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It’s a predicament many investors face right now, with traditional forms of investment income being squeezed by the threat of rising interest rates. Investors are forced into ever more esoteric environments such as EM bonds and mortgage REITs in search of income, only to find these get hit too when rates rise, only more so.
Take a look at Emerging-market bond funds for example, during the May/June sell-off the Market Vectors Emerging Markets Local Currency Bond ETF (EMLC) lost 10.4%. Even funds that invest in so-called inflation-protected bonds got hit, losing 6.8%.
And mortgage REITs fared even worse, during the same period the iShares Mortgage REITs Index Fund ETF fell over 15%, as investors realized that rising interest rates mean lower mREIT yields due to higher funding costs.
Investors have learned the hard way that replacing yield in a portfolio outside of traditional bond funds is hard task. As Brendan Conway points out in todays Focus on Funds. “Finding that bond-like non-bond investment is a tall order. Maybe it’s impossible.”
So investors should accept that interest rates are going to rise and bonds are going to get hit. What you should be doing is preparing your portfolio for the upcoming volatility and not searching for evermore exotic investment vehicles in the hope of riding out the storm.
Russ Koesterich — BlackRock Chief Investment Strategist has some sound advice for how investors can do just that.
Todays Other Top Stories
MarketWatch: – Marty Fridson says junk bonds are overvalued again. – Investors have been ferociously diving back into high-yield bonds over the past month and a half, bidding up prices to a point where they are overvalued, says Marty Fridson, a high-yield bond guru who runs the research shop FridsonVision LLC.
FT: – Fitch and Fed warn on risks from ETFs. – Parts of the booming market for exchange traded funds risk worsening broader market sell-offs or triggering crashes, according to two studies released this week.
Learn Bonds: – Bill Gross vs. Jeffrey Gundlach: 2013 edition. – 2013 has been a wild year so far for bond investors, with rates hitting two year highs in yesterday’s trade. While its easy to make money in bonds when interest rates are falling, the true test of a bond fund manager is if they are able to earn a return for their investors, or at least minimize losses, when interest rates rise sharply. Let’s have a look at how two of the most well known bond managers in the world, PIMCO’s Bill Gross and DoubleLine Capital’s Jeffrey Gundlach, have performed so far in 2013.
Forbes: How To buy a bond ETF in this market. – Buying a bond ETF can bring you diversification, but it’s not the whole answer. Instead, consider these tactics for spreading out bond risk.
InvestmentNews: – Gundlach dips toe into uber-indexing. – DoubleLine Capital LP plans to launch an enhanced index fund based on Yale University economics professor Robert Shiller’s cyclically adjusted price-earnings ratio.
Financial Post: – Year’s juiciest plays may have been already squeezed. – Investors may have squeezed the richest juice out of 2013’s top investment themes, with a recovery in developed markets, the ‘Great Rotation’ out of bonds and flight from emerging markets all seeming largely played out.
Trading Floor: – Why it’s time for corporate bonds. – Maybe this is the time you should be thinking of adding more corporate bonds to your portfolio. Saxo’s Fixed Income Team Leader, Simon Fasdal, explains why now could be the perfect time to step away from core bonds as the global economy appears to be improving. He says that corporate bonds and shorter maturities are performing well, and there is little sign of them losing their allure for investors.
FundWeb: – How the sell-off created an opportunity in U.S. high yield. – Allianz Global Investors US chief investment officer Doug Forsyth says the June sell-off in bonds has led to the prospect for “better-than-coupon-like” returns on US high yield for the rest of the year.
Bloomberg: – Detroit General-Obligation Bonds Seen Paying 100%. – Detroit’s $369 million of voter-approved general-obligation bonds provide a “strong case” to be treated as secured debt in the city’s record bankruptcy, returning 100 percent to investors, according to Barclays Plc.
MarketWatch: – Foreign investors dumped large amounts of bonds in June. – Investors weren’t just selling their bonds stateside in June. Foreign investors dumped fixed-income holdings as fears about a scale-back in the Federal Reserve’s bond-purchase program roiled markets globally that month, according to monthly Treasury International Capital data, released Thursday.
WSJ: – Muni investors make Michigan pay. – Investors signaled they are willing to dip a toe in the unsettled Michigan municipal-bond market for a price, buying $18.7 million of school-district debt in the state’s largest sale since Detroit’s bankruptcy filing.
Interactive Investor: – Retail bonds: The pros and cons. – Ten years ago, bonds were one of two sorts: gilts from the UK government or corporate bonds. Fast-forward to 2013, and investors are now faced with a dazzling array of bond investments; including retail bonds, which are now a hot topic.
MoneyNews: – Investors return to corporate bonds after recent sell-off. – Investors are making their way back to the corporate bond market after dumping those holdings from early May through early July.
Cate Long: – Gallagher’s muniland armageddon. – Three quarters of muniland is held by retail investors, and their exit strategies could be very costly. I’m 100 percent with Gallagher that there are many risks, and that expanding investor awareness is a must. Will muniland be struck by the Armageddon? The more the possibility is discussed, the more defenses and education can be put in place. Don’t shoot the messenger; let’s work on fixing the market’s weaknesses.
Financial News: – Interactive Data plots real-time bond pricing. – Interactive Data, a provider of financial data and analytics, is preparing to launch a service for pricing corporate bonds, at a time of regulatory upheaval for bond trading across the globe.
ETF Trends: – Muni Bond ETFs: Finding value post Detroit bankruptcy. – Over the last nine to twelve months, interest rates in the muni market have risen anywhere from one to one and a half percent, meaning that there are terrific entry-point opportunities in the marketplace now that haven’t existed in the better part of two, two and a half years.
Financial Post: – REITs and some utility bonds remain attractive. – Rising yields will remain a significant headwind for Canadian corporate bonds during the remainder of the year, but further tightening of spreads should help offset some of the impact.
— PIMCO (@PIMCO) August 16, 2013
Gross: Pogo said, We have met the enemy & he is us. I say, All asset mkts peaking; W/o central bank ck writing we only have ourselves 2sell2
— PIMCO (@PIMCO) August 16, 2013
Kiesel: Favor building material company bonds over home builder’s for next phase of #housing expansion.
— PIMCO (@PIMCO) August 16, 2013