Investing in bonds feels like swimming against a powerful tide these days. Yields have risen sharply since Election Day, pushing bond prices down. The dynamic has made it tough to earn a positive return in high-grade bonds, which may suffer additional price declines.
The problem is that a long era of ultralow interest rates appears to have ended. The Federal Reserve has started raising short-term rates, and it is winding down its program of buying government bonds to help prop up prices (and keep yields down). Donald Trump’s election as president, meanwhile, has revived the prospect of stronger economic growth and inflation, which would erode the value of bonds and their fixed-income payments. Already, the yield of the benchmark 10-year Treasury note has climbed from 1.8% before Election Day to 2.4% today, a huge spike in a brief span. Kiplinger forecasts that 10-year Treasury yields will be at 3% by year-end. That almost certainly means more pain ahead for holders of high-quality bonds. “We’re concerned that rates will continue to rise and returns on bonds will be low to negative,” says Laird Landmann, codirector of fixed income at TCW, which runs TCW and Met West bond funds.
Higher yields do grant one big benefit: They put more cash in your pocket from interest income. If you own short-term debt, the bonds’ prices shouldn’t fall much if rates rise modestly. And you can reinvest cash proceeds from bonds maturing in a year or two, pocketing higher market rates relatively soon. But it could take many years to recoup losses in long-term bonds if rates keep ascending. For example, if long-term interest rates were to rise by one percentage point, the price of a 30-year Treasury bond would likely decline by 20%, wiping out more than six years’ worth of interest payments.
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So how do you invest for income in this climate? Limit your risk of losses from higher rates and spread your bets. Corporate bonds and mortgage-backed securities yield more than Treasuries and are less sensitive to rate swings, for instance. Also appealing are some high-yielding stocks, such as real estate investment trusts and energy pipeline firms, as well as closed-end funds, many of which yield upward of 7%. Of course, several of these investments come with an elevated risk of a credit-rating downgrade or default. But layering them atop a foundation of high-quality bonds and cash can help steady your portfolio if markets head south.
Here are 29 income ideas to scoop up yields from 1% to 10%. All prices, yields and related data are as of March 31.
- Municipal Bonds: 1%-5%
- Investment-Grade Bonds: 2%-4%
- Real-Estate Investment Trusts: 4%-6%
- High-Yield Bonds and Bank Loans: 3%-5%
- Foreign Bonds: 3%-6%
- Master Limited Partnerships: 6%-8%
- Closed-End Funds: 7%-9%
- Mortgage REITs: 8%-11%
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