Are You Seriously Considering Buying Bonds?

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For many investors, the imperative to own a certain percentage of your portfolio in bonds trumps every other consideration. But the same investors who wouldn't hesitate to pull back on stock allocations when stocks were overpriced don't seem to recognize the same conditions in the bond market.

Bond investors have had to make huge sacrifices in recent years. With rock-bottom interest rates, Treasuries pay so little that they're hardly worth investing in. Banks aren't paying their CD customers any better. When you look at the absolute reward and risk involved, buying corporate bonds makes less sense than ever. In comparison, corporate offerings look attractive -- at least in a relative sense.

Giving up every bit of upside potential for a yield that barely covers inflation doesn't make sense for most investors. Bonds are useful tools, but only when they give you returns worth buying them for.

A Snapshot of Bond Land
As some people fear a return of the conditions that brought on the 2008 financial crisis, bond yields have tumbled. That's good news for those who already own bonds, as bond prices move up when yields fall.

But if you're looking put new money to work now, low rates aren't your friend. The iShares Investment Grade Corporate (LQD) ETF has a current SEC yield of just 4% despite having a quarter of its holdings rated BBB, just above junk status.

Of course, it's possible that bond prices could continue to climb from here. Even now that the Fed has stopped making additional bond purchases through QE2, a new economic slowdown could keep interest rates low for some time. Bond buyers could end up looking smart, especially if the stock market responds to economic woes by falling sharply.

News like yesterday's favorable jobs reports put a more positive spin on the future, but then this morning's jobs number brought all that euphoria back into question.

Still Not Convinced?

It's a fundamental truth of investing that any time you make an investment thinking that it will climb through the roof, the person selling that investment to you thinks it won't.

When the folks on the other side of the trade are financially savvy companies taking advantage of historically unprecedented favorable market conditions, investors should think twice before taking the opposing position.

Amid such uncertainty, there's one group that isn't taking any chances: Corporations have once again stepped up in issuing new bonds, locking in attractive low interest rates before the fallout from the end of the Federal Reserve's quantitative easing program -- along with a more solid economic recovery -- finally take away the low-rate punch bowl.

Some of the companies issuing new debt included the following:

  • Early in the holiday-shortened week, Devon Energy (DVN) and General Dynamics (GD) were among investment-grade corporate issuers that combined for $10 billion in new bonds Tuesday and Wednesday.
  • Yesterday, Bank of America (BAC) and Deere's (DE) John Deere Capital division successfully sold debt carrying rates of less than 4%, with maturities extending from 2016 to 2021.
  • In addition, Anheuser-Busch InBev (BUD) and Toronto-Dominion Bank (TD) each raised more than $1 billion through a combination of fixed-rate and floating-rate bonds. All of the bonds offered came in with spreads of less than 1 percentage point over Treasuries with the same maturity date.
Applying that fundamental axiom of investing, which side of this trade do you think made the better move: companies or bond investors? My money's on the corporations that issued that debt.

Don't Allocate Your Assets Blindly
Before you jump out and buy bonds that companies are issuing now, take a step back and consider: Who's getting the better end of the trade? Your better bet may well be to buy shares of the companies who are cashing in on low rates.

Motley Fool contributor Dan Caplinger likes investments that pay you back. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of General Dynamics and Devon Energy and Bank of America.

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