substitute corporate debt for treasury debt? (for pragmatic or moral reasons)

[murphy_p_t]

In HBs book, Failsafe Investing, I seem to recall HB making a passing reference to using corporate debt in lieu of US treasuries...if one has moral reservations? My recollection is very fuzzy on this.

Considering HBs libertarian views, I suspect he refers to reservations in funding the US gov't through the purchase of its debt.

I'm looking for ideas if anyone is substituting corporate debt in place of US treasuries.

For instance, I saw this http://www.kitco.com/reports/KitcoNews20120403_MM.html

Don't know if these bonds are "callable" or not, though.

For folks living outside the US...where your country doesn't offer 30 year treasuries...have you considered using corporate debt of blue chip companies?

[D1984]

Murphy,

Using corporate debt in place of LT Treasury debt isn't that great an idea IIRC. The LTTs are there because they will do well in a deflation or deflationary market crash because in a fiat money system Treasury bonds and interest will always be paid back in full (well, assuming Congress doesn't vote to default on them but that is an issue of will to pay, not one of ability to pay).

Look how LTTs behaved vs LT corporate bonds in the 1987 crash or in the fall of 2008 and you'll see what I mean.

Vanguard has a decent LT corporate fund that has been around since the mid-70s and has around 20-30 year maturities in it if you want to invest in long term corporate debt...but in my opinion that investment belongs in the VP and not in the PermPort.

[WildAboutHarry]

With corporate bonds, especially long-term corporate bonds, you also have call risk.  Rates go up and you are stuck with the lower yields.  Rates go down, and the bonds are called and you lose the high yields.

Treasury bonds, at least the current crop, are non-callable.

[KevinW]

IIRC Browne discussed corporate bonds on the radio show too.  It seemed like he was addressing a specific concern voiced by someone who wanted to boycott Treasury bonds for political reasons. So far I haven't heard of anyone actually doing this. It may be a solution in search of a problem.

There's a catch-22 with corporate long-term bonds in the PermPort. Buying individual bonds has problems and buying a fund has problems.  Corporates have credit risk, so if you buy individuals, they need to be diversified. But it's difficult to do this properly with an individual-sized portfolio without racking up big transaction costs. And, keeping track of your holdings' credit ratings and screening for new companies is a constant burden with lots of room for error.

If go with a fund, you have the usual problems of expense ratios, counterparty risk, and asset lending. Also there aren't very many appropriate funds out there.  I'm only aware of the Vanguard mutual fund and their newer ETF (VCLT). I haven't looked in a while, though.

Similar to the situation with socially-responsible stock funds, I think the best plan is to leave politics out of investing, and give time and money to causes as a separate project.

[moda0306]

I'd love to see a AAA Corporate non-callable long-term bond fund.  I'd probably sock that in my VP.

[KevinW]

I'd love to see a AAA Corporate non-callable long-term bond fund.  I'd probably sock that in my VP.

I'm curious, why? I thought the academic literature found that stockholders are better compensated for credit risk than bondholders.

[moda0306]

KevinW,

Mainly, as a fun exercise of observing spreads, and maybe try my hand at timing them.  Most of the time I agree, though... don't borrow money to corps... become a stockholder.

[alvinroast]

I don't think there are pragmatic reasons to do this for anyone that has access to treasuries or treasury funds.

I have "moral reservations" regarding US treasuries. It would be almost impossible not to when you see how the government spends money. Part of the beauty of the HBPP is that you're always partially invested in something you don't like. It not only works in spite of this, it works because of this.

I have a small amount of ST corporate in VP, but I really can't imagine owning LT corporate debt. It's taking on risk without adequate compensation in my opinion. The US Govt is one of a limited number of entities that can print any amount of money. Imagine how different things would be if Greece were able to print it's own money. The moral hazard of US treasuries is nothing like the Euro.

Remember that the gold portion of PP is short government, short crooked books, short fiat and arguably long on Venezuela and Iran. This is an all season portfolio and substituting corporate for treasury could make it a three season portfolio IMO.