A year ago, I wrote about why I favored corporate bonds instead of government bonds. I revisited the subject this week after doing my semiannual review of my workplace retirement savings account.
One of the funds I hold in my 403(b) account is the Vanguard Intermediate-Term Investment-Grade Fund Admiral Shares (VFIDX). As the name implies, it invests in higher-quality corporate bonds. These bonds are riskier than Treasury bonds with similar maturities because there is a greater chance of a corporate issuer defaulting. The risk of default among investment grade bonds is nowhere near as high as it is for high-yield (aka, junk) bonds, but U.S. government bonds are still the safest.
The reason I took a second look was credit spreads. A credit spread is the difference in yield between a safer and riskier bond of similar maturity. It’s helpful to think of spreads in terms of insurance premiums. Insurance companies charge more if they think there is a greater risk of having to pay out on a policy (e.g., because a person has had a few traffic violations). Similarly, bond investors demand higher yields if they think there is a greater risk of the bond issuer defaulting. Depending on the prevailing economic and risk-taking environment, credit spreads can narrow (less difference between the yields for safer and riskier bonds) or widen (a bigger difference between the yields for safer and riskier bonds).
More on AAII.com
- Corporate Bond Analysis: What to Consider – When considering a corporate bond, look beyond yield and focus on an issuer’s character, capacity, collateral and conditions.
- Where Credit Is Due: A Look at the Ratings – In this 2009 AAII Journal article, we explained what credit ratings are and contrasted the various ratings from Moody’s, S&P and Fitch.
Highlights from this month’s AAII Journal
- Well-Built 529s Can Be a Great Option for College Savings – These plans provide a tax-free way to grow and use savings to pay for college; plus see which plans Morningstar rates as being the best.
- Stock Order Types – This month’s InvestoGraphic explains the various options your broker may give you to choose from when placing an order to buy or sell a stock.
AAII Sentiment Survey
Pessimism about the short-term direction of the stock market is at its highest level in six months. Also, optimism among individual investors fell to an unusually low level. More about this week’s results.
- Bullish: 28.0%, down 6.0 points
- Neutral: 31%, no change
- Bearish: 41%, up 6.0 points
- Bullish: 38.5%
- Neutral: 31.0%
- Bearish: 30.5%
Take the Sentiment Survey.
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The Week Ahead
Earnings season remains in full swing with nearly 140 S&P 500 companies scheduled to report. Included in this group are Dow Jones industrial components: Coca-Cola Co. (KO) and Pfizer Inc. (PFE) on Tuesday; Apple Inc. (AAPL) and DowDuPont Inc. (DWDP) on Thursday; and Chevron Corp.(CVX) and Exxon Mobil Corp. (XOM) on Friday.
The week’s first economic report will be September personal income and outlays, released on Monday. Tuesday will feature the August S&P Corelogic Case-Shiller home price index and the Conference Board’s October consumer confidence survey. The October ADP employment report and the October Chicago Purchasing Managers’ Index (PMI) will be released Wednesday. Thursday will feature preliminary third-quarter productivity, the October PMI manufacturing index, the October ISM manufacturing index and September construction spending. The October jobs data—including the change in the nonfarm payrolls and the unemployment rate—as well as October motor vehicle sales, September international trade and September factory orders will be released on Friday.
Chicago Federal Reserve bank president Charles Evans, who will speak on Monday, is the only Fed official scheduled to make a public appearance.
Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!