But not this time.
- Experts urge investors to seek safest issues
- More employers are freezing or closing pension plans
- Small caps coming with large caveats
- Lack of flexibility can hurt retirement plans
- The savings game
- The Leckey file
- Getting started
- Spending smart
- Can they do that
- Taking stock
- Railroad stocks pick up steam as hot demand helps pricing
- The week ahead
Bonds are the IOUs investors receive when they lend money--often to a business or governmental body, but sometimes in a round-about way for home mortgages.
And investors in bonds only receive their interest payments and original money back in full if the homeowners or others who needed the loan stay in good shape and keep paying their debts.
Investors in stocks and bonds are worried because homeowners and businesses have been taking on record levels of debt, even though the borrowers could be in over their heads and have trouble repaying the loans.
Worries are showing up clearly in bond mutual funds that invest in mortgages, corporate bonds and bonds issued throughout the world. Although defaults remain relatively low, experts are urging investors to seek out the safest issues.
Both high-yield bond funds, which invest in bonds issued by shaky companies, and emerging-market bond funds, which invest in developing areas of the world, have lost money of late. And analysts are warning that tumult involving risky bonds is likely to continue.
According to Lipper Inc., which tracks mutual fund performance, the average multisector income fund--which invests in a variety of bond types--declined 0.95 percent in July, and 1.6 percent over the previous three months. High-yield bond funds--or what are commonly referred to as junk bond funds--dropped 3.17 percent, according to Lipper, slightly more than the benchmark Standard & Poor's 500 stock index.
Investing in bonds overseas also has been treacherous. Emerging market debt funds lost 1.37 percent in July as investors worldwide worried that investors have become too cavalier during the last few years without properly weighing risks.
"While it is tempting to say the worst is behind us," value fluctuations "rarely stop on a dime," Morgan Stanley bond analyst Gregory Peters said in a recent report.
Standard & Poor's managing director Diane Vazza also has been warning investors that trouble may be ahead. She noted in a recent report that "a decade-long shift toward more aggressive corporate financial strategies and continued evolution of the leveraged finance market has combined to shift our median rating" for non-financial issuers to BB in 2007 from BBB- in 1997.
That means the ratings that Standard and Poor's uses to help investors understand the risks they take in bonds show that more bonds are riskier now: BB means bonds are weaker than BBB.
So people who buy BB rated bonds should know they are taking on additional risk that they won't get their original investment back. As Vazza surveyed the full U.S. corporate bond market, half were so risky they fell into the "speculative" category.
Worse, Vazza said, "the ratings mix continues to deteriorate as firms borrow to buy back shares and make acquisitions."
The key force in deterioration of the bond picture is the fact that lenders have poured significant numbers of weak bonds into the market during 2007.
In the first half of 2007, Standard & Poor's said, there was "record issuance in both the high-yield and leveraged loan markets, adding up to $452 billion in leveraged loans and close to $98 billion in high yield debt." If investors focus on the recent track record of companies to pay their debts to bondholders, they will see little reason for concern.
The default rate--or proportion of companies failing to pay bond holders--is low, at only 1.22 percent, Vazza said. And Standard & Poor's is predicting only a slight increase in defaults by the end of the year--a rate of just 1.4 percent.
But that obscures the future.