Dec 2 With the Federal Reserve keeping rates
low and casting a cautious eye on Europe, is there still a way
for investors to achieve higher yields?
There are many options -- from municipals to A-rated
corporate bonds to emerging market bonds. Sometimes funds that
are at opposite ends of the risk spectrum can add to your
portfolio diversification while boosting yield. Two often
overlooked choices are, Ginnie Maes and high-yield corporate
While they're dissimilar when it comes to default risk,
they could both be paired up in a diversified income portfolio
to achieve returns above U.S. Treasuries and money-market
Ginnie Maes are mortgage-backed securities -- but not the
kind that plummeted in value during the 2008 meltdown. That's
because they are backed by the Government National Mortgage
Association, a full-fledged U.S. agency that has the full faith
and credit of the U.S. government.
They provide an even safer yield than the securities issued
by Freddie Mac and Fannie Mae, which have an implied guarantee
from the government, but are part of agencies that were
publicly-traded prior to their takeover by the government
during the housing collapse.
On the other end of the spectrum are high-yield bonds,
which are corporate bonds with relatively low credit ratings,
meaning they are more likely to feel the impact of defaults
than other fixed income securities. They are not government
guaranteed and carry more risk, hence their nickname "junk"
BOND FUNDS SPREAD OUT RISK
In either category, bond funds are the best vehicle for
most investors to build income in. Funds give investors the
benefit of the highly diversified holdings. They also spread
around the risk of any single bond going bad.
Safe as they are, even Ginnie Mae issues could be hit by a
rash of early payments on mortgages if homeowners pay off loans
early, especially as mortgage rates fall and they refinance.
On the other end of the spectrum, high-yield bonds are so
sensitive to repayment risk their value can fall quickly if the
economy turns sour and companies start having trouble repaying
In addition to providing diversity, funds with professional
managers constantly monitor their portfolios for trouble spots
and make adjustments.
Here are some good candidates:
-- One of the best ways to buy high-yield corporate bonds
is through ETFs such as the SPDR Barclays Capital High Yield
Bond ETF (JNK.P) or the iShares iBoxx $ High Yield Corporate
Bond Fund (HYG.P). The SPDR fund is yielding 8 percent and the
I-Shares fund yields 7.7 percent.
-- The largest Ginnie Mae funds include Vanguard GNMA
(VFIIX.O), Fidelity GNMA (FGMNX.O) and T Rowe Price GNMA
(PRGMX.O). What's a typical return for these funds? The
Vanguard fund, for example, had a 6 percent total return over
the past year (through Dec. 1), according to Lipper, a Thomson
Reuters company. Considering that you get barely a 1 percent
yield on an insured money market fund, that's pretty robust.
Ginnie Maes usually pay a 1-percent to 1.5-percentage point
yield advantage over Treasury securities of comparable
Neither bond fund is a substitute for cash, such as a
federally-insured money-market account or certificate of
deposit. They only make sense as part of a diversified income
portfolio that also holds Treasury bonds, Treasury
Inflation-Protected Securities (TIPS), highly-rated corporate
and municipal bonds, insured vehicles and emerging market
As with all bond funds, these investments are subject to
interest-rate risk. Since the Fed has stated it won't raise
interest rates until 2013, that gives you a window of
opportunity. Should interest rates rise, bond values will fall,
so always consider the kind of downside risk you can afford to
stomach before investing.
The author is a Reuters columnist. The opinions expressed
are his own.
(Editing by Beth Gladstone and Richard Satran)