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Corporate bonds smash records for low yields

A view of Barclay's headquarter at London's Canary Wharf financial district

Lefteris Pitarakis/AP

There have been a ton of stories about government bonds setting records for their low yields. Now corporate bonds are heading in the same direction.

Earlier this week, the Barclays U.S. corporate investment grade index fell to just 3.096 per cent, its lowest yield since the bank made started the index in 1973.

Not only are corporate bond yields dropping, but their spreads over Treasuries are collapsing as well. The Bank of America Merrill Lynch corporate bond index currently has a spread of 294 basis points over Treasuries, about 50 basis points tighter than the 348 at the start of 2012.

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There's no secret here: investors are clearly grasping for yield. Stocks aren't as sexy now that the global economy is cooling, and government bonds are already extremely expensive.

But there's something investors should keep in mind: corporate bonds aren't risk-free. As Bloomberg pointed out this week, bond durations, or their sensitivity to interest rates, are sky-high. So even though the Federal Reserve said it would keep rates effectively at 0 per cent until 2014, should the economy pick up speed or the Fed change course, corporate bond investors will feel the pinch fast.

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