How Do Corporate Bonds Appreciate in Value?
There are two primary ways for a corporate bond to produce a capital gains opportunity for the investor. The credit quality of a company’s debt can improve as a result of a strengthened balance sheet; a merger with a stronger company or from improvement in the company’s operating performance. Generally these positive changes would be reflected in a credit ratings upgrade by one or more of the rating agencies. The changes could also result from improvement in the market perception of the company’s ability to pay. The second way for corporate bonds to appreciate results from changing credit market conditions. Corporate bonds trade at yields expressed as a spread to US Treasury securities. In normal conditions, corporate bonds will trade at yields of 100 to 200 basis points higher than comparable treasuries. Currently, corporate bonds are trading at yields reflecting a default rate of over 20%, producing yields for investment grade bonds more than 500 basis points higher than treasuries.
