To understand bond returns one has to understand the bond dynamics. Companies need money for expansion, acquisition in new units, or exploring new market etc. One way of raising these funds is through a bond issue.

Bonds are corporate debt, and the attractiveness will be determined by the organization’s credit history. The key question arises over how the bond rates are determined.

Bonds rates are measured with respect to their position above treasury yield. This is to induce the investor to purchase their bonds assuming that if the rate is below the treasury yield no one will be interested in investing these bonds as treasury is the most bonds. Currently treasury yields are low making overall bonds look attractive. But there are secondary factors.

It has has been more than 30 months during which the FED has kept interest rates low. With inflations showing signs of returning with the record high price of oil and commodities we expect that inflation will keep rising. In the last six months the producer price index (PPI) has risen at an annual rate of 10%. That will feed into the consumer price index (CPI) over the next few months.

This is a serious concern for bond buyers and one reason they remain under pressure.

Please find below the table of major ETF’s.

From the above table we have a mixed picture of returns since the bonds are used as a fixed income returns usually. AGG is the best as it has a significant history of 5 years as all the others are the new one in the markets. AGG has also good volumes making it more attractive for investment purposes.  BND is also good in terms of return and heavy volume the overall return in 5.18% which I well above the treasury benchmark yield of 10 years. The expense ratio is 0.12%.

Please find bellows Distribution by credit quality as at 31-03-2011

From this we see AGG has better diversification in terms of credit quality rating compared to BND.

Total Bonds are very important from the portfolio perspective. There appropriate use can provide stability and a hedge when equities drop. The proper allocation of bonds in the portfolio not only provides the hedge in terms of volatility but also a good fixed income streams.

Symbols: BND, AGG, BIV, PCEF

Exchange Tickers: (NYSE: BND), (NYSE: AGG), (NYSE: BIV), (NYSE: PCEF)

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