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Bob Carey
Chief Market Strategist
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  Sizing Up The Corporate Bond Market
Posted Under: Bond Market
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View from the Observation Deck

  1. Investors seeking income and willing to assume some credit risk might want to consider investing in corporate bonds.
  2. Investment grade corporate bonds carry credit ratings of BBB- up to AAA (Standard & Poor's System), while speculative-grade ("High Yield") corporate bonds range from BB+ down to D (Default).
  3. Generally speaking , the higher yielding corporate issues tend to be found in the speculative-grade category. Greater risk should be accompanied by the potential for higher returns.
  4. The yield on the Bank of America/Merrill Lynch U.S. Corporates, 7-10 Year Index (investment grade) was 3.13% on 11/7/12, compared to 7.03% for the Bank of America/Merrill Lynch U.S. High Yield Master II Index (speculative-grade).
  5. From 1983-2011, the average default rate for investment grade corporate debt was 0.08%, compared to 4.7% for speculative-grade corporate bonds, according to Moody's.
  6. Since 1983, the average investment grade default rate for a single calendar year never exceeded 0.5%. So the concern with defaults pertains mostly to speculative-grade bonds.
  7. Moody's is forecasting a global speculative-grade default rate of 3.0% for December 2012 and 2.9% by September 2013. Both are well below the historical 4.7% average since 1983.
  8. From 2002-2011, investment grade corporate bond issuance averaged $743.2 billion per year, compared to $138.4 billion for speculative-grade corporate bonds (see chart).
  9. Both have already surpassed their respective averages through the first nine months of 2012. Those companies able to have been eager to refinance their existing debt obligations at lower interest rates.
Posted on Thursday, November 8, 2012 @ 2:58 PM • Post Link Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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