Bondholders Beware!

It's very important to be ultra-careful when buying corporate bonds. This is because private equity buyers aren't friends of the bondholders of companies they acquire. These buyers tend to load too much credit on their acquisitions, thus hurting the credit quality of existing bonds.

Before abundant credit became the order of the day, buyers of corporate bonds were protected by covenants that forbade over-leveraging the balance sheet. That's no longer the case, so bond holders are vulnerable - as soon as an LBO deal is announced, the bonds of the target company often plunge in price.

So if corporate bonds are unappealing, you might want to hold municipal bonds in a taxable account and Federal government issues in tax-deferred accounts.

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