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Thomas Kenny

The Slump in Corporate Bonds Has Reached Three Months... and Counting

By January 31, 2013

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The recent weakness in bonds has received plenty of media attention, but one aspect of the downturn that has been somewhat overlooked is that the slump in corporate issues has in fact been going on for three months now. Since peaking on November 30, the largest corporate bond ETF - iShares iBoxx $ InvesTop Investment Grade Corp. Bond Fund (ticker:LQD) - has slipped 1.7%. On a price basis, the ETF has fallen all the way back to where it was in August of last year.

This sort of weakness is nothing new for the asset class; in fact, it's the one-way market we saw through most of 2012 that's unusual. But for the many investors who poured money into corporate bonds in the past two years, it may come as a mild shock given how well corporates performed in 2012. Also, the countless actively-managed mutual funds that piled into corporates to pick up extra yields and boost total returns may now be surprising their investors with sub-par performance.

 

For individual investors, patience should be the order of the day. While corporate bonds are highly unlikely to match their strong performance of the past three years in 2013, the Federal Reserve is almost assuredly maintain its policy of ultra-low short-term interest rates. This means that corporate bonds should have an ongoing source of buying support as yields tick up, cushioning the sector from a major downturn. But for now, the pundits calling for weaker bond prices in 2013 are sitting pretty.

Learn more:

2013 Outlook: Corporate and High Yield Bonds

What are the risks of corporate bonds?

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