i- shares Corporate Bond Fund (SLXX:LSE)
For the first time in years we started looking at Corporate bond funds, mid last year. Corporate bond markets are holding the sale of the century, it seems. Prices have not been more favourable since the Great Depression, say some pundits. Investment grade credit looks like extremely good value.
Why are we looking at the corporate bond funds?
Investors anxious for decent returns, or yield, are having to look beyond cash. With the Bank of England Bank rate at its lowest level in more than 300 years savers are hard-pushed to get any return at all. Two-year gilt yields slipped below a pitiful 1 % recently. Stock-market investors are still smarting from last years loses and dividends from blue chips are being cut left, right and centre.
We are certainly in recession, but the market seems to be pricing in something worse. The gap (spread)
between the yield (return) on US investment-grade bonds and Treasuries (US government-backed bonds), hit a record in December and is still at levels last seen in the 1930s.
Against all this gloom, typical yields on corporate bonds average between 5% and 7% on high-grade bonds and an eyecatching 10% or more on riskier high-yield bonds. Analysts at Morgan Stanley estimate that prices for US investment grade corporate bonds imply a default rate many times higher than the worst rate in any previous five-year period.
Of course, bond markets might be right to price in such a drastic scenario. Its true that, several big companies have already hit the wall in 2009, and the carnage will most likely continue. There's also the danger that deflation will be more short-lived than investors fear, pushing up yields across all asset
Nonetheless, corporate bonds look attractive right now. However it is important that you choose the right way to get exposure to them.
Big global, bond buyers tend to be institutions such as pension funds, banks and hedge funds. They are aiming for a decent return, taking account of the bond's risk, and what they could earn elsewhere. As a rule of thumb, the less appetite these investors have for lending companies money by buying bonds,as
was the case in 2008,the lower prices go and the higher the yield. Hence the current opportunity to buy bonds cheaply.
Individuals will usually be better off using a fund rather than trying to buy the corporate bonds directly. This is because, higher-yielding bonds are expensive and hard to trade and the jargon surrounding bonds is complex and confusing to the novice investor. We have identified two exchange traded funds can give you exposure to this market, cheaply and easily.
For Sterling investors The iShares Sterling Corporate Bond Fund (LSE:SLXX) yields 8%. There is no front end load or fee, the expense ratio is just 0.2%, and you can get in and out quickly and with ease.
TOP 10 HOLDINGS as of 30/06/2008
BARCLAYS BK PLC 8.25% DEC 15 2049 4.15%
BANCA INTESA SPA 5.5% DEC 19 2016-11 4.11%
GLAXOSMITHKLINE 5.25% Apr 10 2042 3.98%
WAL-MART STORES 4.875% Jan 19 2039 3.92%
UBS AG LONDON 6.625% Apr 11 2018 3.84%
GAZPROM 6.58% Oct 31 2013 3.41%
ARGON CAP PLC 8.162% OCT 29 2049 3.39%
ING BANK NV 6.875% May 29 2023 3.38%
HBOS CAPITAL 9.54% MAR 31 2049 3.29%
CITIGROUP INC 7.625% Apr 3 2018 3.29%
Total % Holdings 36.76%
If you are looking for higher income than on deposit and feel comfortable that these companies will remain solvent, then -
Buy i- shares Corporate Bond Fund (SLXX:LSE) up to 107p