“This Historic Collapse Presents a Huge Buying Opportunity”

It is official! The back-to-back quarterly losses of nearly 18% in the Dow Jones Corporate Bond Average is the third worst six-month period since 1929 (See chart):

Chart 1, Dow Jones Bond Average – Top 5 Worst Quarterly Losses since 1920

This has rattled investors who, for 40 years, turned to bonds and bond funds to provide both income and price appreciation during an inflation benign era.

Back to Bond Basics –

Bonds are debts issued by corporations, governments, state and local municipalities. Coupon rates vary based on when the debt was issued, and maturities range from a few years to many decades. Because bonds provide a fixed income over a defined period of time, the near certainty of returns is their greatest advantage to investors who hold bonds to maturity.

This is very different from common stocks and real estate, where most profits are made through unpredictable increases in the values over time. The daily price of bonds oscillates around the maturity value (or par value) of $1,000 per bond based on current changes in the level of interest rates. The real profit power of bonds comes through the regular interest paid to the investor by the company that issues the bond.

These corporate income investments can be divided into bonds of high-quality companies and companies of lower standing that have to offer investors a higher level of interest.

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Historically, corporate bonds have been steady performers with an average annual total return on 6.6% since 1863 and have generally performed well against inflation (inflation adjusted total return of 4.4%).

Bond Bear Market Statistics –

Unlike common stocks that have annual losses 28% of the time (with one-third of those being multi-year bear markets), corporate bonds have losing years only 16% of the time and rarely have consecutive bad years.

Corporate bonds are also famous for quicker recoveries than stocks in financial calamities. During the Great Depression, Dow Jones Corporate Bond Average eclipsed its 1929 level by 1933. Bonds also had the same stellar performance during the Great Recession of 2008 when prices fully rebounded in 19-months!

Historic Bond Buying Opportunity –

A reliable indicator of oversold conditions in the bond market is to measure the current price of the Dow Jones Corporate Bond Average versus its 40-week moving average. In the following chart, current bond prices are at a significant spread to the moving average. In fact, there have only been three other times that bonds have been this oversold: 1932, 1980 & 2008.

In a mad scramble to rebalance investment holdings, Wall Street has, “thrown the baby out with the bath water”. This has presented savvy investors with the rare opportunity of buying 3-to-5-year debt in some of America’s oldest corporations at a bargain prices and mouth-watering yields that should outperform stocks in the foreseeable future.

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