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Stocks are down sharply. But some of the best opportunities lie in bonds.
Relatively safe debt issues are selling at juicy yields that, until recently, were only offered by junk-rated companies.
The best strategy: Focus on the debt of low-profile companies in relatively stable businesses. While bonds from household names such as PepsiCo yield 5% or so, yields for more obscure companies, such as National Rural Utilities Cooperative Finance Corp., are much higher.
The not-for-profit cooperative makes loans to rural utilities, most of which don't have access to capital markets. The company recently issued A-rated, non-callable bonds maturing in 2018 that offer a hefty yield of about 9.40%, a more than six-percentage-point spread to 10-year Treasurys.
A year ago, the spread was less than one percentage point, showing how investor appetites have changed. But its credit-default swaps aren't especially wide.
The company, with $20 billion of loans outstanding, has faced just $181 million of net charge-offs since 1969. While paying high rates on its recent debt could weigh on National Rural's margins, its blended cost of financing was just 4.56% as of Aug. 31, and it charged its customers a rate of 5.52%.
Another overlooked bond is from Thermo Fisher Scientific, the largest provider of research laboratory products. It has $932 million of net debt and a $14 billion market capitalization.
The 2015 bonds yield about 9.2%, despite an investment grade credit rating of BBB+. The company is expected to generate annual free cash flow of about $1.4 billion over the next three years, more than enough to meet ongoing needs, say analysts.
The bond issue is relatively illiquid, with just $500 million outstanding. That scares away some larger investors but provides an opportunity for those willing to hold them to maturity.
By sticking with overlooked bonds, investors can reap rewards.
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