- Big companies like Starbucks are turning to bonds for borrowing
- Attractive returns but a high level of risk
- There are large levels of corporate debt in world and it is expected to grow
Corporate bonds are issued by companies looking for an injection of cash. With many businesses struggling for cash as industries shut down all over the planet, we could see more of these bonds launched.
For example, it was recently reported that Starbucks Corp. (SBUX) and Textron Inc (TXT) were both looking to dip into the investment-grade bond market to get hold of funds.
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It is easy to see why this is needed, as Starbucks has been forced to close its branches across countries like China and the US this year due to the coronavirus. The coffee chain is said to have borrowed around £1.2 billion in this way.
Therefore, this is a good time to see if you should be interested in investing in bonds like this.
The possible profits
These bonds typically offer higher returns than options such as treasury bonds. Indeed, the extra yield that you can expect on corporate bond right now is increasing. Recently, the difference increased by 0.3%, which is the biggest jump since 2008.
These are tempting bonds when you look at the possible returns. The fact that big, established names like Starbucks are involved also gives them an air of reliability. Rather than directly buying bonds, it is more common for individual investors to buy into an ETF.
The problem with investing in this way is that it carries a big risk. To start with, you need to understand the credit rating involved. The riskiest are junk bonds. But even giant corporations like Starbucks aren’t rated that much higher.
Companies around the planet are sitting on huge piles of debt of around £10.8 trillion that some analysts have called an “unexploded bomb”. The recent collapse of oil prices has shown up a massive debt drought in the corporate world that looks like getting worse before it gets better.
One piece of good news came when the Federal Reserve in the US produced a bill to buy corporate bonds and ETFs based on them. This is called the Secondary Market Corporate Credit Facility and it acted to bolster a market that has been struggling.
The latest move by the Fed has helped the corporate bonds market to steady. Yet, it isn’t yet enough to make this a recommended type of investment for most people.
Many corporate bond ETFs are up in the last week but still down heavily in the year to date. It is still too early to know if the upswing will continue or if it was only a temporary relief for a battered and bruised section of the market.
With huge debt issues hanging over the corporate world, expect to see a lot of talk about this kind of bond. There may be some extremely tempting deals on offers from major firms.
Yet, the risk factor is still too high for more conservative investors to get involved. If you are happy to run the risk then go into it with your eyes wide open by understanding the credit grades and the possible returns on offer.