The end of last year proved to be bad news for almost all investment asset classes except U.S. Treasury Bonds. The ongoing flight to safety has rendered retired investors bewildered. Investors are struggling to find safety and reasonable rates of return.
It seems the popular place to look for answers in 2009 is in Treasury products. However, experts such as Mohamed El-Erian, Pimco Chief Investment Officer, and Andrew Bary, popular finance author, recommend staying away from those instruments as the price-yield equation is not that attractive. See the Barrons article (search for http://online.barrons.com/article of January 5, 2009) entitled Get Out Now.
With Treasuries out of the picture, what other asset classes offer any hope for this year? Our research, and others commenting on this situation, point to four investment classes. We have already published an article on the fourth one, so we will concentrate on the first three. Here are all four classes we have examined.
* Securities backed by Mortgages * TIPS: Treasury Inflation-Protected Securities * Municipal Bonds * Investment-Grade Corporate Bonds: refer to the AboutETFs.info article at http://www.aboutetfs.info/Monthly-Income-Strategies.php
1. Yields on mortgage-backed securities have been declining ever since the Federal government November 2008 announcement that it would purchase up to $500 billion of Ginnie Mae, Freddie Mac and Fannie Mae home mortgage-related bonds. But with the purchases just beginning in January, current yields of this battered asset class still look attractive relative to historical levels. Also, with the Fed’s intervention, mortgage-backed securities now offer effectively the same Federal guarantee as U.S. Treasuries, but with higher yields. Consider iShares Barclays MBS Bond Fund (MBB), iShares Barclays Agency Bond Fund (AGZ) and SPDR Barclays Capital Mortgage Backed Bond ETF (MBG).
The TIPS products, Treasury Inflation Protected Securities, are impacted by inflationary or deflationary trends. Recent fears about deflation have negatively impacted TIPS prices, but this may present a good time to buy TIPS. Looking forward, with many believing our Federal stimulus packages will result in substantially higher inflation, TIPS may appreciate. TIPS really shine during inflationary periods. Advisors currently are suggesting (TIP) iShares Barclays TIPS Bond Fund and (IPE) SPDR Barclays Capital TIPS.
3. Municipal Bond tax-free yields have reached historically high levels as Municipal bond prices plummeted in November 2008. Although prices have recovered and yields have waned since the bottom, municipals still offer remarkable value compared to U.S. Treasuries. With today’s 4-5% tax free distribution rates, investment-grade municipals look like a bargain (a 5% tax-free yield for a taxpayer in the 35% Federal tax bracket is the taxable equivalent yield of a Treasury bond paying 7.4%). Municipal Bond ETFs worth considering include PowerShares Insured National Municipal Bond Portfolio (PZA), iShares S&P National Municipal Bond Index Fund (MUB) and SPDR Lehman Municipal Bond ETF (TFI).
Another bond choice to study is a California fund, (CMF) iShares S&P California Municipal Bond Fund. One reason to watch this ETF fund is the pending Federal assistance programs under the stimulus packages. California is likely to benefit from these programs due to its enormous size and political importance.
For the ultimate in credit safety, look at Market Vector’s Pre-Refunded Municipal Index ETF (PRB). PRB is the first ETF investing 100% in pre-refunded municipal bonds. Pre-refunded municipals are issued to pay off existing, higher yielding bonds. These bonds are fully collateralized by U.S. Treasury securities, making them the only municipal bond class 100% fully guaranteed by the U.S. government.
The fourth asset class we reviewed for safer retirement income is the investment grade corporate bond approach. At their current prices, corporate bonds are still a bargain. We are witnessing portfolio managers, insurers and brokers loading up on high grade corporate bonds because they believe that the government bailout programs may lead to fewer corporate defaults. For more details on the corporate bond funds strategies, read the www.AboutETFs.info article on 15 asset classes at this link: http://www.aboutetfs.info/Monthly-Income-Strategies.php .
In future articles, we may examine two additional income-producing asset classes: senior loans and preferred stocks. But for now, your best bets for principal safety and steady income seem to be mortgage-backed securities, Treasury inflation protected securities (TIPS), municipal bonds and high-grade corporate bonds.
As always, results are not guaranteed and these strategies may not be suitable for your personal investment objectives. You should consult with a professional before buying or selling any securities. This article is not intended to be investment advice for the purchase or sale of any mentioned securities.
