Corporate Bonds in Favor

While the stock-market rally is hogging the headlines, corporate bonds are staging their own remarkable surge.

The average junk-rated company is now no longer "distressed," meaning yields have fallen to less than 10 percentage points above the benchmark Treasury bond. Yields on higher-quality companies also are dramatically lower as investors feel less leery about corporate debt. As yields fall, bond prices rise.(…)

Some investors are choosing to hedge their bets, preferring corporate bonds over stocks. They say even risky bonds are a smart cushion against uncertainty about the stock-market rally’s staying power.

"If you believe in a V-shaped recovery, then you buy stocks. If you believe we’re going to bump along, then you have to go with credit," says Kent Wosepka, chief investment officer of active fixed income at the Standish Mellon Asset Management Co. unit of Bank of New York Mellon Corp. "If I told you that you could get 10%-plus in equities, you would jump at it."

[corporate bonds]

Even if the default rate on high-yield corporate bonds hits the 14% rate by the end of 2009 projected by analysts at Citigroup, returns from the junk that survives would more than offset the default-related losses, says Mr. Wosepka, who oversees $186 billion in assets.

In addition, bondholders typically get some money back following a default.

Stock investors usually are wiped out when a company files for bankruptcy protection.

Meanwhile, the spread between investment-grade bond yields and Treasurys has been halved to about three percentage points, according to Merrill Lynch. High-yield spreads are down sharply from their all-time high of 21.8 percentage points in December. Total yields on junk bonds average about 12.3%, above their 10-year average of 10.7%, Merrill calculates.

Returns on high-yield bonds could reach the midteens over the next year, as long as the recession doesn’t deepen, the recovery is sluggish and Treasury bond yields don’t change much, says Martin Fridson, chief executive of Fridson Investment Advisors.

Other investors still think stocks will outperform bonds as layoffs and other cost-cutting moves position companies for an earnings rebound.(…)

Full WSJ article


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