Sovereign Society’s investment director Eric Roseman says he would rather hold investment-grade corporate debt than Treasury bonds. The yield in the corporate debt market is at a multi-year high and can be easily accessed via low-cost ETFs. But Eric says it is wise to avoid financial firms, as more trouble lies in store for this sector.

After witnessing a major rally following the Bear Stearns Cos. bailout in mid-March, investment grade corporate credit spreads have risen to multi-decade highs this summer.

If you’re a long-term investor, I would consider nibbling at these levels because interest rates for many bonds in the non-financial sector now pay attractive inflation adjusted yields.

But I’d avoid most financial company debt instruments because these securities will remain distressed much longer amid ongoing balance sheet erosion and high risk premiums to fund borrowing obligations.

The corporate debt market now yields an effective 3.11% above risk-free Treasury bonds compared to 3.05% at their pre-Bear Stearns‘ peak in March, according to Merrill Lynch (NYSE:MER).

The Dow Jones Corporate Bond Index now yields an effective rate of 6.04% or 2.20% above ten year Treasury bonds. That’s also at a multi-year high.

One of the cheapest ways to invest in investment-grade corporate debt is to buy low-cost exchange traded funds (ETFs). These products are listed in the United States and offer daily liquidity. You can also find similar products traded in Frankfurt, Germany and denominated in euro.

Another segment of the credit markets also offering high value is the mortgage-backed securities market or the MBS sector.

The investment-grade corporate debt market and mortgage-backed securities are cheap. These products provide a low correlation to common stocks AND they pay attractive inflation adjusted yields. Plus, non-financial corporate bonds offer strong balance sheet management.

In fact, I prefer to own the corporate debt of, say, Coca-Cola (NYSE:KO) or Exxon-Mobil Co. (NYSE:XOM) than the U.S. federal government or the state of California. These and other S&P 500 Index non-financial companies have far healthier balance sheets.

As the U.S. and global economy continues to slow this year, inflationary pressures should also cool. This should open the door to higher bond prices, especially in the high grade investment sector and mortgage-backed securities.

But I would still avoid junk bonds or high yield debt because the corporate default rate for risky issuers continues to rise and won’t peak over the next 12-18 months.

Source: Time to Start Bargain Hunting: Where I’m Looking