Corporate Bonds: Long-Term Plays vs. Short-Term Signs
Keep them front and center, or just make sure the fundamental story remains the same?
Buzz Op-Ed: Corporate Bonds
Minyan James Kostohryz, 1:20 p.m.
If I were asked, one major suggestion I would make to investors right now it would be this: Put the corporate bond market indices up on your screens.
Although they are imperfect gauges, you can take a look at LQD, HYG and JNK.
Moves in the bond market tend to be very long and tendentious and I would suggest that the corporate bond market is in the early phase of a very big, game changing move that is going to have a tremendous impact on the equity market – particularly stocks leveraged to the availability of credit.
Take a look at the action in those corporate bond indicators for the past couple of days. The corporate bonds are rallying intraday even when the equity market is tanking. This sort of divergence may be an early sign that major buyers are stepping in.
The huge liquidity injection by Fed and Treasury programs is going to be pushing money out onto the risk spectrum. As fears of Great Depression II subside, and people realize that banks and the other big holders of corporate paper aren't going into disorderly liquidation, many institutional investors will begin to gravitate out of T-bills and Treasuries that are yielding below the cost of capital and will move into the very juicy yields that corporate bonds are offering. Indeed, on a relative historical basis, corporate bonds are cheaper than equities right now so many asset allocation models will drive purchases in that direction.
Progress in the corporate bond market is probably the single best indicator of whether the equity market has another major leg up. Keep an eye on it.
Professor Bill Feingold, 3 p.m.
I applaud Minyan James Kostohryz's earlier buzz suggesting following certain ETFs to track the performance of corporate bonds.
But the beauty of owning bonds -- and yes, this is going to sound a bit scary, like the repeal of mark-to-market for long-term holders -- is that you don't have to watch tick by tick. In fact, you're better off with a certain casual indifference.
A bond needs to be checked once in a while to make sure the fundamental story isn't drastically changed. Frankly, many of them are in this world. But the idea of buying and holding and clipping coupons still has some real merit.
When you mix that with the upside of stocks, you get convertible bonds.
And sometimes those end up being terrific long-term investments.
There needs to be a collective effort to make it easier for individuals to buy corporate bonds, including convertibles.
I'm working on it.
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