Breaking Up With Bonds

Jul 18 2011

Breaking Up With Bonds

It’s on the mind of millions of Americans, especially retirees: What to do about municipal bonds that, for generations, have provided a steady income? Is there an attractive alternative — or even an unattractive one? Worries about the $3 trillion muni-bond market started in 2008, when some analysts raised questions about whether certain issues might default or lose value to inflation. Some of those concerns have eased, but even so, many retirees would be wise at least to consider some other income-generating options, say financial advisers.

An increasingly popular choice: dividend-paying stocks in foreign markets. Many of the juiciest yields, it turns out, can be found abroad. And what’s more, says Cliff Remily, comanager of the $9.2 billion Thornburg Investment Income Builder fund, some of the most generous dividend payers overseas happen to be among the faster growers, too. One example: energy firms that pay dividends in China. The average dividend in the Chinese market for the first five months of 2011 is 2.2 percent, compared with 1.9 percent for firms in Standard & Poor’s 500 index. “We’re finding a lot more opportunities outside the U.S.,” says Remily. He likes the international telecom sector, because there’s been an explosion in the number of consumers willing to pay a premium for smartphone services like text messaging and Web access. The Australian telecom Telstra, for one, currently yields 10 percent.

It also helps to have foreign exposure when it comes to bonds, say many veteran managers. Foreign central banks have been raising their rates to combat inflation, pushing up yields on their government and corporate bonds. In Brazil, the current base rate is 12.25 percent. Heiner W. Skaliks, the Bolivia-based manager of the $26 million Strategic Latin America fund, likes the debt of Brazilian meat-producing giant JBS; the firm’s five-year bond, denominated in dollars, yields around 7 percent. Bonds denominated in local currencies can yield even more. Plus, pros say, currency moves sometimes work to investors’ advantage. Last year Brazil’s currency appreciated, giving the country’s -denominated bonds a boost.

Whatever tactic investors choose, they’ll still have to prepare their bond portfolios for what many experts say will be an inevitable increase in U.S. interest rates. Many expect the Federal Reserve to start hiking short-term rates in the first half of 2012, but traders will likely start pushing longer-term rates up before then (rising rates lower the value of bondholders’ existing holdings). One good investment for such an environment is bank-loan funds, some financial advisers say. These are mutual funds that invest in bank loans made to lower-rated firms whose payments are reset according to prevailing rates. But remember: Don’t put your bank-loan fund on autopilot. While it’s hard to imagine today, rates will once again be set to fall. And when that happens, unprepared investors might get burned.

Wealth Finance