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Bonds are hot, but come with risks

Bob Moon Sep 9, 2010

Bonds are hot, but come with risks

Bob Moon Sep 9, 2010


Kai Ryssdal: With Monday being Labor Day and today Rosh Hashannah, the Jewish New Year, this is something of a short trading week. You’d never know it, though, to look at one particular corner of the capital markets.

Corporate debt has been on fire, from blue-chips like Hewlett-Packard to firms with junk ratings. Companies have issued $32 billion worth of bonds this week — that’s the most of any week this year, short or otherwise. It’s because interest rates are so low and investors are desperate for returns that are better than bank deposits and seemingly safer than stocks.

Marketplace’s senior business correspondent Bob Moon explains the frothy bond market isn’t without risks.

Bob Moon: It’s cheap money for corporations to build their businesses or simply build-up their cash on hand. Investors see it as a way to shield themselves from the threat of a deflationary spiral and get some kind of return for their money without climbing on the Wall Street roller coaster.

James Floyd is senior research analyst at Minnesota’s Leuthold Group. He also works with investors as a fund manager.

James Floyd: They’re looking for safety. They’re tired of losing money. We’ve lost money in our house, we’ve lost money in our 401(k), and I think they’re just trying to stop the pain by investing in an asset class that can’t go down — at least that’s what they’re hoping.

Still, investors big and small have been willing to shovel their cash over even to corporations with the weakest credit ratings. Just last month, nearly $25 billion in junk bonds were sold. Investors get no guarantee they’ll be paid back.

The demand has pushed bond interest rates lower since companies can attract buyers without raising rates. IBM recently raised $1.5 billion in fresh capital by offering a return of just 1 percent. At Envision Capital Management, investment strategist Marilyn Cohen sees irony in the voracious appetite for the smallest of returns.

Cohen: What’s the big deal? There is no big deal. In fact, it’s a little deal. It’s a little rate of return for a much more downside than upside potential.

Leuthold Group’s James Floyd says as long as banks stay reluctant to lend and keep paying even smaller returns, the corporate bond market will remain attractive for investors.

Floyd: Short-term interest rates could stay low for quite sometime as the U.S. economy struggles, so I don’t see there’s any light at the end of the tunnel for that changing, maybe for a few years.

But Envision Capital’s Marilyn Cohen fears a bubble that can’t keep growing forever.

Cohen: I think the proverb here is, wherever the massive amounts of money are going will be the next area of great pain and anguish.

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

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