Corporate Bonds Approach Record-Low Yields, $2.8 Billion Prices

Published February 07, 2012Dow Jones Newswires

Article from Fox Business

NEW YORK –  High-grade corporate bond issuance was a little subdued Tuesday as just three sizeable issuers took advantage of cheap financing in the U.S. credit markets, while in secondary trading, yields on the Barclays Capital investment-grade corporate bond index were close to hitting a record low.

Demand for corporate bonds has been on fire in recent weeks as investors have been encouraged by strong domestic data, fewer bad news items from Europe and a Federal Reserve policy of keeping benchmark Treasury rates at basement levels.

Chief among borrowers hoping to take advantage of continued demand Tuesday was Noble Holding International Ltd., a worldwide contract drilling services company. It sold a $1.2 billion, three-tranche deal featuring $300 million of five-year bonds priced at a spread over Treasurys of 170 basis points, $400 million of 10-year bonds at a 200-basis-point spread, and $500 million of 30-year bonds with a 215-basis-point spread.

Abu Dhabi-based Dolphin Energy priced $1 billion of 10-year bonds with a yield of 5.50%, or 352 basis points over Treasurys. New York Life Global Funding, a subsidiary of New York Life Insurance Co., sold $600 million of five-year bonds priced at 1.686%, or 88 basis points above the Treasury rate.

The $2.8 billion from the three sales bring February issuance past the $30 billion mark, according to data provider Dealogic. In February 2011, $60.5 billion was priced all month long.

The potential for issuance to continue surging is strong as companies seek to refinance debt at extremely low cost.

The Barclays index only needs a slight nudge to hit a record-low yield. The index finished Monday at 3.37% -- a six-month low and just one basis point away from the all-time low set on Aug. 4, 2011. The index dates back to 1973.

One corporate bond trader said he hopes the index doesn't improve further because such low yields make it tough to entice buyers and move paper.

"That's one reason financial bonds continue to get lifted higher," he said. "It's the only place investors can go to grab yield."

In the absence of much U.S. data or news, the corporate bond market failed to move much Tuesday as headlines focused on Greece's need to implement austerity measures.

Though equities finished the day higher, Markit's CDX North America Investment-Grade Index, a measure of health for the corporate bond market, had deteriorated 0.1% as of 4:10 p.m. EST.

Individual bond trading was mixed, according to MarketAxess. The three most actively-traded bonds all worsened on the day, relative to Treasurys: Rabobank Nederland and Goldman Sachs Group (GS) 10-year bonds have widened seven basis points and two basis points, respectively, and Citigroup (C) five-year bonds due 2013 deteriorated 21 basis points.

Other actively traded bonds remain in rally mode: Bank of America Corp. (BAC) bonds due 2018 and 2022 have improved 11 basis points and two basis points, respectively, versus Treasurys. Thirty-year bonds from AT&T Inc.(T) tightened one basis point Tuesday, contributing to a 19-basis-point improvement over the week.

Article from Fox Business

3 investments for an era of low interest rates

By MARK JEWELL, AP Personal Finance Writer – 2 days ago 

Article from associated press

BOSTON (AP) — The Federal Reserve is making it increasingly hard for investors to earn anything, unless they're willing to accept plenty of risk. Ben Bernanke and his Fed are playing the role of adviser, encouraging Americans to get a little more adventurous by shifting savings out of low-yielding bonds and putting it to work in stocks.

The latest nudge came last week when the Fed said it doesn't expect to raise its benchmark rate until late 2014, at the earliest, because the economic recovery remains fragile. Rates have been near zero since December 2008. The latest extension means borrowers can expect another three years of low-cost loans and mortgages.

However, it's more bad news for savers and retirees depending on investment income, particularly when there's 3 percent inflation. Investors who value earning stable returns from Treasury bonds end up with little more than satisfaction that they're faring better than people keeping money in traditional savings accounts.

Consider that investors committing to lock up their money for a full decade were only being paid 1.8 percent for buying U.S. Treasurys this week. And yields have turned negative for investors trading 10-year Treasury Inflation-Protected Securities, or TIPS. On Wednesday, the yield was negative 0.28 percent. In essence, investors are willing to pay Uncle Sam to borrow their dollars for 10 years, because the opportunity to minimize losses is attractive compared with other options.

That may be patriotic if the government puts that borrowed cash to work to stimulate the economy. But it's no way to invest for your future.

"I don't know why people would pay the U.S. government to borrow their money, unless they're very, very pessimistic," says Robert Horrocks, chief investment officer and a portfolio manager with the Matthews Asia mutual funds.

