Experts recommend shorter duration bonds.
While stocks have taken the brunt lately in the market's downturn, corporate bonds are also seeing the effects. "With the market worried about an economic slowdown and the higher interest rates that have occurred over the last year or so, corporate bond spreads have started to widen," says Timothy Womack, director of fixed income at Creative Planning in Overland Park, Kansas. With the yield curve relatively flat and uncertainty about continued rate hikes looming, Womack says lower-rated, longer-dated corporate bonds may be out in the New Year, in favor of shorter maturity and higher quality choices. When looking for corporate bond options in 2019, consider making these seven buy-and-hold plays.
Allegiant Travel Co. (ticker: ALGT)
Assigned a BB- rating by Standard & Poor's, Allegiant Travel may be an under-the-radar choice for corporate bond seekers. Patrick R. McDowell, research analyst and portfolio manager at Arbor Wealth Management in Miramar Beach, Florida says smaller carriers like Allegiant have redefined the airline business model, specifically pointing out Allegiant's focus on profitable flights rather than expanding routes to maintain market share. The current yield to maturity, which represents the total return expected when the bond is held to maturity, is 4.5 percent, making these bonds attractive in the near term, with a stable outlook for the long term. McDowell's company recently enhanced its position in Allegiant with bonds maturing in mid-2019.
iShares Floating Rate Bond ETF (FLOT)
Some experts have a less optimistic view for corporate bonds through 2019 and beyond. "Either interest rates might be rising or the economy is entering into a recession next year," says Lars-Alexander Kuehn, an associate professor at the Tepper School of Business in Pittsburgh. Rising interest rates can lead to negative returns while a recession could bring the possibility of increased defaults. "Both scenarios are bad news for the corporate bond market," he says. A floating rate bond fund such as FLOT is a good option if that holds true. FLOT offers exposure to floating rate bonds with remaining maturities ranging from one month to five years, making it useful for managing interest rate risk.
GameStop may not immediately come to mind as a buy and hold corporate bond selection, but it could be a win for 2019. Robert Spivey, director of research at Valens Research in Boston, says GME is a company that's easy to dislike, since it's a challenging business. The company's Moody's credit rating is at a high yield Ba1, with 2021 6.75 percent bonds sitting at a 6.62 percent yield to worst -- the lowest potential yield a bond can offer. "Fundamentals are forecast to slow the next few years, but even in that environment, GME's cash flows will still be sufficient to handle operating obligations," Spivey says, including debt maturities for 2020 and 2022.
Icahn Enterprises LP Common Stock (IEP)
Icahn's holdings are far-reaching, with investments stretching from real estate to metals. With a BB+ S&P rating, McDowell says these bonds have grown more attractive in a low interest rate environment. Current yield ranges from 5.5 percent to 6 percent annually, depending on purchase price, with bonds reaching maturity in August 2020. "This bond is callable, which scares a lot of potential investors away," McDowell notes, "But the yield to call is currently far better than the yield to maturity, so we wouldn't be disappointed if these bonds were called away." Yield to call is what a bond yields if you buy and hold it until the call date, assuming the call occurs before maturity.
HCA Healthcare (HCA)
HCA Healthcare is a large company "with a strong footprint and excellent operations," Spivey says. The 2022 and 2023 bonds are trading near a 5 percent yield to worst, but Spivey says HCA's 2022 7.5 percent and 2023 5.875 percent bonds look interesting. Market concerns with HCA center on how health care reimbursement could affect the company's profitability. There are concerns about HCA's ability to operate with limited cash balances with its debt load. But, Spivey says, HCA's cash flows are on track to consistently exceed its operating obligations by more than $3 billion over the next five to seven years, making its credit and debt position more optimistic.
iShares iBonds Dec 2019 Term Corporate ETF (IBDK)
Niko Finnigan, co-founder of Delta Wealth Advisors in Indianapolis, says target date bond funds offer an attractive opportunity for buy-and-hold moves. "Target-date bond funds offer a yield to maturity, which means bondholders can calculate how much they can expect to earn until the bond fund matures at a given time," he says. IBDK may be suited to short-term, buy-and-hold strategies, since "investors can capture much of the bond market's yield by purchasing short-term bonds," Finnigan says. The exchange-traded fund offers exposure to investment-grade corporate bonds maturing between Jan. 1, 2019 and Dec. 15, 2019. It's an option to consider for managing interest rate risk.
Western Union (WU)
Like GME, Western Union may give some bondholders reason for pause. The company "has consistent debt maturities over the next five to six years and growing competitive threats from new entrants into the money-sending business," Spivey says, resulting in WU's 2023 bonds pricing in risk that may not necessarily exist. Looking ahead, he says WU has strong cash flow projections. Even if those were to decline, the company would have no issues handling debt obligations. With an S&P rating of BBB, the immediate outlook is for stability, something bond investors may be seeking more of if market volatility continues into 2019.
The best corporate bonds to buy and hold for 2019.
To review, up here are seven bonds to buy and hold in 2019.
-- Allegiant Travel Co. (ALGT)
-- iShares Floating Rate Bond ETF (FLOT)
-- GameStop (GME)
-- Icahn Enterprises LP Common Stock (IEP)
-- HCA Healthcare (HCA)
-- iShares iBonds Dec 2019 Term Corporate ETF (IBDK)
-- Western Union (WU)
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