Saturday, January 16, 2010

dreamspeak -- 16 January 2010

*** Notice:  dreamspeak is a special feature in this blog where I get to speak whatever that comes to my mind.  Having your own opinion certainly beats having no opinion at all.  ***

My corporate bonds have gained about 4.6% over the last four months.  It is certainly respectable when you consider that the asset class is bonds and not equities.  If you include the accrued interest, the gain is even higher, considering that the bond portfolio pays 9% per annum.

Apparently, most of the recent gain seem to come from improving corporate credit quality.  The improvement is going at the fastest pace in almost three years.  In fact, Moddy's Investors Services is upgrading more U.S. companies than it's downgrading for the irst time since the second quarter of 2007.

The surge in bond prices won't last forever.  There will be a tipping point when bond prices have risen too much and the yield is deemed too low.  The spread between yields on corporate bonds and benchmark government securities narrowed to 160 basis points yesterday, the smallest gap since Dec. 31, 2007, according to Merrill Lynch Global Broad Market Corporate Index.  What it means is that buying bonds at the current price levels is not attractive.  Investors maybe better off taking a punt in equities.

With the interest rate hike looming in the horizon, I am thinking of taking profit on some bond positions by end March.  Anyway, I am holding perpetual bonds which will be adversely affected by interest rates when Fed decides to hike.  Right now, the high employment is still justifying the low interest rates and keep the money printing press operating 24 x 7 so I have time to make a graceful exit.

No comments: