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Published: April 12, 2006
Which Bonds Should You Buy
Now?
The bulls and bears have been fighting it out in the bond pit for weeks.
Pointing to a slowdown in the housing sector, the bulls were convinced
there would be one more interest rate increase and then the Fed would
put the brakes on its rate hike campaign.
Not likely, said the bears, eyeing the surprising growth in payrolls and
other positive economic indicators.
Then on March 28th, new Fed
Chairman Ben Bernanke seemed to weigh in on the side of the bears.
Raising the federal funds rate (a key short-term lending rate) an
expected 0.25%, he reaffirmed that "some further policy firming may
be needed." That's Fed-speak for "interest rates may go higher
to stem inflation in what appears to be a buoyant economy."
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How much higher, no one knows
-- not even the Fed. In sharp contrast to Bernanke's warning about
further rate hikes, Kansas City Fed President Thomas Hoenig recently
noted that the federal funds rate may be "very close to where we
need to be." That type of comment suggests the Fed may indeed be
nearing the end of its rate tightening cycle.
The big question on every income investor's lips right now: Should I
sit tight in case rates move higher, or should I dive in and capture
bond yields now that they've been pushed to multi-year highs?
The question is important because, as you know, bond prices decline when
interest rates rise. After all, why would anyone pay a $1,000 to buy a
bond yielding 4%, when they can get one at the same price a few months
later yielding 5%?
For example, if you had purchased a 10-year Treasury yielding 4.02% last
August, then you would have seen its value fall from a market price of
$1,000 to $822.09 based on today's prevailing 4.89% yield. The -18%
capital loss in just eight months is far more than the 4% interest
income the bond would pay in an entire year.
So, as you can see, timing can be critically important when investing in
the bond market. The good news for income investors is that in times
like these, bond funds may be the answer to your prayers. By holding
dozens of bonds with different maturities and asset classes, bond funds
can capture the highest rates around, while readily shifting their
strategy to respond to changing interest rates.
Which funds offer the best yields while taking on the least amount of
risk? Over the past few weeks, I've scoured hundreds of bond funds --
open-end, closed-end, short-term, long-term, municipal, high-yield,
global, emerging market -- you name it. In the process, I've scouted out
some very attractive bond funds with yields of up to 9.9%. In the
upcoming May issue of my premium newsletter -- High-Yield
Investing -- I'll
describe my favorite bond funds for these uncertain times.
I'll also profile a very special stock/bond hybrid as May's
"High-Yield Security of the Month." This Enhanced Income
Security (EIS) gives you the best of both worlds -- the upside potential
of a stock and the dividend security of a bond. I like its 11.4% yield,
based on the past 12 months' payouts. I also like the fact that the
company is in the consumer staples industry, which makes this security a
great defensive play.
And finally, in my next "Income-Plus" Stock Finder article,
I'll turn my attention to the surprising rebound in the real estate
investment trust (REIT) sector. In the process, I'll provide a list of
overlooked property REITs that offer yields in excess of 6% and are
still trading at attractive prices.
Good investing!
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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Carla
Pasternak draws on a variety of financial backgrounds to make profitable
calls on income-generating stocks for her readers.
Carla has
been employed in the investment industry for more than two decades. In
addition to her work as a writer for several other nationally recognized
financial publishers, her previous experience includes a position as
President of a well-respected investor relations firm. She has also been
writing shareholder reports for public companies (annual reports,
speeches, corporate profiles, slide shows, etc.) since 1980.
A highly
successful investment analyst, Carla specializes in high-yield,
income-paying stocks. In that pursuit, she's always mindful to select
companies that not only pay rich dividends, but that also have the
potential to deliver strong long-term capital gains.
On the
educational front, Carla holds both MBA and Ph.D. degrees. When she's
not watching the market, she's teaching business courses at the college
level and managing several million dollars in portfolio assets.
