Without question, the economy has surfaced out of the grips of the latest recession. More and more positive news is coming out of the various government departments that report on housing starts, consumer confidence, automotive sales and so on and so forth. Companies are starting to report profits (at last) or narrower losses (well, it's a start).
In fact, investors' impressions are that things have turned around. The markets support this, with most of the global markets having returned considerable gains over the past year. As well, rates that companies pay on borrowed capital have been coming down. Those yields are not longer dripping with immediate profitability. Many suggest that corporate bonds, which make up a niche of bonds called high yield investments, are fairly priced. This tells us that there is no longer such a great opportunity for substantial gains (many high yield bond funds returned more than 40% in 2009).
But does that mean that high yield bond funds are no longer the place to invest?
Not at all. Remember that the purpose of investing in bonds is primarily for the income they produce (this is why they are part of the "income" class of investments, after all). A secondary objective is to achieve gains as rates start to come down (in so doing, lower rates push the price of those bonds higher, allow for capital gains).
What makes high yield bonds a touch risky right now is that those gains may not be as abundant as they were once expected to be. This makes a bit of sense because, as the economy recovers the rates charged to companies will start to stabilize (they have already dropped a lot). That means that people investing in high yield bonds will need to do so for the income alone. Does that means that rates will start to rise? Yes, eventually.
Realistically, however, the economy has not recovered entirely. There is still a lot of room for the market to recover as well. And with the expectation that rates will flatten over the coming year, it does not mean, for one minute, that corporate bonds are the "wrong" place to invest. Quite the contrary; investors seeking better yields from their income class of investments ought to purchase these types of bonds.
The reason? Corporate bonds still have value in the fact that it could be close to a full year before those rates even level out. Look at the Dow Jones; down for the year. The S&P; down for the year. If the markets are forward looking, then they are telling us that there is still some volatility in equity markets.
As well, the spread between corporate and government issues needs to narrow a touch more. Since it is unlikely that government rates are going to increase anytime soon, corporate rates will have to come down a little more. This does not mean that investors should expect to find 40% returns for the year; but a healthy return should still be achieved.
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