In terms of credit quality, there’s no argument that U.S. Treasury bonds arethe safest investment. However, if you measure risk as the volatility of thebond’s price over time, corporate bonds are the more stable, less risky investment.

Corporate bonds trade at a “spread” – the extra amount of yield that the corporate bond must provide an investor in order for that investor to own the bond – over a benchmark Treasury bond. In times of economic turmoil,the spread typically increases because investors become more concerned about a corporate borrower’s ability to meet their debt obligations.

Investors, therefore, require the corporate bond to yield more (pay a wider spread) than the Treasury bond.

While uncertainty drives the spread wider on the corporate bonds, it often drives the yield lower on Treasury bonds. This occurs because investorsmove funds to U.S. Treasuries (the flight to quality) driving the price ofthese bonds up and correspondingly the yield lower. The net effect of bothactions is lower volatility in the yield and price of the corporate bonds.

An important point to remember is that as the yield on Treasury bonds rises, the price falls by a greater amount than the price change of the corporate bond.

In today’s volatile market, corporate bonds offer a substantial improvement in yield over Treasury bonds. Additionally, their higher yields normally comewith lower price volatility. Treasuries undeniably offer the lowest credit risk,but the fluctuation in their price is often greater than that of corporate bonds of similar maturity. Investors will be well served by placing a portion oftheir funds into high-grade corporate bonds of large issuers.

ALAN S. MOORE writes this column every Wednesday for L’Observateur. He isa financial advisor in the New Orleans office of Legg Mason Wood Walker, Inc.,a securities brokerage and financial services firm and member of the New York Stock Exchange, Inc. and SIPC.Back to Top

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