Returns are even smaller for money-market funds, safe harbors where investors can park their cash until they're ready to put it back into the market. Money fund returns are closely tied to interest rates, and their returns have been barely above zero for three years. They're now averaging 0.02 percent — call it nothing. Don't expect improvement until the Fed pushes rates back up.

Here's a look at three relatively low-risk alternatives to generate some income in a low interest rate environment:

1. Dividend stocks

Dick Bristol, a 74-year-old retired Air Force major from Biloxi, Miss., counts on dividend-paying stocks for his retirement security. His investment portfolio is nearly 100 percent in stocks that make regular payouts, and he and his wife count on a few hundred dollars of dividends coming in each month.

Of course, dividend-paying stocks are not immune from market drops. And companies often cut dividends when the economy skids. But Bristol is convinced the potential returns are worth the risks. In August, he invested in Dynex Capital, a real estate investment trust. The stock has since risen 8 percent and has a high dividend yield of 12 percent. That's the amount of the dividend paid divided by the share price.

"Keep in mind that if you invest in something that's earning 1 to 2 percent, you're losing out to the 3 inflation we've got now," Bristol says. "Over the long run, nothing pays like dividend stocks."

2. High-yield bonds

These bonds are issued by companies with credit problems. High-yield investors expect higher returns because there's a greater risk of default than with companies possessing investment-grade ratings. And they've gotten them recently. Mutual funds specializing in high-yield bonds have produced an average annualized return of 19 percent over the last 3-years.

Anne Lester, lead manager of JPMorgan Income Builder (JNBAX), has recently been adding to the fund's holdings in high-yield bonds. They now make up 44 percent of a portfolio that also is invested in stocks. Corporate default rates remain low and high-yields are attractively priced compared with Treasurys and other bonds, Lester says.

The market is pricing high-yield bonds "as if we were in a recession, and we're clearly not in one," she says.

But high-yield bond investors face plenty of risks. Chief among them is the possibility that Europe's debt problems spin out of control. That could put the domestic economic recovery at risk, potentially leading to a spike in corporate defaults and losses for high-yield investors.

3. Municipal bonds

Investments in the bonds of state and local governments typically won't make you rich, because returns are generally low. But muni bond interest payments are exempt from federal taxes. That protection may extend to state taxes if the munis are issued by the state in which the investor lives. Investors can pocket attractive returns even after taxes, because the tax hit can be sizeable for those in higher income brackets.

Muni bond funds have been on a terrific run, with average returns of nearly 15 percent over the last 12 months. But don't expect double-digit returns this year. Muni bond prices have rebounded from a market scare in late 2010, when the poor financial condition of many states and cities left investors nervous about a surge of defaults. Although many governments remain troubled, there has been no default surge and municipal bankruptcies declined last year, says Jim Colby, a muni bond analyst with Van Eck Associates.

A setback for the economic recovery could put more pressure on government budgets. But Colby says munis remain an attractive alternative to Treasurys. He's expecting muni returns to average 4 to 5 percent over the next few years.

"Munis give an investor opportunity," he says, "at a time when so many are saying, 'Boy, I'm having a hard time stomaching these low Treasury yields.'"

Questions? E-mail investorinsight(at)ap.org

Article from associated press

European Bond Rally May Have Legs

FEBRUARY 2, 2012
Article from The Wall Street Journal

By RICHARD BARLEY

Europe's disaster movie isn't guaranteed a sad ending. So, investors shouldn't shy away from the region's investment-grade corporate bonds, even though they returned a bumper 2.9% in January. They still look unloved. A 4.2% yield on five-to-seven-year bonds is far above German bund yields and prices in a lot of risk.

Last year, European corporate debt priced in a credit crunch. But the European Central Bank's liquidity injections staved off a systemic crisis. Average European corporate-bond spreads tightened to 2.8 percentage points over government bonds, from 3.3 during January. That still is far above 2011's tightest of 1.6 points.

But the market continues pricing in disaster. The iTraxx Europe index of credit-default swaps on 125 European blue-chip companies, a proxy for corporate-bond spreads, costs €139,000 ($181,842) a year to insure €10 million of debt against default for five years. Assuming a 40% recovery rate, the index is pricing in a five-year default rate of 11.4%, says Tradeweb. Yet the peak default rate since 1970 was 2.4%, says Deutsche Bank. With corporate balance sheets strong and economic data improving, high defaults look unlikely.

Of course, if the euro-zone crisis spins out of control, history may prove of little value. But investors have to put cash to work. Those with absolute yield targets may be tempted to ditch government bonds for higher corporate yields. January's rally could have further to run.

Write to Richard Barley at richard.barley@dowjones.com

Article from The Wall Street Journal