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.
-
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.
-
What Is the Buffett Indicator?"It is better to be roughly right than precisely wrong," writes Carveth Read in "Logic: Deductive and Inductive." That's the premise of the Buffett Indicator.
-
I Have $20,000 to Invest. What Should I Do?We asked a financial expert to weigh in on where to invest $20,000.
-
CPI Report Puts the Kibosh on Rate Cuts: What the Experts Are Saying About InflationCPI Consumer price inflation reared its ugly head to start the year, dashing hopes for the Fed to lower borrowing costs anytime soon.
-
Fed Leaves Rates Unchanged: What the Experts Are SayingFederal Reserve As widely expected, the Federal Open Market Committee took a 'wait-and-see' approach toward borrowing costs.
-
CPI Report Keeps the Fed on Track: What the Experts Are Saying About Inflation
CPI Disinflation in key areas of consumer prices should help the Federal Reserve stick to its policy path of gradual cuts to interest rates.
-
Blowout December Jobs Report Puts Rate Cuts on Ice: What the Experts Are SayingJobs Report The strongest surge in hiring since March keeps the Fed on hold for now.
-
Fed Sees Fewer Rate Cuts in 2025: What the Experts Are Saying
Federal Reserve The Federal Reserve cut interest rates as expected, but the future path of borrowing costs became more opaque.
