5 April 2016

An Updated Look at Public Pension Funding




This recap of a new study by Moody’s on public pension funding reveals three important points, as well as the impact of pension funding on the municipal bond market.

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30 September 2014

Additional Thoughts on the Rising Glidepath Approach




4 March 2014

Do Corporate Bonds Add Value in Portfolios?




I frequently get asked about the merits of corporate bonds, both investment-grade (IG) and high-yield (HY), relative to government and municipal bonds. I don’t believe the risk-return profile for long-term investors (particularly taxable individual investors) is improved by owning IG or HY corporate bonds compared with simply owning a diversified portfolio of stocks and high-quality government bonds.

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6 January 2014

Bond Funds Aren’t Naturally Riskier Than Individual Bonds




In spending significant time talking to clients and wealth advisors about fixed income, one common misconception is that bond funds are more exposed to interest rate risk than laddered individual bond portfolios. The logic basically starts and ends with the observation that individual bonds can be held to maturity while bond funds don’t necessarily hold all bonds until they mature. Because all individual bonds can be held to maturity, as the logic goes, it doesn’t matter if their prices go up or down in the interim. This does indeed sound logical, but as it turns out, laddered individual bond portfolios and bond funds with similar-maturity bond holdings have almost identical exposure to interest rate risk. There simply isn’t much of a difference, yet the incorrect point of view is all too common within the industry and can lead investors to take excessive interest rate risk in individual bond portfolios without understanding the implications.

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20 June 2013

How to Make Your Own Investment-Grade Corporate Bond Fund




Last week, I outlined how to construct a portfolio of stocks and high-quality bonds to replicate the returns of high-yield corporate bonds. This week I’m tackling investment-grade corporate bonds.The same basic logic as last week holds: There’s not much unique about investment-grade corporate bonds that you can’t achieve with a diversified portfolio of stocks and high-quality bonds. The only difference is you don’t need as much in stocks to replicate the returns of investment-grade corporate bonds as you do with high-yield corporate bonds. This is because high-yield corporate bonds are more similar to stocks because they both have substantial exposure to default risk. Investment-grade corporate bonds have less default risk and therefore aren’t as similar to stocks.

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13 June 2013

How to Make Your Own High-Yield Corporate Bond Fund




With interest rates at low levels for a number of years now, many investors have moved some portion of their high-quality bond portfolios to higher-yielding investments like high-yield corporate bonds. I’ve long argued that there’s not much these strategies add relative to a traditional stock fund and high-quality bond strategy. Further, the traditional stock fund and high-quality bond allocation strategy tends to have lower costs and be more tax efficient. This is a bit of a qualitative argument though, and I wanted to illustrate the point quantitatively.

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13 June 2012

The Risks of Yield Seeking Strategies




Over the past couple of weeks I’ve focused on high-yield corporate bonds, but three other yield-oriented investments I frequently get asked about are high-dividend stocks, preferred stocks and oil-and-gas master limited partnerships (MLPs). In the past couple of years, I’ve found that most investors who ask about these strategies are contemplating using them in place of high-quality fixed income because “fixed income rates are low.”

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5 June 2012

More on High-Yield Bonds




In last week’s post, I referenced the performance of high-yield corporate bonds during periods of stock market turmoil. Unfortunately, we now have more recent data to evaluate how high-yield corporate bonds tend to perform during periods of bad stock market performance. The S&P 500 was down about 0.6 percent in April, 6.0 percent in May and about 2.4 percent in June (through June 4). The backdrop of the poor performance is an apparently slowing U.S. economy and a heightening of the Eurozone debt crisis, with the health of the Spanish banking system being the current area of focus.

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30 May 2012

High-Yield Corporate Bonds




I got an e-mail this past week noting that Vanguard would be closing its high-yield corporate bond fund to new investors “effectively immediately” and that the fund had received “approximately $2 billion” of flows over the past six months. While growth of Vanguard’s assets under management is almost always a good thing, a fund shuttering its doors to new flows makes one wonder just how frothy credit markets have become. Let’s take a step back, though, and look at high-yield fixed income as an asset class. I find that many investors simply don’t understand what returns high-yield bonds have historically generated or just how closely correlated they are with the equity markets.

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