Corporate bonds: Attractive and risky

401k

TEXT OF STORY

Tess Vigeland: If you're willing to take a bigger risk, and tie up your money for a long time, corporate bonds have become a highly attractive investment. In fact, the total money sunk into what are essentially longer-term loans to companies, just hit $1 trillion. Our senior business correspondent Bob Moon tells us that may be great news for business, but your 401(k), pension, or mutual fund could be on the line.


BOB MOON: If talk of "corporate bonds" weighs heavily on your eyelids, this might be an eye opener: Morgan Stanley warned today the explosive rally in corporate bonds shows worrisome signs of flaming out.

The allure has been much-higher returns than, say, government treasuries. But the premium returns can require tying up cash for a decade or more.

At Envision Capital Management, bond expert Marilyn Cohen cautions interest rates have nowhere to go but up. And when they do, your pension fund, for example, could be hit with a lose-lose choice.

MARILYN COHEN: Do I hold or do I fold? And if you decide to fold and sell the bonds, then you take a loss. If you decide to hold, then you as a pension fund are missing the opportunity of not locking in the higher yield that's, you know, 3 percent higher than what you bought many years ago.

Cohen says other returns have been so puny it's still been worth putting at least some money in corporate bonds. But it might be safer settling for less return on, say, a five-year bond, should rates go up in a few years.

COHEN: So if you had to sell it, you may take a little bit of a loss, but not a huge loss.

The government has helped fuel this rally by subsidizing it. That's investment strategist Axel Merk's view. And he worries it's time to stop before another bubble bursts.

AXEL MERK: Corporations, they have a survival instinct. They're trying to do the best thing, they're trying to maximize their profits, and so they're doing the best out of the situation. We are through the emergency phase, and so now we need to withdraw those emergency measures, even if the cost is that we're going to have another recession.

Merk says the risk of recession might be preferable to another wave of big investor losses.

In Los Angeles, I'm Bob Moon for Marketplace.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.

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