[Publisher’s Note: There is big news on the way for Wealthy Retirement subscribers. I just got confirmation that Investment Director Marc Lichtenfeld will make a huge announcement within the next 10 days. Stay tuned…]
The same factors driving investors back into stocks – stronger balance sheets and earnings – also make high-yield bonds more attractive for the retired or about-to-retire investor.
Since 2008, companies have reduced the size of their workforces, lowered or restructured debt, reduced inventories and strengthened their balance sheets – all of which support equities. But bonds issued by the same companies benefit from the same improvements and can deliver above-average returns with more security and much less volatility than stocks.
Bonds from names like Exide Technologies, Ferro Corp. and Eagle Rock are paying 7.5% to as high as 11% annual returns on short-term bonds. And some have been in the 20% range.
While everyone has to own some equities, the economic catalysts required to drive stock prices may be hard to find in this environment of 2% growth. Corporate bonds, whose payouts are not dependent on economic forces, are a great way to generate stable returns despite a slow-growth economy.
And most encouraging for the senior portion of the population, according to Fitch (one of the best ratings agencies), the current default rate for these bonds sits at an incredibly low 2%. That means 98% of the companies are paying on their bonds exactly as promised. The high-yield market looks very good, even in this rate environment.
But the real key to a successful bond portfolio in this market requires looking at more than just yield. In a recent Barron’s article, J.P. Morgan’s Scott Siegel agreed with me that short maturities – (He’s holding five- to eight-year bonds… I’m recommending an average maturity of five years, but no longer than seven years.) – are an absolute requirement to limit price fluctuations when rates move up, which they have to do.
The Fed can’t continue to buy Treasuries forever, and rates will take off when it stops.
Siegel sees the current rush into stocks being forced by the Fed’s bond buying, which is designed to keep yields low. He thinks most investors are taking on more risk than they really want, or can afford, in a desperate effort to earn any kind of return on their money.
He recommends using the “Sell bonds!” noise that’s echoing in the markets as a buying opportunity.
With improved fundamentals and a super low default rate, high-yield corporate bonds are an essential addition to a conservative portfolio.
Don’t overlook corporate bonds.