Why I Trust Bonds, Even Now
Once again in 2025, bonds' dual mandate of timely, reliable income and risk mitigation is proving its value.
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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free 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.
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.
Related Content
-
We inherited $250K: should we buy a second home or save for college?He wants a vacation home, but she wants a 529 plan for the kids. Who's right? The experts weigh in.
-
The $300,000 Social Security Decision You Could Get WrongDeciding when to claim Social Security is a complex, high-stakes decision that shouldn't be based on fear or simple break-even math.
-
4 Ways Washington Could Put Your Retirement at RiskLegislative changes, such as shifting tax brackets or altering retirement account rules, could affect your nest egg, so it'd be prudent to prepare. Here's how.
-
I'm a Financial Adviser: This Is the $300,000 Social Security Decision Many People Get Wrong
Deciding when to claim Social Security is a complex, high-stakes decision that shouldn't be based on fear or simple break-even math.
-
4 Ways Washington Could Put Your Retirement at Risk (and How to Prepare)
Legislative changes, such as shifting tax brackets or altering retirement account rules, could affect your nest egg, so it'd be prudent to prepare. Here's how.
-
2026's Tax Trifecta: The Rural OZ Bonus and Your Month-by-Month Execution CalendarReal estate investors can triple their tax step-up with rural opportunity zones this year. This month-by-month action plan will ensure you meet the deadline.
-
Is Your Retirement Plan Built for 2026 — or Stuck in 2006?It's time to move away from the 4% rule and the 60/40 portfolio to an adaptable, tax-diversified strategy focused on reliable income and longevity.
-
Filed for Social Security Too Soon? 2 Ways to Get a Do-OverIf you've claimed Social Security too soon, two SSA rules allow a do-over. But be warned: Using them clumsily can lead to surprise repayments or lost benefits.
-
Have You Aligned Your Tax Strategy With These 5 OBBBA Changes?Individuals and businesses should work closely with their financial advisers to refine tax strategies this season in light of these five OBBBA changes.
-
Stocks Close Down as Gold, Silver Spiral: Stock Market TodayA "long-overdue correction" temporarily halted a massive rally in gold and silver, while the Dow took a hit from negative reactions to blue-chip earnings.
-
The New Fed Chair Was Announced: What You Need to KnowPresident Donald Trump announced Kevin Warsh as his selection for the next chair of the Federal Reserve, who will replace Jerome Powell.
