Are You Seriously Considering Buying Bonds?

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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Michael McDonald

July 23 2011 at 12:17 AM Report abuse rate up rate down Reply

Why make the rich richer? I have gotten out of the stock and bond markets, let the money men gamble with their cash not mine. Trust me the 401k's out there are designed to take your hard earned cash not make you rich, just research the nations 401k's performances over the last 30 years and tell me anyone who works for a living is really benefiting.

July 11 2011 at 6:01 AM Report abuse rate up rate down Reply

I say SCREW ALL OF THEM and put your federal reserve notes in your MATTRESS. Notice I used the term FEDERAL RESERVE NOTES and not MONEY.

July 10 2011 at 11:51 PM Report abuse rate up rate down Reply

Revive the WPA!!!!!

July 10 2011 at 4:35 PM Report abuse -1 rate up rate down Reply

lets not forget that our elected officials receive the best health care at no cost to them, they receive a solid pension
when they retire, and in recent years they have voted themselves numerous raises to surpass the private sector
in salary. Most importantly, they are hypocrites who only pander to there financial supporters so they can
get re-elected and enjoy there false sense of celebrity. In reality, they are incompetent fools who could never survive in the private sector. Obama, Palin, MaCain,Boehaner, Charlie Rangel and my favorite of recent Andrew Weiner a pathetic loser with a ego as big as his beak. These are our leaders today america, wake up !!!!!

July 10 2011 at 12:15 PM Report abuse +2 rate up rate down Reply
1 reply to bl3160's comment

All leaders are PATHETIC. All the talk about JOBS. They're nothing but SALESMEN. They bail their BED BUDDIES (wall street, banks, oil, insurance just to name a few). Jobs, the BACKBONE is ALWAYS LAST.

July 10 2011 at 11:57 PM Report abuse rate up rate down Reply

Some think that treasuries price will increase over the next few years. This recession will probsbly last another 8 years at least---the housing must first recover. There are no real signs as yet of inflation, that is, at least the way the gov't calculates inflation, and a double dip recession is a possibilty. Fear will make investors run to safety.

July 10 2011 at 8:54 AM Report abuse rate up rate down Reply

ET, please, calm down. We're talking about investing in bonds. That's all. There's another place and time for us all to learn about your world view.

July 09 2011 at 9:57 PM Report abuse rate up rate down Reply
1 reply to sargecol115's comment

I am an independent voter and agree with your statements of reality completely. How dumb and brainwashed by the media this country has become. SCARY!

July 10 2011 at 12:07 PM Report abuse rate up rate down Reply

Dribble, dribble, posture, posture, self-indulgence,....untruths! Feel better, "Gary". My, my,...the pride exalted from the polluted spewing. Just love to heave lies do we now "Gary", particularly your comments about President Obama actions and abilities. "You Lie", "David"! Feel better, "David". Hope it's therapy for you. I don't label myself left-wing, right-wing, broken-wing, tea party,coffee party, bold progressive, not bold progressive. I'm just me, free thinker with enough skill to decipher truth from fiction. I vote for whomever I think is the best candidate. Unlike your erroneous comments, I prefer truth and honesty. I may dismiss a mistake for re-examination, but not blatant lies. Blatant lies assume the listener is stupid. What an insult! I don't hate anybody in particular. I despise racists (of any race). I deplore bible-toting behavior spitting, "my way or no way" sermon spewing fanatics who try to impose their choices onto others and their Gods. I believe in science, evolution as creation, global warming and logical thinking. My parents taught me to be a free thinker, as does my God. I loathe the notion that someone would even consider to assume that he/she has the authority to define and set my freedoms guaranteed under the constitution, and by my God! Imagine that!!

July 09 2011 at 5:56 PM Report abuse rate up rate down Reply

Lets help everyone with their paychecks.
Shop on line.........

July 09 2011 at 11:45 AM Report abuse rate up rate down Reply

Investing is a very strange activity. For most things, we know we should buy when prices are low and sell when prices are high. But not when we are investing. Our emotion tells us to buy when things are expensive and sell when they are cheap. Answer: If you can't control your emotions, hire someone who can. Just be sure that the advisor is an advisor, not a broker or salesperson!

July 09 2011 at 10:20 AM Report abuse rate up rate down Reply