Who is buying 1 year Corporate bonds when treasuries pay more?

[webdesignbellflower]

I can't undertand why anyone would risk a corporate bond default, when you can buy US Govt Treasuries with a full 1% higher interest rate. Am I missing something? Maybe large fund prefer corporates for some reason? Or maybe Corp Bond ETFs are having a hard time finding bonds so they are competing with each other and driving price up, and yields down? Makes no sense to me.

https://imgur.com/xFF73FN

EDIT Maybe these are just ridiculous bid/asks and have been sitting there a long time, since Vanguard isn't much of a bond exchange it seems.

EDIT Turns out only one of them is non callable, a J&J bond expiring one year from now, with yield at ask of 4.034%, (based on bid of 102.5% of face due to 6.7 coupon), so still weird to me. So still the same issue, but really only one bond shows it clearly.

https://imgur.com/5e9zqnk

 

[puretruth7]

@webdesignbellflower Look up an actual corporate bond and note the price and yield. I bet you the price will be discounted to par.

 

[webdesignbellflower]

@puretruth7 Vanguard shows yields based on current bond value (bid asks separate), not the face, but the only one of the few available that is not callable (which messes up valuation) is a J&J that pays just over 4.03 at the bid, and way less at ask.
Both bid and ask are over 100% however because coupon is over 6.7%. So I still don't get why someone would buy a J&J bond for just 4% ytm for almost exactly a year.

https://imgur.com/5e9zqnk

 

[thecoldneverbotheredme]

@webdesignbellflower Expectation that rates may decline and that J&J can be considered “risk less” given how big they are and their ability to pay back the debt are two reasons that come to mind

 

[ecalmese]

@thecoldneverbotheredme But J&J is certainly not less risk that the US government.

 

[greenlee]

@ecalmese J&J is actually the best rated entity on earth, even above the USA. ( Even if of course corporate and sovereign ratings aren’t really comparable)

 

[samantha91]

@ecalmese When the GOP decided to publicly brag about wanting to let the US default on its debts in 2011, the US was downgraded to a rating of AA+ from AAA (even though the default never happened).

There are quite a few bonds rated higher than the US Government ever since then.

 

[biblebasedbelief]

@ecalmese The House going Red could mean going back to threatening Congress not paying their bills. I'd bet money on a US government technical default over J&J in the next year

 

[tomaspianist]

@webdesignbellflower The corporate bonds could be selling for under face value. So while the yield is lower than the treasuries, the pay off for the principle amount can be greater. IE* 50k price for a 100k face value which is paid in full at maturity.

 

[richardson217]

@tomaspianist To add to this, this is why you should look at yield to maturity, not just yield. In this example the YTM of the 100k FV bond is 100%

 

[leejr]

@richardson217 Generally 'yield' of a bond is short for yield to maturity, while 'yield' of a fund is short for trailing twelve months dividend yield.

 

[beauharnais]

@richardson217 But even when ranking on yield to maturity, you can still find bonds being traded at significantly worsen yield to maturity than treasury

 

[richardson217]

@beauharnais Probably to do with payment schedules in this case, if we assume r=0, a bond that pays $25 every 3 months is less risky than a bond that pays $100 in a year’s time, so the $100 in a year bond should be cheaper and therefore have a higher YTM

 

[kingdomwaygh]

@richardson217 Yield is YTM here, depending on the platform it could be YTW, but almost never do they use interest yield for this tables.

 

[tshane]

@richardson217 So ytm is not inclusive of the dividend ?

 

[rigley]

@tshane YTM includes coupon(dividend) and change in price.

 

[webdesignbellflower]

@tomaspianist Thanks but those are yields to maturity based on current bid/ask on the bond, plus coupon amount if any. They show the actual bid asks when you click on those, and highest (ignoring callable bonds) is a Johnson and Johnson paying 4.034 IF you were to get the bid price. It has a coupon over 6.7% so bid is around 102.5% of face. So still 4.034 vs higher treasury yield, so I'm still confused.

https://imgur.com/5e9zqnk

 

[kingdomwaygh]

@webdesignbellflower It's probably just an illiquid bond, look at the spread, the bid needs the bond for X reason and is willing to pay a premium for it.

 

[kingdomwaygh]

@tomaspianist This is included in the yield.

 

[denny99]

@tomaspianist Sorry if too pedantic but FYI the term you are looking for is principal and not principle.