Is the party over for corporate debt?

Making decent money from corporate bonds in the second half of 2009 will be tough. But, even if yields have fallen, all is not lost. Some lower-risk, blue-chip funds still offer decent yields and the safety of diversification.

It's been quite a ride for corporate-bond investors. Investment-grade corporate bonds returned 9.2% this year up to June, beating Treasuries (US government bonds) by a staggering 13.7%, according to Merrill Lynch. That's the biggest margin on record, and proof perhaps that the bankruptcy of Lehman Brothers once a blue-chip bond issuer has become a distant memory. What's more, "you could have bought any corporate credit in January and February and made out like a bandit", says Richard Lee, a managing director at broker-dealer Wall Street Access in New York on Bloomberg.

But making decent money in the second half of 2009 will be tougher. Bond prices, which were as low as 10p per £1 of debt for some firms at the height of the crisis, have recovered as investors have piled into the market. Of the new money pumped into funds in May, for example, £717m went into corporate bond funds. That made it the most popular sector for the seventh month in a row, according to the Investment Management Association. The result has been rising prices and falling yields. Indeed, yields have fallen both in absolute terms and relative to government bonds, so new investors are no longer being paid a big premium to stomach the extra default risk.

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