Monday, Sep. 27, 2010

The Next Play in Corporate Bonds

With company balance sheets in spiffy shape, many yield-hungry investors have rushed into high-grade corporate bonds. They have paid off handsomely over the past year, delivering double-digit returns. But one result of that performance is that the yield on high-quality bonds is now below 3%. So are there any opportunities left? "For investors who can tolerate more risk, the lowest-quality end of the market, high-yield bonds, still offer value," says Jim Blair of the Moneta Group, an investment-advisory firm in St. Louis. Junk bonds pay decent yields today, about 8%, but nowhere near the mouthwatering 17% yields that prevailed during the height of the 2009 financial crisis. Even so, these bonds offer a nice play on the economic recovery, because as conditions improve, the perceived risk of junk bonds should decline. It's important to remember, though, that junk-bond issuers have shakier finances than investment-grade companies, so they should deserve only a sliver of your savings. Also, investors should use only mutual funds with veteran managers and strong track records.