Bond Pricing: Corporate vs. Muni bonds

Corporate bond pricing and yields may not be enough to entice investors these days, according to last week’s numbers that 1.7 billion dollars was taken out of high yield mutual funds. While it had briefly looked like bonds with fat yields were bouncing back after a sustained period of safety bids over fear of a bond market meltdown, yields are now at the lowest they’ve been in 2010 as investors are once again looking to the security that Treasury bonds and essential service revenue muni bonds provide.

What Is a Corporate Bond?

Rather than being the product of municipalities, corporate bonds are directly issued by corporations. While they’re known to carry sizeable yields and appealing bond pricing, they’re often perceived as less safe than other types of bonds. Statistically, they’re 97% more likely to default than muni bonds. This is because municipalities can make the choice to raise taxes in order to prevent the prospect of defaults and corporations can’t. If you were to directly compare two bonds of the same rating, one municipal and one corporate, the corporate bond will likely carry significantly more risk. In fact, BBB muni bonds are considerably safer than AAA corporate bonds. Moreover, muni bonds have also traditionally recovered more principal if they should default.

Investors turn to corporate bonds because they’re hungry for the higher yields and bond values that come with higher risk, and they’re perhaps too trusting of ratings agencies.

Smart Bids on Corporate Bond Pricing

Is corporate bond pricing worth the risk? Should investors always play it safe with essential service muni bonds and treasury bonds? As there are signs that the economy is rebounding, and interest rates are on the rise, if this trend should continue, corporate bonds could likely rebound. Furthermore, in the event of a stock market storm, as some are predicting may happen in the near future, all bonds, including corporate, will see a surge.

You want to make sure you’re playing it smart by doing your own research and bond analysis. When assessing corporate bonds, you want to focus on bond pricing and the amount of income to be made, measuring it against the interest and principal amount. If the income is substantially higher, you’re more likely to make a return on your investment. Ultimately, it is most viable to spread and diversify in order to control risk and keep income steady.