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There Is More to Corporate Bonds Than Meets the Eye

People have said to me: “I know what a bond is, Dan, but what is a corporate bond?” It is a valid question. A corporate bond is a loan issued by a corporation to raise capital like a municipality or a government entity would. It is just taxed differently.

A typical corporate bond investor will buy them when they’re looking to have a fixed income supplement in their portfolio. One day, when rates may be higher, there will be more of an audience tuned into corporate bonds and to bonds in general.

The bond portion of any portfolio varies with each investor because each investor profile is different. Bonds offer a good mix. If you have a portfolio of 60% stocks and 40% fixed income, you may want to consider 15%-20% of fixed income in corporate bonds as a diversifier. If you are a muni bond investor, having a corporate bond or a CD is essentially the same thing as taxable fixed-income investments used as a diversifier.

What I do at Hefren-Tillotson is shop. I want to see where other bond dealers are placing their bond deals for sale and try to buy them there. I check out new issue bonds being priced while staying in tune with the markets, whether it’d be the bond market, the commodities market, and cryptocurrency, which I am still trying to wrap my head around. 

Keeping An Eye Toward Fiscal Policy

Being a trader, every day that I come in I want to be aware of different situations. My eyes are in tune to a lot of different figures, so I take that information along with what I see and hear in the news that might come out that day, and process it while I look for bonds for our clients. In the course of my day I also take service calls that come in – and we get a lot of them – I answer questions and serve as a resource to the advisors. At times, they will bring me in on a call or to meet with a client because they, too, have lots of questions.

Our eyes and ears are on fiscal policy and the new tax plans being presented right now. 

As you know, monetary policy comes from the Federal Reserve. Currently, it is driving the market. Most traders, myself included, are comfortable with Federal Reserve Chairman Powell’s moves and understand where he is coming from.

So now the question is on the fiscal policy coming from the Biden administration. His new tax policy leaves question marks in the market. Has it affected the corporate bond market? No. Not directly, but perhaps indirectly and just a little with immaterial moves if anything.

What Bond Investors Need to Know

I have been in fixed-income trading for 11 years after spending 12 or 13 years as a broker. Most of my experience is with institutions. In having limited experience with retail investors in the past, I found that corporate bonds are foreign to them. Some investors think there is more risk attached to corporate bonds. To some degree, that’s true. And it is certainly possible they read something in the newspaper about how corporations go out of business more often than you normally see in a municipality defaulting.

However, I feel what investors really need to know is that there is varying risk in the muni market as well as in the corporate market. Each bond carries its own degree of risk. Bond Basics 101 teaches you the risks to bonds are interest rates, credit and call risk, inflation, reinvestment and liquidity risk. The idea is managing that risk.

When you start looking at individual bonds, that’s where you can find your safe place. The bond market is huge. There are bonds out there that are extraordinary, and there are bonds without too many bells and whistles that you should really stay away from. When you avoid those, you’re comparing apples to apples, so to speak, in terms of safety.

Ratings

Ratings are one-tenth of the equation. You look at a rating to give yourself some kind of guideline, but they are not updated as quickly. With the corporate bond market being the largest market in the world, there are so many corporate bonds out there and different series.

For instance, a company may be A-rated, and considered low risk, but they could have – depending on the rank of the debt – a senior secure bond that is also A-rated, and a junior subordinated bond that is rated BBB, medium risk. It is the same company but the rank of lien is lower.

So that is something to keep an eye on. Take in the rating, but then look at the financials and get your own credit analysis. Incorporate that with munis and the S&P 500 who put their ratings on there too.

In the Final Analysis

For the past eight years, I have been dealing with banks, money managers and different clients, and trading with the other dealers.

At Hefren-Tillotson, I am able to help our advisors as well as our investors by being able to go out and buy a bond fresh from the market, not bid size from another dealer, and go right to the client with it – as opposed to most retail investors having that bond marked up to two other people, possibly.

What makes me happy as a Hefren-Tillotson fixed income trader is offering retail investors wholesale prices. It’s really that simple.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.

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