Bonds Benefit From Stock Slide

Investors in tax-sheltered investments, such as 401(k)s, could continue to find bonds an attractive alternative as well as a diversification tool. Still, experts don’t anticipate returns to be quite as high as in recent months, according to Reuters.

Happy Returns

Companies, taking advantage of pent-up demand and lower interest rates after a lackluster fourth quarter, issued $90 million in debt, which was snapped up by investors wary of the equity market (see Q1 Corporate Bond Issuance Sets Record ):

• Investment-grade corporate bonds returned 4.09%
• Less risky U.S. Treasuries returned 2.09%
• Intermediate bond portfolios yielded 2.7%
• Junk bonds recorded returns of 5.88%, on average

More Not Necessarily Better

Moody?s Investor Service sees credit quality eroding with rating downgrades outnumbering upgrades by 3.5 to 1 this year. A rise in the U.S. junk bond default rate to about 11% by year-end from 6.82% last year is also anticipated.

However, much of this is already in the prices and debt growth is expected to moderate and corporate earnings to improve, impacting credit quality by the close of 2001.

Price is (Still) Right

Prices of corporates remain attractive, and are placed to outperform Treasuries, most of which now yield less than 5%, while some junk bond yields still top 12%.

The outlook for investment grade corporate bonds is less rosy, with some managers anticipating returns of only around 3% from now to year-end, making cash appear more attractive.

– Camilla Klein editors@plansponsor.com