sinch, purchasing a basket of corporate paper with double digit yields and expirations scheduled for 2009 / 2010 is almost a slam dunk at this point.

I have never been a gold bug.  Gold has been and might very well continue to be a losing trade, at least in the short run as central banks are furced to liquidate their gold holdings to fund their operations.  Fear rules right now and gold still can't get out of its own way.  I have plenty of exposure to oil as an inflation play, but I am looking for yields. 

Not every company in the world will go bankrupt and if one chooses wisely the recovery rates on the ones that do default will be solid.


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