Moving to Corporate Bonds and Preferred Stocks
The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (The FRED Report) -- Here at The FRED Report, we have been giving various seminars around the country. The question most often asked is, "What keeps you up at night?" The answer is the bond market. Treasury bonds, in particular, are overextended and spreads in the bond market have been wide due to fear in the market place, plus the economic issues surrounding the quantitative easing maneuvers of the Fed.
Our concern is that, as spreads narrow and rates rise a bit because the economy continues to improve -- bond investors might end up with loss of principal, particularly on bonds purchased last year. What are some possible solutions to this problem? We look at these below.
First, for some time, we have been looking at transferring funds into corporate bonds. Indeed, the biggest mistake we made in the FRED Report last year was selling TLT too early -- but we transferred those funds into LQD, the corporate bond ETF. We show daily charts of these both below. Readers can see that LQD remains in an uptrend, while TLT is rolling over.
However, readers can also see that LQD has declined off the recent all-time high. Are there any other income ideas that could do well if rates rise a bit? Let's take a look at high-yield bonds. These have been trading more like stocks than bonds, due to the level of fear in the markets. This should start to change - and if this is the case high yield might even advance as treasuries decline. Another area of the market that may do well is preferred stocks. High levels of fear caused some volatility in preferred stocks last summer, but they are acting well in the current environment also. We show charts of both PHB and PGX, below.
The technical picture is becoming clearer -- the market is slowly moving away from safety and income to a philosophy of income plus possibilities for growth. Fixed income investors should look carefully at their portfolios and talk to their financial advisors to make sure that they are properly positioned for a rise in rates over the course of 2012. We have seen the first wave down in treasuries -- a bounce is possible over the next few months, so now is the time to consider alternatives. For those that have an aggressive bent, one should consider playing TBT after the bounce in treasury prices take place.
At the time of publication Fred Meissner had no position in the ETFs mentioned above.