There’s More to Corporate Bonds Than Interest Rates: Searching for Alpha for May 2014

Yesterday’s Federal Reserve announcement of a reduction in its bond-buying program came on the heels of lower than expected first quarter GDP growth. The central bank seems confident that warmer weather will stimulate more activity after the harsh winter.  

Temperatures are not all that is drifting higher. Corporate bonds have been enjoying a resurgence in demand after last year’s lackluster returns. 

One of the reasons for an uptick in corporates is lower issuance.  While higher-quality new issues are running about flat from last year, high-yield new issues are down by about 50% from 2013. This will likely lead to continued outperformance of credit versus Treasuries for the rest of 2014.  Increased demand for bonds, especially by pension plans, has also led to higher prices. Apple Computer’s bond deal, for example, is nearly three times oversubscribed

We continue to recommend a fixed income portfolio that is dominated by lower-duration corporate and mortgage-backed paper, while Treasuries should be underweighted (or avoided).

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