The world is running out of safe, reliable sources of steady income. One of the best remaining sources: U.S. corporate bonds.
U.S. corporate bonds represent about 12% of outstanding investment-grade debt worldwide and account for nearly 33% of yield income, according to Bank of America Merrill Lynch, as reported by The Wall Street Journal.
Bond Basics
Government bonds (Treasury bonds) are fixed-income securities maturing in more than 10 years. U.S. Government debt is considered among the safest of all investments.
Corporate bonds are issued by companies, which have great flexibility in how much debt they can issue. Terms for corporate bonds can be anywhere from less than 5 years to more than 10 years. Corporate bonds pay the highest yields because they offer the most risk.
Current State of Bond Rates
Although bond rates have fallen in 2020, interest rates on 7- to 10-year bonds of high-quality U.S. companies sit at 2.08%, compared with the 10-year Treasury, which hit a low closing figure of 0.78% on Oct. 9, 2020.
As noted, corporate bonds are safe but considered riskier than government debt. The Wall Street Journal reported a likely increase in global interest in U.S. corporate bonds, driving down yields as well as borrowing costs for U.S. companies.
Why Buy Corporate Bonds?
Corporate bonds can be issued by either public or private companies. Corporate bonds are rated by services such as Standard & Poor's, Moody's, and Fitch, which calculate the risk inherent in each specific bond. The most reliable (least risky) bonds are rated triple-A (AAA).
Highly-rated corporate bonds constitute a reliable source of income for a portfolio. They can help you accumulate money for retirement or save for college or emergency expenses.
How to Buy Corporate Bonds
Some corporate bonds are sold via the initial offering by the company in what is known as the primary marketplace. Others are traded over-the-counter (OTC) in the secondary marketplace. Bonds are highly liquid, can be bought and sold quickly and are typically offered in $5,000 face values.
Brokerage firms, banks, bond traders, and brokers all sell bonds in the primary marketplace. These sellers take a commission. The secondary market, as noted, includes the exchanges (NYSE, Amex, and Nasdaq).
Bond prices are quoted as a percentage of the face value of the bond – based on $100, and interest is typically paid every six months. For more see: How To Invest In Corporate Bonds
