Bond ETFs and the Search for Higher Yields

The recent rate cut by the Federal Reserve has had the intended effect in some areas, by setting off a buying spree for investors, sending them in search of bond exchange traded funds with higher yields.

This has been evidenced in heavy buying of exchange traded corporate bond funds, says Tom Petruno for The LA Times. Some have even been venturing into the junk bond sector.

Yields on junk securities remain sky-high, but have pulled back a bit as the bonds’ prices have rallied, while Treasury bond yields continue to slide. The question now with junk bonds is whether it’s investors looking to lock in yields, or speculators chasing short-term momentum.

Other yield-hunting investors have also been going after municipal bonds, since historically the yields are high and they’re tax-free, unlike the corporates.

The central bank also said it might buy Treasuries for its own portfolio, to keep downward pressure on longer-term interest rates.

Either way, while the temptation for these yields is alluring for an investor, be strict with a discipline and watch the market trends.

• iShares iBoxx $ High Yield Corporate Bond (HYG): down 18.7% year-to-date; 12.03% yield

• iShares S&P National Muni Bond Fund (MUB): down 1.2% year-to-date; 3.6% yield; 6.12% tax equivalent yield

Comments

[Urbane Gori...:]

Good article. Thanks for the note of caution. Too many articles hype something and don't spell out the downside, or an exit point. jegan

2008 Dec 27 04:11 PM

[Burticus:]

Anyone chasing the bait of higher yields on junk or muni bonds will end up in the fish box. Those fleeing to the "safety" of zero-yield Treasuries backed by the full faith and credit of a bankrupt gubmint will fare no better. The bridge is out ahead, which means the safe exit point is NOW.

My only "temptation" is to run like hell away from bonds, Treasuries, cash and most U.S. stocks before the U.S. economy collapses under a mountain of manipulated debt paper and the FRN free falls in the "Collapse of 2009."

When the music stops in this game of financial musical chairs, there will not be enough golden chairs for the Chinese, Japanese and Arab holders of foreign "currency" reserves and all the other unwitting saps clutching sacks of paper.

2008 Dec 27 06:43 PM