7 Key Factors Affecting Corporate Bonds Performance

1. Market Conditions - Market conditions are one of the key factors that will affect the performance of corporate bonds. If market conditions change then this will affect the way that these investments perform. If the market improves then the economic outlook and interest rates will also improve, and this may increase the bond yield. If the bond is callable and the market and economy decline then this can cause the bond to be called, so new ones may be issued at a lower rate.

2. Interest Rate Sensitivity - Some companies, fields, and bonds are more sensitive to interest rate changes then others. When the interest rates rise the bond prices tend to fall, and this relationship is true for all bonds. Short term bonds will be less sensitive to changes in the interest rate while those of a longer duration will have a higher degree of sensitivity in this area.

3. Credit Quality - The credit quality of specific corporate bonds will also affect the performance of these investments. Each company and bond is assigned a credit rating by the rating agencies, and bonds which have a higher credit rating will generally perform better and be more liquid than those offered with a lower credit quality. The lower the credit rating of a bond the more likely the corporation is to default, but the higher the possible yield may be.

4. The Bond Duration - The duration of a bond also affects the performance of this investment, because the duration will help determine the interest rate sensitivity. A longer duration means that the bond is more sensitive to any changes in the interest rate, and this causes more fluctuations in the performance to occur.

5. Current Events - One important factor when looking at the performance of corporate bonds is any news or current events that could affect the ability of the underlying corporation. If a company is filing for bankruptcy, even under chapter 13 reorganization, then the desirability of that specific bond can drop dramatically. Anything that affects the value of the underlying corporation can affect the performance of the bonds offered.

6. Corporate Cash Flow - This type of bond is backed by the company that issues the bond, and the financial aspects of the company are related to how the bond performs. A company which is not performing well financially and that does not generate a good cash flow will typically have a bond that performs poorly. Investment analysts prefer that the company generates at least enough cash to cover any debts. A poor cash flow and financial position could cause a downgrade in the credit rating of the bond, which adversely affects the bond performance.

7. Inflation - Inflation can have a negative effect on corporate bonds. When inflation rises this is bad for bonds, because the low yield will not generate enough income to provide the same buying power to allow the investment capital to keep up with rising interest rates. The price of bonds will usually decrease to compensate for this fact. When inflation goes up so do yields, but the bond prices decrease. When inflation goes down the yields do as well, but bond prices rise.