Daniel Craig as James Bond in Skyfall.Francois Duhamel/Sony Pictures/The Associated Press
Want to make some money playing in the bond market? You needn't get super sophisticated.
To date this year, the plain-Jane U.S. investment-grade corporate bond index is outperforming the supposedly sexy investment-grade credit default swaps index by a wide margin. As calculated by Barclays Capital, the U.S. corporate bond index has tightened about 100 basis points since January while CDX.IG – the investment-grade credit default swap – has tightened by only about 25 basis points.
There are two explanations for this. First, there's a difference in the basket of bonds and swaps. Most notably, large U.S. banks and brokerages aren't included in the CDX index, but they are in the corporate bond index. That's causing big problems this year because these bonds have been big time winners in 2012.
Then there is the retail factor. Scores of retail investors are plowing their money into corporate bonds, and guess what type of bonds they want? Super-safe investment grades. Barclays noted that during the week of October 3, the U.S. market saw the highest weekly inflow into investment-grade bond funds in nearly three years.
However, the differences may not last long. "While we expect robust inflows to continue, the record low yields of investment-grade bonds are likely to limit further spread tightening from here," Barclays noted.
Still, you can score one for retail investors.
Tim Kiladze