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 RSS FEEDS (close)
By Mina Kimes, writer-reporter

CDs & Money Market
MMA 0.69%
$10K MMA 0.42%
6 month CD 0.94%
1 yr CD 1.49%
5 yr CD 1.93%

Find personalized rates:

Rates provided by

(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
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. 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

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.