Now’s a Good Time to Buy Corporate Bonds, Pros Say

Investors who wish they had locked in high rates on U.S. Treasury securities two weeks ago still have a shot to grab decent yields--if they’re willing to take more risk.

Yields on corporate bonds, including high-quality bonds and lower-rated “junk” issues, haven’t fallen nearly as far as Treasury yields. What’s more, many companies are planning to issue new bonds in the next two months, which could keep supply, and yields, high.

In the junk-bond market, the yield on the KDP Investment Advisors index of 100 junk issues has eased to about 10.3% now from a peak of 10.5% on Aug. 11.

By contrast, the yield on 10-year Treasury notes slid from 6.15% to 5.72% in that period.

With corporate yields still at significant premiums to Treasury issues, many money managers say corporates are good buys.

Yield spreads between corporates and Treasuries are “extremely attractive” on a historical basis, said Michael Hansen, bond manager at First Investment Group in Omaha.

Moreover, “September is being set up to have a lot of [new issues], which will probably put pressure on spreads,” said Wayne Schmidt, a bond manager at Advantus Capital Management in St. Paul, Minn.

Among major companies, Wells Fargo on Wednesday sold $750 million of three-year notes at a yield of 6.61%, about 0.90-point above the yield on three-year Treasuries.

Crown Cork & Seal, the largest food and beverage can maker, sold $350 million of three-year notes at a yield of 7.21%. The notes are rated “BBB” by Standard & Poor’s, one letter grade above junk status.

Of course, buyers of corporate bonds also must be willing to accept the risk of default, however small that might be with most issuers. And should the economy fall into recession, the value of many corporate issues could sink even if the companies have no trouble making interest payments.

Among popular bond mutual funds, share prices have rallied in recent weeks as interest rates have come down. But yields on many of the funds still are above what was available in spring.

The net asset value of the Class A shares of the Pimco Total Return bond fund was $10.12 on Wednesday, up 2.2% from the recent low of $9.90 on Aug. 10. But the net asset value was $10.40 in mid-April.

As bond fund share prices fall, the interest yield for a new buyer rises, barring major portfolio changes.

Bloomberg News and Reuters were used in compiling this report.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Far to Go

The net asset value of the Class A shares of the Pimco Total Return bond fund have rebounded from their recent low as bond yields have eased. But the shares remain far below spring levels.

Weekly closes and latest

Wednesday: $10.12

Source: Bridge Information Systems