Wealth Finance

Investors seem to have an insatiable appetite for fixed-income products these days. But which types of bonds offer the best deals?

High-Yield Bonds

Buy

One man’s junk is another man’s treasure, and nowhere is that more apparent than in the bond world. A high-yield—or “junk”—bond is debt issued by a firm whose credit record isn’t the best, so it’s forced to pay a higher interest rate. Junk bond prices have soared 24% in the past year, but yields are close to 9%. Some pros are investing in “fallen angels”—firms making strides to regain an investment-grade rating. One such firm: Ford Motor (F). The automaker has been paying down debt, and its long-term bonds yield around 9%, says Elaine Stokes, comanager of the Loomis Sayles Bond fund, which owns Ford debt. These bonds might lose value if rates rise, she notes, but there’s a “solid story” behind them.

Mortgage-Backed Bonds

Sell

Millions of Americans are struggling to pay their mortgages. Yet bonds backed by residential mortgages aren’t yielding much more than Treasurys, says Gibson Smith, co–chief investment officer at Janus Capital Group. Most of these bonds were issued by Fannie Mae and Freddie Mac, the troubled firms now controlled by the government. But regardless of the government’s intentions, the bonds’ prices could fall if the housing market deteriorates further. They yield just 0.06 percentage points more than Treasurys, not much reward, say some pros. Many mutual funds own these bonds, and they are a big holding of index-based ETFs such as the SPDR Barclays Capital Aggregate Bond fund.

U.S. Treasurys

Hold

Uncle Sam’s debt may be safe, but it’s sure not paying investors much. Treasurys have rallied this year on fears of a “double-dip” recession, and that has sent yields (which move in the opposite direction from prices) down to about 2.5% for the benchmark 10-year bond. Treasurys could quickly lose value if investors start worrying about inflation, and longer-term bonds would be the most vulnerable in that scenario. But with the economy losing steam, some experts think deflation is more of a threat now, making Treasurys a sound bet with the potential for gains. Bond manager Jeffrey Gundlach of DoubleLine Capital keeps 35% of his Core Fixed Income fund in Treasurys, though he figures yields have probably hit bottom.

Under the Radar : Foreign Bonds

Greece might be the poster child for a sovereign-debt debacle, but some pros say bonds issued by other foreign governments look attractive. Australia’s 10-year bonds yield 5%, and Brazilian bonds yield more than 10% in the local currency, beating U.S. Treasurys, notes fund manager Stokes. U.S. investors can lose money on the currency conversion, of course, and Australia, for one, has started hiking interest rates, which is likely to depress prices. Still, rate hikes tend to attract money to a country, which could give the local currency a lift against the dollar, Stokes says. Investors can get foreign bonds through funds, such as Templeton Global Bond C (TEGBX) or Loomis Sayles Global Bond Retail (LSGLX).

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