The stock market may be reeling, the U.S. sovereign debt rating may have taken a hit from Standard & Poor’s and the Eurozone debt crisis may be worsening, but high-quality corporate bonds are looking like a great deal.
That’s the word from bond industry analysts, who say that fears of a global recession, which have driven nervous investors into the traditional haven of U.S. Treasuries, have led to widening spreads between Treasuries and high-quality corporate debt.
Last week, Morningstar Analyst Dave Sekara was saying that A, AA and AAA corporate debt was a great option for investors, offering high yields with very low risk.
As he noted, companies like Wal-Mart, rated AA, as well as Microsoft and Johnson & Johnson, both rated AAA, are showing huge amounts of cash on their balance sheets, making them very low-risk investments.
Microsoft, for example, has $53 billion in cash and short-term investments on its books and only $12 billion in debt.
“But,” Michael Collins, said senior investment officer at Prudential Fixed Income, “if you liked high-quality corporate debt a week ago, you’d love it today!”
Collins said that five-year Treasuries by Wednesday had fallen to 90 basis points, while a sale of 10-year Treasuries was snapped up at a yield of 2.11%.
Meanwhile, he said, the spread for corporate bonds has widened by 30-70 basis points.
“It’s a classic flight to quality,” said Collins. “As people get increasingly worried about a recession, you get this flight to Treasuries, and so corporate yields rise.”
In fact, he said, the risk of corporate bonds -- particularly of industrial bonds -- is very low. “Most of these companies haven’t been borrowing, and in fact have been paying down their debt, they have lots of cash, and their earnings are strong," Collins said. “Even if there were a new economic downturn for a couple of quarters, the debt of these companies would not be at risk.”
Indeed, Morningstar’s Sekara noted that thanks to SEC reporting requirements, corporate finances are a lot more transparent than are the government’s books.
“At this moment, investors have a great opportunity with corporate bonds,” Collins said. “All you need now is to see a little growth and corporate bonds will outperform dramatically.”
Dave Lindorff writes for Financial Planning.
