Corporate bonds provide a compelling investment opportunity for millions of investors for sure. They offer higher yields than one can expect in the US treasuries. The prime reason for it is that corporations are more likely to default that say in the case of a government and hence have to pay a higher amount of yield to the government. To determine the higher corporate bond yields one has to consider the following options for sure.
- Prevailing interest rates- Since the corporate bonds operate on the philosophy of yield versus spread any impact on the government bonds have a direct effect on them.
The major factor which stems out from the following discussion is that higher the yield of a commodity the higher levels of risk associated with it. For example if the financial policies of a company are affected it will have an impact on the debt position of the company in a big way. Considering the other side of the coin if a company reports a loss, the investors will press the panic button for sure. It needs to be kept in mind that corporate bonds on the basis of their financial stability receive ratings from the various financial agencies based on their ability to pay. The fact of the matter is that these agencies can upgrade as well as downgrade the ratings of the bonds which will create a situation of panic among the investors. The bottom line is that the bond prices will react in a big way for sure.
The corporate bond yields sometimes gets effected where the issuers have no role whatsoever in the scheme of things. When the market is positive investors go about looking for higher investment options. On the other side of the coin any sort of disruptive activities in the company may force the investors not to hold anything of substantial value with them in the first place. If any symptom of high risk is seen in the market the investors flock to the market and try to get rid of the securities as far as possible. No exceptions to the fact that this is the same case with the bond market as the low yield corporate bonds are the wildest in such a scenario for sure. The key point of consideration is the optimism factor as if things are optimistic then investors are more likely to invest in the market for sure.
So the need of the hour is to combine all the factors together and put it on a single platform. This is all the more so in the case of the corporate bond as the impact of a single financial change can be felt on the overall performance of the bond. No doubts municipal bonds are forward looking but one has to see their portfolio and purpose if they are planning to buy one.