Wednesday, April 6, 2011

Cutting room floor - corporate bonds

Here is some text left out of the final version of my Barron's Online story today:

In the corporate bond market, the charts a little different. During the financial crisis in 2008, investors flocked to the safety of Treasuries causing yields to tumble as prices soared. In contrast, yields of corporate bonds moved higher as their prices moved lower.

But since last summer, iShares iBoxx $ InvesTop Investment Grade Corp. Bond Fund (LQD) has held up better than its Treasury bond counterpart. After easing lower from September through December of last year, the corporate bond proxy settled into a trading range (see Chart 3).

I'll leave full analysis of the fundamentals to others but with profits improving and reports of hoards of cash stuffing corporate coffers, it does make sense that their bonds would look better. However, while corporate bonds are usually traded according to their presumed safety vs. Treasuries, they also depend on the overall level of interest rates. If Treasuries yields break out to the upside, then corporate yields could move higher with them.

For the corporate bond prices and the iShares exchange traded fund, that means lower prices. And if it moves below the bottom of the trading range at 106.75, the next support does not come into view until 103.35. This would wipe out all of its 2010 gains.

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