Big Corporations Are Buying Corporate Bonds

If you are like most investors that are looking for income or just a good place to park money in an uncertain market environment, you may want to look at what the big corporations are doing now.corporate-bonds
What are the big corporations doing with their cash now? They’re buying bonds of other big corporations.
A report by The Wall Street Journal indicated that companies with lots of cash at their disposal – such as Apple (NASDAQ: AAPL), Oracle (NASDAQ: ORCL) and Johnson & Johnson (NYSE: JNJ) – have been seeking yield in the corporate bonds of companies like Verizon (NYSE: VZ) and Gilead Sciences (NASDAQ: GILD).

Why Corporate Bonds Look Good Now

The case for buying corporate bonds now is relatively simple:

  • Cash and Treasurys are paying almost nothing, which translates into a negative return after inflation.
  • With an interest rate hike expected within months, stocks and mutual funds carry too much principal risk for short- to intermediate-term objectives.
  • In a risk-off environment, high-yield bonds are not the best idea.

Therefore, by reason of deduction, corporate bonds look better than other income investment choices.

Should You Buy Corporate Bonds Now?

Before you go out and buy a bunch of corporate bonds like some of the big corporations are doing now, there are a few key portfolio management considerations to keep in mind:

  • The fixed-income big picture: Big corporations aren’t parking all of their short-term money in corporate bonds. In fact, they’re likely keeping most or all of their short-term needs in cash for liquidity purposes. The corporate bonds are for intermediate-term needs – i.e., two to five years out.
  • Risks of holding bonds: Bonds have principal risk and interest-rate risk, which are related. Bond prices and interest rates have an inverse correlation. So when the Federal Reserve finally starts normalizing monetary policy and hikes interest rates, the lower yields for today’s bonds will be less attractive and will therefore push prices lower.
  • Your holding period: Because of the aforementioned risks, it is wise to plan for holding your bonds to maturity, which will ensure (but not completely guarantee) that you will receive your principal back. So if you think you’ll need your cash back in one year, you may not want to buy bonds maturing three years from now.

Bottom Line on Buying Bonds Now

As with most investment decisions for individuals, it is wise to adhere to timeless portfolio management tactics and strategies, such as diversification.
Corporate bonds can be a smart addition to your fixed-income assets but shouldn’t be 100% of it. And within the bond allocation, investors are wise to consider a laddering strategy, where bonds of various maturities are evenly spaced across several months or several years so that the bonds are maturing at regular intervals. For more liquidity, a fixed-income investor can hold bonds with maturity dates that are closer together.
In summary, if you want to buy and hold bonds like the smart money is doing, be smart about buying and holding bonds!
Kent Thune is the owner of an investment advisory firm in Hilton Head Island, S.C. He personally does not hold any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.

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