Investors on the hunt for yield in choppy bond markets can find income in some areas, but they should be careful to balance risk and reward. The first half of the year was hard on fixed income. Bond yields rise as prices fall. Back in mid-June, the 10-year Treasury yield topped 3.48% — a level last seen in 2011. It was a painful time for investors holding these bonds in their portfolios, as their prices swooned just as equities were falling. Interest rates have calmed since then, with the 10-year currently yielding just under 3%. For investors who are shopping for yields that are more attractive than what they can find in government bonds, opportunities may lie in investment grade debt, high-yield corporate debt and core bond funds. “There are more opportunities now than there were at the start of the year,” said Lawrence Gillum, fixed income strategist, LPL Financial. Corporate credit Strategists like the corporate credit market for income and are specifically focusing on investment grade debt. “We like investment grade corporate bonds,” said Kathy Jones, managing director and chief fixed income strategist for the Schwab Center for Financial Research, adding that investors can stay relatively high in credit quality and still see solid returns. For example, she noted that A-rated corporate bonds are seeing yields of nearly 4%. That’s “not bad in terms of the risk-reward trade-off,” she said. For example, Johnson & Johnson has a triple-A rating from Moody’s, while Kimberly-Clark is rated A2 by the same firm. It may be an especially good opportunity if you can hold such bonds for a longer duration, according to Gillum. “If you can hold that position over the course of the next three to five years, I think you’re going to look back and see that this was a pretty good buying opportunity,” he said. High yield Those looking to ratchet up their risk level for higher rewards could search further down the corporate credit rating ladder, where yields can easily top 6%. “This is often a much more attractive rate of return than investors were able to get for last five to 10 years,” said Russ Koesterich, portfolio manager of the BlackRock Global Allocation Fund. His group is focusing efforts on the BB area, where investors can get good yield for reasonable risk. They’re looking closely in cyclical sectors such as transportation and energy. The ICE BofA U.S. Corporate BB Index, which tracks the performance of BB corporate bonds, currently yields 5.07%. Investors willing to go lower in credit quality could find higher yields, but they would be taking on more risk. Back in May, Fitch Ratings affirmed Ford Motor’s long-term issuer default rating of BB+. Meanwhile, T-Mobile has a BB rating from S & P. “The more you get into high yield you’re taking on more equity-like risk,” Koesterich said. In addition, as the economy slows, lower-rated companies are going to struggle more to keep up and could potentially see defaults. The U.S. is worrying about the potential of a recession as the Federal Reserve raises interest rates to reel in the highest inflation in decades. That could pose an issue for companies in shaky standing, even if their corporate debt seems to be producing high yields at attractive prices. “This is not the point in the cycle to go bottom fishing,” said Koesterich. Less risky bets Investors who are craving yields higher than Treasurys but don’t want to go into corporate debt have a few options as well, according to LPL’s Gillum. That includes picking up index funds or exchange-traded funds that are concentrated on corporate credit markets. The chart below includes performance as of 2:10 p.m. ET. “For individual investors, most of the time it’s better to have a diversified vehicle,” he said. Gillum also sees core bonds and mortgages as solid places to invest for those looking to get some yield without taking on too much risk – for instance, the Bloomberg U.S. Aggregate Bond Fund currently yields 3.73%, up from about 1% a year ago. “You don’t have to take the risk to get these increased yields,” he said.
Discussion about this post