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There's no getting around it: These are go-go days for bonds and bond ETFs. Turn on CNBC and you're sure to hear a pundit or two talking about the possibility of a Treasury bubble. If deflation remains in place or even if low inflation takes hold, we probably don't need to worry about a bond bubble, but as has already been well-documented, Treasuries just aren't providing adequate shelter from the storm that has recently hit equity markets.
Funny thing is investors poured $49 billion into bond ETFs through the first seven months of this year, according to ETFdb.com. Obviously, not all of that cash is flowing into funds that hold bonds issued by Uncle Sam, but Treasury ETFs have seen their fair share of inflows. That's an interesting scenario when considering that practically every investor know how weak the yields on Treasuries yet appetite for these instruments remains strong. What's really funny is that Treasuries sported yields well into the double digits in the early 1980s and no one wanted any part of them back then.
Investors seeking the comfort of bonds can do better than Treasuries and there are plenty of ETFs to accommodate those in search of yield. Start with corporate bonds. The spreads between Treasuries and high-grade corporate bonds aren't huge, but the difference is enough to make corporate bonds the preferred.
A conservative investor may want to have a look at the iShares iBoxx $ Investment Grade Corporate Bond ETF (NSYE: LQD). LQD is holds high-quality debt issued by blue chip companies like AT&T (NYSE: T), Goldman Sachs (NYSE: GS) and Verizon (NYSE: VZ). LQD yields a solid 5%.
Willing to take on a bit more risk and do your best Michael Milken impression? Embrace junk bonds with the SPDR Barclays Capital High Yield Bond ETF (NYSE: JNK). Junk bonds got a bum wrap back in the 1980s, but here's the deal and it applies to LQD as well: U.S. companies are sitting on record mounds of cash. Only the very weakest links would be in position to default on their debt issues. JNK holds issues from AIG (NYSE: AIG) and Citigroup. Uncle Sam has already shown he won't let those companies fail, so JNK with its 10.8% yield is worth a look.
There's something to be said for corporate bonds as highlighted by the performance of JNK and LQD in recent months.
Income Security Recommendation December 2011 Issue.
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