Investment-grade corporate bonds yield more than Treasuries of comparable maturity but carry only slightly more risk. And because of their higher interest payments, corporates hold their value better than Treasuries when interest rates rise.
What could go wrong: Although the default rate on high-quality corporate bonds is low, companies can—and do—go bankrupt. Moreover, if rates rise sharply, prices of corporate debt will fall.
How to play them: To get decent yield without taking on too much interest-rate risk, look for intermediate-term bond funds and individual corporates with maturities of three to 10 years.
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Consider, for example, two bonds with triple-B-minus ratings, the lowest investment-grade ranking. One, from private-label credit card issuer Synchrony Financial (SYF), yields 2.5% to maturity in February 2020. Synchrony, which is being spun off from General Electric this year, has a strong business. The other bond, from Expedia (EXPE), the popular online travel site, yields 3.4% to maturity in August 2020. Expedia is growing through acquisitions, most recently with its announced purchase of competitors Orbitz and Travelocity.
A good place for fund investors to start is Vanguard Intermediate-Term Investment-Grade Investor (VFICX). The fund, which yields 2.4%, has about three-fourths of its assets in corporate bonds, with the rest in Treasuries and asset-backed securities. Manager Gregory Nassour emphasizes quality. More than 75% of assets are in debt rated single-A or higher, compared with 45% for the average corporate bond fund. The fund’s average duration is 5.4 years, and expenses are a modest 0.20% of assets annually.
Fidelity Total Bond (FTBFX), a member of the Kiplinger 25, is a bit more aggressive. It owns mostly Treasuries and highly rated corporate bonds, but it also has a smattering of junk corporate bonds and emerging-markets debt. The fund yields 2.4% and has an average duration of 5.1 years. Annual expenses are 0.45%.
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