Value in Bonds

Market prices for fixed income securities can be volatile just like those for equities, especially for those bonds with longer maturities. As you may be aware, Benjamin Graham describes bargain issues as those stocks and bonds particularly worthy of a security analyst's investigation. In terms of bonds these bargain issues are bonds that are deemed to be safe investments but which still sell at so low a price "as to offer a chance of considerable enhancement in market value". This is why we want to find bonds of a higher quality which are trading at a discount to bonds of a lower quality. In most cases bonds would be trading cheaply because their safety is questionable but this is not always the case. As in equities, there are always a small number of cases where a security may be trading at a discount while still meeting strict investment standards. Fundamentals still reign supreme in fixed income though, so not only do you want a company that may have been battered by the market and investor sentiment (even if correlated with a higher yield on the fixed income security), but you want to be confident that your contrarian views are correct. The bonds are only valuable so long as the company is still in existence!

The concept of finding value in fixed income securities is relatively straightforward, but where do we begin to look for these bargains? If the equities of certain companies may have been negatively affected, creating value opportunities within the equity market, then perhaps the fixed income securities of these companies may be a good place to start. As there is no apparent systematic way to segment corporate bonds into value and growth categories, The Brandes Institute went back to a study they conducted on equities and then studied the bonds that the companies in the study had issued. Their main findings were as follows: