The Case for Corporate Bonds…Still!

There is no need to illustrate the fact that everything took a dive when the market crashed last year. Due to liquidity problems, all asset classes reverted to a correlation of 1 with the S&P and corporate bonds were beaten as bad as any. Since the March low, corporate bonds have put in a massive, massive rally, on par with stocks, with less risk and a much higher payout than the sub 2.0% yield of the S&P. I have to say that I bought into corporate bonds exactly on the bottom (lucky), but even with the large gains I have on the books I am sticking with them. For these three major reasons:

1.) The Fed has given you a green light that rates will be low to at least mid 2010, let’s say June 2010. Bonds, as all assets, are forward looking so I would expect bonds to start pricing in some Fed movement 4-6 months prior to a raise in rates. This gives me another 2-4 months of impeccably stable bonds prices.
2.) With yields on bond funds between 8-12% and portfolio durations around 2-3 years you can stomach a 2-3% move higher in interest rates and have the payout break even for the year.
3.) When the Fed does move rates, I believe that corporate bonds may actually catch a bit more of a bid because investors will still want exposure to the amazing corporate balance sheets out there and rising revenues due to whatever recovery that does come about, but don’t want to risk their cash in the common.

AHITX, is my preferred bond portfolio of choice in my IRA, though PHK, JNK, LQD, and HYD would do just fine.