Everyone knows I love bonds, and after the recent turmoil in so many other corners of finance, I trust you agree. Once again in 2025, bonds' dual mandate of timely, reliable income and risk mitigation is proving its value.
Hence my segue into an assessment of the various sectors heading into summer. Despite lagging performance in early 2025, municipal bonds offer clear and present value, with yields as a percentage of Treasury rates that are extremely high.
While a 10-year T-bond yields 4.2%, for example, you can find AA-rated and AAA-rated tax-free issues galore priced to yield as much or more to maturity, for a taxable-equivalent yield in the range of 6% to 7%. This is due to what U.S. Bank bond honcho Bill Merz calls "an incremental blend of a variety of things," including a burst of new muni supply in 2025 that was just in time for mass selling of illiquid municipal exchange-traded funds that cheapened the entire sector.
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But now yields are high enough to bring insurance companies back alongside individuals. And if you reckon the world is quasi-boycotting Treasury debt and other U.S. assets, foreigners are not much of a factor in municipals.
Next — and this sounds counterintuitive — I would not avoid high-yield corporate bonds. Yes, this group is more closely correlated to stocks than munis and Treasuries. And yes, in April some of my favorite high-yield funds, such as Fidelity Capital & Income and Hotchkis & Wiley High Yield, got body-slammed while stocks crashed. But unless you think the economy is failing — the first-quarter decline in economic growth is misleadingly negative — the extra yield will still pay for itself.
"Fifty percent of high yield is double-B, while it used to be only one-third," says American Century's corporate bond chief Jason Greenblath. While bank-loan defaults may be creeping higher and CCC-rated bonds are dicey, BB bond credit problems are not.
Most high-yield funds lean toward the stronger layers of the sector. And after the struggles in April, the spread between BB bonds and Treasury yields has narrowed again after spiking to more than 3 percentage points in the April trading panic. But at around 2 to 2.5 percentage points, the extra income is still greater than at the start of the year.
Nice yields, minimal risk
I also see fresh opportunities in preferred stocks, either via funds or in the individual issues of banks, utilities and insurance companies.
The rule is that any $25-par-value investment-grade preferred priced at around $23 is safe to buy and becomes an instant source of extra yield. Various Allstate, Bank of America, JPMorgan, Truist and electric-company preferred shares occupy this zone, for current yields between 6% and 7% and minimal risk.
If you go down in quality to BB, you can find more than 7%. Banks and insurers are in better condition than in 2008, so if the entire economy really does falter, they will not fail or get downgraded to where the value of these obligations takes another whacking.
I’ll note that the stocks and stock funds that did the best during the worst of the unpleasantness are the most bondlike: AT&T, Realty Income, Franklin Low Volatility High Dividend ETF — or pretty much any fund with "dividend" in its name. Nothing is immune from renewed pressure if the political situation, the economic situation or both descend into another, more intractable crisis.
The chance of stagflation and that sell-America theme rule out long-term Treasury bonds unless you can hold to maturity. But the domestically focused high-income standbys that have been dear to my heart for decades are likely to survive.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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