Investors are increasingly turning to bonds to help pad their portfolios. Incapital can attest to bonds' popularity, as its InterNotes program, which offers first-issue corporate bonds to retail investors, is now selling nearly $1 billion in corporate bonds per month. "Not only is there a continually growing demand for bonds among individual investors," says Tom Ricketts, president and CEO of the Chicago-based investment banking firm, but "as more financial advisors find out about the [InterNotes] product and get comfortable with it, they're shifting a lot of their fixed-income investments away from bond funds and into individual corporate bonds."
Indeed, investors and their advisors are becoming increasingly disenchanted with bond funds' inability to deliver a fixed rate of return or their principal back. That's just one reason why Incapital's sales of corporate bonds are booming. Since we spoke with Ricketts about a year ago, the two-year-old Incapital (www.incapital.com) has added six new issuers to its InterNotes platform. Bank of America, Household Finance Corp., and DaimlerChrysler were the first three companies to join Incapital's InterNotes program in 2001. Other companies that have followed suit are Boeing Capital Corp., PHH Corp., Dow Chemical, CIT Group, Inc., and, most recently, GE Capital and Sears. Another retail issuer is expected to join soon.
Ten issuers on the InterNotes platform--with more on the way--means advisors and their clients "can build a diversified portfolio," Ricketts says. InterNotes, which are issued at par ($1,000) and in denominations of $1,000, are rated A or higher, and are offered weekly on an ongoing basis. Sales of InterNotes were just shy of $12 billion at year-end 2002, notes Ricketts. "Sales definitely picked up over the course of the year," he says, with sales in the fourth quarter alone reaching $4 billion. He projects that 2003 year-end sales could hit $20 billion.
Ricketts figures about three-quarters of Incapital's sales come through financial advisors--independents as well as those working for brokerage firms. And it's the more experienced advisors, those with at least seven years in investment management, that tend to recommend individual bonds as opposed to bond funds, he says. The majority of corporate bond buyers are 60 or older, because they're the ones "looking for interest income and return on principal."
Now's a good time to invest in corporate bonds because "corporate bonds still offer a pretty substantial yield pickup over government bonds," Ricketts says. "And if the economy gets better, corporate bonds should naturally strengthen because the companies that have sold them are strengthening. And there should be an improvement in the way corporate bonds are priced."
Washington Bureau Chief Melanie Waddell can be reached at email@example.com.