Talk about late to the party. Investors looking to invest in corporate bonds may get tired of hearing about how returns in 2013 won't match those of 2012.
Investors must temper their expectations, then, said Kathy Jones, fixed-income strategist for the Schwab Center for Financial Research. All corporate bond returns will be modest — in the single-digit range, she added.
Investors have poured money into all kinds of bonds, pushing yields down to near-record lows. For example, the Morningstar Corporate Bond Index recently registered its lowest yield, 2.58 percent, for investment grade bonds since the index's inception in 1998. Average yields usually hover around 5.41 percent.
These low yields will drag down bond performance in 2013.
The looming "fiscal cliff" and a sluggish economy may throw ringers into bond performance, too.
Though Schwab and several other firms have forecast that Congress will probably reach a deal—avoiding the most severe spending cuts and tax hikes that could trigger a recession—some corporate bonds are still vulnerable to the slow economy and are already richly priced, such as high-yields.
"So there aren't any bonds we can pound the table about, since they've all had a strong run," said Jones.
There will also be fewer new debt issues, Jones predicted, translating into more money chasing even fewer bonds. The corporations that could issue debt, especially investment-grade quality, have already cashed in on low rates and strong investor demand, refinancing debt and extending maturities.
Over half of the proceeds were used to pay off existing debt, said Eric Takaha, director of corporate and high-yield bonds at Franklin Templeton. Bond credit quality, he adds, is still much better than pre-crisis levels, which is good news for investors.
So, even if 2013 looks to have solid fundamentals, it will be a bond pickers' game, said Takaha. Already strong sectors like housing and financials won't necessarily outperform the overall market. (Read More: Fixed Income Outlook.)
"Individual selection will matter," said Takaha.