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| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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How to survive bond exodus
Investors told to keep some bonds as a bridge to future |
The Journal Sentinel - Jan. 9, 2010 - By Kathleen Gallagher
Investors are getting more skittish about bonds.
After ballooning in asset size by about 20% during most of the year, bond funds began to see outflows in the last two months of 2010, according to Investment Company Institute statistics.
The United States' continued deficit spending, expected lower investor demand for bonds and projections for stronger economic growth in 2011 all suggest interest rates will rise. And when rates go up, bond prices go down.
Still, investors shouldn't abandon bonds completely, said Michael J. Steppe, a partner at Brookfield Investment Partners LLC.
To maximize income without excessive risk, investors should create a "bridge" between today's low interest rates and the fatter yields many expect in 2012 and 2013, he said.
"You want to position yourself so you earn a little yield during this period. You want relatively short maturities and relatively high quality," Steppe said.
No fan of bond funds, Steppe says he would particularly avoid them in this environment.
Bond funds have been rewarded for taking interest rate risk and credit risk in what was until recently the "perfect market" for them, Steppe said. If interest rates rise, that story will change.
"You'll see losses in those funds, which will translate into a significant level of redemptions," he said. The funds will be forced to sell their easier-to-sell, highest quality bonds.
"Then the nice, safe investments will be gone and you'll have the bottom part of the portfolio they bought for yield that's not so safe and not quite so liquid," Steppe said.
Instead of bond funds, he suggests yield-seeking investors use a mix of three types of individual securities:
• A Fannie Mae or Freddie Mac benchmark security with a two-year maturity will provide a yield of about 0.7%. Benchmark securities are their most liquid issues.
• A high-quality (AAA credit) corporate or municipal bond that matures in three or four years will provide a higher yield. For example, Steppe has used a Waukesha County Technical College municipal note that matures April 1, 2015. It has a yield of 1.67%, which provides a real return of 2.32% for investors in the 28% tax bracket because the federal government doesn't collect taxes on municipal bonds.
• A 15-year amortizing Ginnie Mae security will have a yield between 3% and 3.2%. It contains a pool of 15-year fixed-rate mortgages and will have an average life of about five years. Steppe said he would put 30% of the money in this option and 35% in the other two.
This three-security blend would provide a yield of about 2% and have an average life of about 3.5 years, Steppe said.
In two years, investors in this strategy would have about 35% of the total in cash that they could invest in the expected higher-yielding securities, he said. In the meantime, they'd be earning more than a bank account or money market offers.
"If I can get a yield between 1.5% and 2%, that's a reasonable yield in this environment," Steppe said. "If you're earning more than 2%, you're probably taking more risk than you should be."
The biggest risk with this strategy is that interest rates could rise more quickly than expected, leaving investors stuck in securities with lower yields than new issues, Steppe said.
ABOUT THIS
The Journal Sentinel focuses on one Wisconsin money manager or analyst in this weekly feature, looking at a trend that helps investment pros make their decisions.
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| Stuff to look at |
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S&P Commentary and Newsletters: S&P
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Income Security Recommendation January 2013 Issue.
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