What do Bank of America (NYSE:BAC), IBM (NYSE:IBM), McDonalds (NYSE:MCD) and Proctor & Gamble (NYSE:PG) have in common? Yes, they’re all giant U.S. corporations. But they’re also among the herd rushing to the debt market recently, looking to borrow as much as they reasonably can — while the borrowing is this good.

• Last week, Bank of America launched a two-tranche issuance of 10-year notes and 30-year bonds expected to total $1 billion or more.
• IBM issued a total of $2.5 billion in three- and five-year notes at record-low coupons of 0.55% and 1.25%, respectively.
• Reclaiming the lowest yield on a 30-year corporate bond, McDonalds issued $500 million of 30-year bonds with a 3.70% coupon — 80 basis points (bps) over the 30-year U.S. Treasury.
• Proctor & Gamble issued $1 billion of 10-year notes with a record-low 2.30% coupon, +55 bps over U.S. Treasuries. It issued another $1 billion of floating rate notes (FRNs) at a coupon below LIBOR (the London Interbank Offered Rate benchmark), the first sub-LIBOR corporate debt issue since 2006.

The primary force behind this stampede is interest rates that continue to hold around historic lows while inflation expectations remain restrained, which makes issuing debt very attractive to borrowers. Yields on investment-grade corporate bonds have fallen to 3.56% from 3.97% since last September and are close to the record 3.503% reached Aug. 9, according to Bank of America Merrill Lynch index data.

Plus, there are signs that U.S. economic activity is picking up, and that growth might just be sustainable — assuming that the EU debt crisis doesn’t result in cascading government and bank failures. Barclays Capital’s financial institutions index finished Wednesday at 3.88%, 68 bps lower than at year’s end, while the spread to Treasuries was 329 basis points — the lowest since Nov. 16, according to The Wall Street Journal.

The yield on corporate notes and bonds above U.S. Treasuries of similar maturities typically tightens, or narrows, during economic expansions, which lowers their coupon rates and yield-to-maturities. Again, this makes money cheaper to borrow.

Why Buy Bonds Now?

But why would investors want to sink hard-earned savings into a fixed-rate, 30-year bond when interest rates are at historical lows and credit spreads are tightening? Safety is probably the main reason, though in the event of another financial crisis or recession and widening corporate bond spreads, Treasuries stand to outperform substantially.

Plus, corporate cash balances are at record levels, and many, if not most, corporations are now in much better fiscal condition than the U.S. government.

Nearly 99% of corporate bonds rated Aaa and Aa by Moody’s Investor Services have met their coupon interest payments and principal repayments as promised over the past 40 years, according to a February 2011 report, “Safety of Investment Grade Bonds.”

The following chart shows that investors can easily limit prospective default risk by investing in corporate bonds rated single-A or better by S&P.

The next chart shows how 2010 corporate bond default rates varied across industry sectors. S&P says default risk improved in 2011 and is expected to continue to “revert to the norm” with improving economic conditions.

So, if you want to lock in a relatively safe, comparatively high-yielding, long-term return on some of your savings, what would you do: Buy 5-year Treasuries or IBM’s new 5-year note and gain an additional 0.62% yield?

Early 2012 total returns for corporate bonds are encouraging, and big-name investment managers including Blackrock (NYSE:BLK), Fidelity and Wells Fargo (NYSE:WFC) are bullish. “Corporate bonds are outperforming U.S. government securities this year as the world’s biggest economy shows signs of growth, according to a Bloomberg News article.”Treasuries have returned 0.3 percent, versus 2.4 percent for company debt, according to Bank of America Merrill Lynch indexes.”

Still, does it make sense to invest in corporate debt now? That depends on individual investors’ financial needs, available capital, risk/reward tolerance and the expected future path of interest rates and inflation. Here are some general tips that can help you make the call.

How Individuals Can Play Bonds

A variety of factors — including a lack of easy access and market transparency, large transaction size and the need to make credit quality assessments — means the corporate debt securities market continues to be dominated by institutional investors and professional bond and hedge fund managers. Long-term issues in particular are really the realm of investors such as insurance companies, pension funds and 401(k) fund managers who are looking for an optimal mix of debt securities that balance regular contributions (inflows) and projected long-term liabilities and redemptions (outflows).

Individuals can overcome these hurdles, to a certain degree, by investing in the many bond funds or ETFs. Here’s a list of the top 5 corporate bond ETFs as rated by theStreet.com:

1. iShares iBoxx Investment Grade Bond ETF (NYSE:LQD) tracks the iBoxx Liquid Investment Grade Index of more than 600 bond issues. Expense ratio: 0.15%. Assets under management (AUM): $17 billion. Annual dividend yield of 3.91% with a 1-year return of 9.44% as of mid-January.
2. iShares 1-3 Year Credit Bond ETF (NYSE:CSJ) tracks the Barclays Capital U.S. 1-3 year Credit Bond Index. All holdings are investment grade. Expense ratio: 0.20%. AUM: +$9 billion. Annual dividend yield of 1.62% and 1-year return of 1.88% as of mid-January.
3. iShares Barclays Intermediate Bond ETF (NYSE:CIU) tracks the Barclays Intermediate Credit Bond Fund Profile of investment grade bonds. Expense ratio: 0.20%. AUM: $4.5 billion. Annual dividend yield of 2.74% and a 1-year return of 5.19%.
4. Vanguard Short-Term Corporate Bond ETF (NASDAQ:VCSH) tracks the Barclays Capital U.S. 1-5 Year Corporate Index. Expense ratio: 0.15%. AUM: $2.3 billion. Annual dividend of 2.30% with a 1-year return of 2.79%.
5. iShares Barclays Credit Bond ETF (NYSE:CFT) tracks the Barclays Credit Bond Index of dollar-denominated corporate and agency debt with maturities greater than one year. Annual expense ratio: 0.20%. AUM: $1.1 billion. Annual yield is 3.27% with a 1-year return of 8.98%.

Of course, investing in long-term corporate debt also comes with risks, both generally and particularly at this point in time. One is that when inflation does pick up, fixed-rate corporate debt  investors will suffer capital losses, that is, the market value (price) of their securities will fall as interest rates rise.

Also, when inflation does pick up, you’ll be getting paid the same amount of dollars, or the same premium (spread) above a reference rate, while the price of goods, services and assets will be rising. If you’ve socked that money away in medium- to long-term corporate bonds to fund a future liability, you may find that its expected future price, or cost, goes up as well, leaving you with a potential capital shortfall. In any case, you’ll always want to keep a close eye on the credit quality of issuers whose debt you invest in.

In addition, interest rates generally rise as economic expansions pick up. Again, corporate debt  investors would incur mark-to-market capital losses as a result, all else being equal, and realized capital losses if they were to sell their debt holdings.

In sum, corporate bonds are a traditional, core part of investors’ portfolios, and for good reason. Whether you’re looking down the line to fund a child’s education, purchase a home, retire or save for other relatively large expenses, investing in corporate bonds merit the time and effort required.