Bonds: The Unbeaten Path to Secure Investment Growth

Chapter 11. CORPORATE BONDS

AT $2.2 TRILLION in outstanding debt, the corporate bond market is huge. Bought by institutions and individuals because of their high yield, corporate bonds span the spectrum of maturities and finance just about every aspect of the economy. As such, their credit ratings range from good-as-gold AAA to down-and-out junk. Corporate bonds are generally sold to institutions in very large quantities, although there are certain kinds that are targeted for retail.

The Big Picture

Good-as-gold corporate bonds are hard to find. According to Kamalesh Rao of Moody's Investors Service, the number of AAA-rated companies has shrunk over the past thirty years.^[95] In the late 1970s, fifty-eight companies had AAA ratings and accounted for 25 percent of corporate debt. In 2001, only nine had the AAA rating, and those companies accounted for only 6.2 percent of corporate debt. The stellar nine are now the stellar five, consisting of two corporate descendants of 1970s AAA-rated companies—General Electric and ExxonMobil—and three newcomers rated AAA by both Moody's and Standard & Poors—Johnson & Johnson, Pfizer, and United Parcel Service (UPS). This list keeps changing.

RATINGS

The higher a bond's rating, the less you're supposed to worry about a corporate bankruptcy and vice versa. With the collapse of Enron in 2001, the ratings assigned by agencies came under increased scrutiny. Moody's Investors Service responded to the critical nature of the government scrutiny by sending ...