High-quality bonds form the base of a fixed-income portfolio. Issuers include major governments, government agencies and companies that are the strongest financially. The bonds have low credit risk; there's little chance that the issuers would be unable to pay interest or principal as promised.
Earnings for All
- 35 Ways to Earn Up to 11% on Your Money
- Short-Term Accounts: 1%-2%
- Muncipal Bonds: 2%-3%
- Investment-Grade Bonds: 3%-4%
- Foreign Bonds: 3%-5%
- High-Yield bonds: 3%-6%
- Dividend-Paying Stocks: 4%-6%
- Real-Estate Investment Trusts: 4%-9%
- Closed-End Funds: 4%-9%
- Master Limited Partnerships: 8%-11%
For most of the period from 2010 through mid 2016, long-term interest rates fell while the Fed kept its benchmark short-term rate near zero. With the Fed now hiking, the bellwether 10-year Treasury note yield has risen from 1.4% in mid 2016 to nearly 3% recently, lifting yields on other high-quality bonds.
The risks: A key determinant of long-term bond yields is the inflation rate, because inflation erodes the value of fixed-income yields. If investors begin to fear that inflation will rise, they're likely to demand higher yields on new bonds–depressing the value of existing bonds.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
How to invest: Vanguard Total Bond Market ETF (BND, $79, 3.0%) is a solid choice for a diversified bond holding, says Miriam Sjoblom, a bond-fund analyst at Morningstar. The portfolio tracks the Bloomberg Barclays U.S. Aggregate Bond index of high-quality bonds, which include Treasury, corporate and mortgage issues. The fund's annual management cost is a mere 0.05% of assets. Its duration is 6.1.
For investors who prefer actively managed funds, Dodge & Cox Income (DODIX, 3.0%) has a "thoughtful long-term approach to investing and an attractive price tag," says Morningstar analyst Sarah Bush. The management cost is 0.4%, compared with an average of 0.8% for similar funds, and the portfolio duration is 4.2. Another actively managed pick: DoubleLine Total Return Bond (DLTNX, 3.4%), a Kip 25 member. Most of the bonds in the portfolio are mortgage-backed securities, the specialty of DoubleLine founder Jeffrey Gundlach. The fund's duration is 3.8.Cullen Roche, head of advisory firm Orcam Financial Group, recommends a small stake in the longest-term U.S. Treasury bonds, using iShares 20+ Year Treasury Bond ETF (TLT, $118, 3.0%). Such long-term bonds carry high volatility risk (the ETF's duration is 17.5), but Roche views them as insurance against a geopolitical or global economic crisis. Long-term Treasuries have been the asset investors flock to in times of great fear. "There's no reason to think that has changed," he says.
-
How to Navigate Your Medicare Advantage Plan in a DisasterIf you're a Medicare Advantage member in an area that has been impacted by a disaster, you might be worried about access to care and medicine. Here's what you need to know.
-
Older Investors: Boost Your Savings and Retire EarlierThis one measure can help older investors retire up to two years earlier and potentially double their retirement savings.
-
How Big Will the Fed Rate Cut Be This Fall?A dismal July jobs report has lifted expectations for fall rate cuts. How low could the fed funds rate be by year's end?
-
July Jobs Report Renews Rate-Cut Hopes: What the Experts Are SayingThe July jobs report shows weakening in the labor market and lifts expectations for a September rate cut.
-
Should You Buy These ETFs Before the Fed Cuts Rates?The Fed is likely to lower interest rates this fall, and tactical investors might want to look closer at these ETFs before rate cuts resume.
-
July Fed Meeting: Updates and CommentaryThe July Fed meeting came and went, with Fed Chair Powell saying little about a September rate cut and President Trump.
-
What Will the Fed Do at Its Next Meeting?Rate cuts remain on hold this summer, experts say.
-
Who Will Replace Jerome Powell as Fed Chair?Buzz is building that President Trump could announce Fed Chair Powell's replacement sooner rather than later, even though his term doesn't end until next year.
-
June Fed Meeting: Updates and CommentaryThe June Fed meeting was a key economic event, with Wall Street keyed into what Fed Chair Powell & Co. have to say about interest rates and the economy.
-
May Fed Meeting: Updates and CommentaryThe May Fed meeting came and went with little fanfare as Fed Chair Powell & Co. stuck to their data-dependent script toward interest rates amid tariff uncertainty. The May Fed meeting came and went with little fanfare as Fed Chair Powell & Co. stuck to their data-dependent script toward interest rates amid tariff uncertainty.
