Corporate Bonds Looking Better

ByABC News
June 22, 2001, 5:51 PM

June 25 -- Don't look now, but investment-grade corporate bonds — considered boring and banal — have become belles of the ball.

After lagging lower quality "junk bonds" for most of theyear, investment-grade bonds have surged ahead. Lower interestrates are causing investors to reach for yield, while pricedeclines in riskier stocks and bonds are leading some investorsto the relative safety of better quality bonds.

"Fixed income investors are coming back to the corporatesector after a year of fear and loathing," said Stephen Kane,whose Metropolitan West Total Return fund has beaten 95 percentof intermediate-term bond funds in 2001, according to fundinformation service Morningstar Inc.

Through June 19, investment-grade corporate bonds, rated"Baa3" or higher by Moody's Investors Service and "BBB-minus"or higher by Standard & Poor's, have returned 6.07 percent,including interest, according to Merrill Lynch & Co. That worksout to about 13.5 percent a year.

Better Than Junk, Beats the Dow

In contrast, junk bonds were up 3.79 percent, whilesuper-safe Treasuries were up 2.64 percent, according toMerrill Lynch. Meanwhile the best performing stock index,the Dow Jones industrial average, was down 1.8 percent.

Investors are noticing. This year they have pumped a net$14.4 billion into investment-grade corporate bond mutualfunds, according to AMG Data Services of Arcata, Calif.

Investment-grade corporate bonds, a kind of IOU fromcompanies raising cash, now typically yield 5.5 to 8 percent,compared to 3.5 to 5.5 percent on most Treasuries.

The Federal Reserve's five half-point cuts in interest rates this year, designed to keep the economyout of recession, have left investors more comfortable takingon credit risk, after they flocked to Treasuries last fall.

"What happened in 2001 has been a move back to normality,"said Gregory Hahn, chief investment officer at Conseco CapitalManagement Inc. of Carmel, Ind., whose Conseco Fixed Income fund hasalso beaten 95 percent of its peers in 2001, Morningstar said.