Forget Treasuries - but not other bonds

Some corporate bonds - especially of the high-yield variety - and munis could still offer yield-hungry investors healthy returns in 2010.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Mina Kimes, writer-reporter

CDs & Money Market
MMA 0.39%
$10K MMA 0.35%
6 month CD 0.37%
1 yr CD 0.68%
5 yr CD 1.37%

Find personalized rates:
 

Rates provided by Bankrate.com.

(Fortune Magazine) -- For all the attention paid to the stock rally of 2009, bonds actually sparked more passion among mutual fund investors: Taxable bond funds attracted inflows of $253 billion in the first 11 months of 2009, according to the Investment Company Institute, compared with outflows of $2 billion in stock funds.

Booming demand for corporate, high-yield, and municipal bonds pushed prices up, generating outsize returns for fixed-income investors.

After such a huge rally, few bonds are screaming bargains today. But with a weaker stock market likely next year, some may offer better returns than equities. Among corporate bonds, consider top-quality high-yield issues, which are yielding as much as 10%.

Junk bonds won't flourish as they did in 2009, when the average fund rose 43% through late November, according to Morningstar.

But they could still produce double-digit returns in 2010 as investors gain confidence that issuers won't fail, says Tony Rodriguez, head of fixed income at FAF Advisors: "We expect to see a steady and continued decline in default rates in 2010."

Consider a fund like Principal High Yield (CPHYX), which has returned 8% annually over the past 10 years and offers an 8.7% yield.

Build America Bonds are all the rage right now. Issuers love the new taxable munis because their interest payments are 35% subsidized by Uncle Sam, and investors like them because they yield about 5%.

Eaton Vance's new Build America Bond Fund (EBABX) offers a diversified selection. The surge in Build America Bonds could also boost regular munis. "You're taking supply out of the tax-free muni market, and [other] muni buyers will have to fight for what's left over," says Richard Ciccarone of McDonnell Investment Management.

Among tax-free munis, Ciccarone recommends general obligation bonds (as opposed to issues used to fund particular projects). Fidelity Tax-Free Bond (FTABX) keeps about 30% of its portfolio in these government-backed issues and has returned an average of 4.3% over the past five years.

Finally, avoid Treasuries for now. Short-term notes offer pitiful yields, and long-term issues are susceptible to rising inflation. "There's no justification for where rates are right now relative to longer-term inflation expectations," says Ross Junge, a portfolio manager at Aviva Investors. "Treasuries continue to be the least attractive investment in fixed income."  To top of page

Company Price Change % Change
Bank of America Corp... 16.15 0.00 0.00%
Facebook Inc 58.94 0.00 0.00%
General Electric Co 26.56 0.00 0.00%
Cisco Systems Inc 23.19 -0.02 -0.09%
Micron Technology In... 23.91 0.00 0.00%
Data as of Apr 17
Index Last Change % Change
Dow 16,408.54 -16.31 -0.10%
Nasdaq 4,095.52 9.29 0.23%
S&P 500 1,864.85 2.54 0.14%
Treasuries 2.72 0.08 3.19%
Data as of 2:32pm ET
More Galleries
50 years of the Ford Mustang Take a drive down memory lane with our favorite photos of the car through the years. More
Cool cars from the New York Auto Show These are some of the most interesting new models and concept vehicles from the Big Apple's car show. More
8 CEOs who took a pay cut in 2013 Median CEO pay inched up 9% in 2013 to $13.9 million. But not everyone got a bump last year. Here are eight CEOs who missed out. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.