My weekly commentary followed by my weekend news and blog links round-up.
Back in January 2009, I wrote how it could be time to invest in corporate bonds, saying:
To cut to the chase, I think if you’re ever going to add corporate bonds to your portfolio, circumstances such as those following a panicked credit crisis may offer a window. The extreme fear in the market creates imperfect pricing, and so opportunities for the brave.
This turned out to be a good observation, not to blow my own trumpet (always painful!)
Some UK corporate bond funds are up 40% since March and it’s been the same story in the US. The Telegraph said last week that:
Corporate bonds have seen the most explosive rally in nearly a hundred years since the markets touched bottom last winter.
Morgan Stanley said none of the previous bond recoveries going back to 1925 had been as dramatic as this.
“Credit rallies are historically fast and fierce, but this one has become unusually rapid. Levels are almost back to where they were in the first quarter of 2008, but equities are still a long way off that.”
The question is should investors still be chasing corporate bonds?
Like red braces, boasting about money, and TV programmes about share trading, borrowing to invest is one of those activities that becomes popular when the stock markets have been going up for a while.
And just like bragging about your shares picks on telly while you’re wearing red braces, borrowing to invest is generally a bad idea.
At the moment, borrowing to buy shares is not so popular; the level of margin debt reported to the New York Stock Exchange touched a low in February this year, and has only risen a little since.
But trading on margin will come back into vogue if this rally continues.
Indeed, I’ve already received a couple of emails from readers suggesting I give my personal views about it.
My personal view can be summed up as Don’t Do It.
But as you may know I never use three words when 3,000 are available here on Monevator, so let’s look into the whole subject in more detail.
Borrowing to invest for the short term
- What are the benefits of corporate bonds?
- What are corporate bonds?
- What causes corporate bond prices to fluctuate?
- The main types of corporate bonds
- Convertible bonds
- Other kinds of bonds you may come across
- Stocks vs corporate bonds
- Historical returns from corporate bonds
- Corporate bond prices and yields
- How to calculate bond yields
- Bond default probabilities: by rating
- Does opportunity knock in the UK retail bond market?
- How to create your own DIY corporate bond portfolio
We’ve previously looked at why corporate bonds should theoretically underperform stocks over longer time periods.
But is the theory right? How have corporate bonds done in reality?
I’ve found it very hard to get figures on the long-term performance of stocks versus bonds. Perhaps the financial community would rather sell us corporate bonds than explain why we should or shouldn’t buy them? (Perish the thought!)
However, the new 2009 Barclays Capital Equity Gilt Study does give the past 10 years of UK returns for corporate bonds as an asset class — and the past 20 years for the US — which I’ll share below.
Mark to market is the act of valuing an asset at its current market price, as opposed to its book price.
Primarily an accounting practice, mark to market is relevant for private investors in several ways:
- If you borrow money to invest, you could face margin calls if your account is marked to market.
- You mark to market when working out your current net worth, by estimating the value of your home and other illiquid investments.
- Discovering assets owned by listed companies that are NOT marked to market — and so are being carried on the books too cheaply — can unearth hidden value.
Some blame mark to market for the credit crisis of 2007 to 2009.
A quick introduction to this week’s suggested articles, as I’m keen to get outside — the sun is shining and it looks like the Great British Indian Summer of 2009 is underway.
It’s therefore time to dust off the BBQ, which I’ve barely used since the Great British Heatwave back in May.
Since then it’s been the Usual Great British ‘Meh’ Summer of Cloud and Intermittent Showers. It’s almost painful to contemplate that we’re nearly into September.
New motivation to invest: Creating an escape fund. 🙂
