investing

Where to find value in the bond market

Depending on your risk tolerance and philosophical bent regarding the role of a bond portfolio, venturing into emerging markets and even other developed countries can add diversity and relatively higher yields.

"Look at the bonds of countries that have budget surpluses and not deficits like we do, and I would mention Brazil there. Their bonds yield about 9 percent; Mexico, 5 percent. In the developed world slightly better yields can be found in Australia," says Andrei Voicu, managing director and chief investment officer at Fragasso Financial Advisors in Pittsburgh.

And even some eurozone bonds could be a good deal now. They're still looked at askance but the yields may tempt investors. Take, for instance, Italian sovereign bonds.

"They pay about 4 (percent) or 4.5 percent on the 10-year right now, and I believe that is a very attractive proposition -- even on the shorter side, maybe three years for instance," says Voicu.

Investing in the bonds of governments other than the U.S. brings in a few different risks, such as currency and politics.

But there are safe options in the bond market that offer decent values to investors. For instance, people may want to have some money in a Ginnie Mae bond fund, according to Hopwood.

"Those don't tend to move very much and the default rate is nil in Ginnie Mae, so the credit risk is not there," he says.

Ginnie Mae, the Government National Mortgage Association, is a government-owned agency. Securities issued by Ginnie Mae are secured by the full faith and credit of the U.S. government, like Treasury securities.

They have a high minimum initial purchase requirement of $25,000 and can be complicated for individuals to buy. So investors may find Ginnie Mae bond funds an easy alternative. Just be sure to keep expenses low as interest rates are way too low to make up for high fees.

Importance of diversification

It's difficult to choose a path without the benefit of psychic powers. The Federal Reserve's rate-setting group, the Federal Open Market Committee, has stated that based on current economic conditions, interest rates could rise by 2015. That's their best guess -- for now. The truth is that no one knows. That's why investing strategies that spread risk among many assets remain popular.

"Two years ago, I didn't think we would still be at these interest rates. There is a cost for keeping everything in (Treasury) bills," Hopwood says.

"In our opinion a broadly diversified portfolio of different strategies that will act differently at any given time would make the most sense rather than trying to guess what will happen," Voicu says.

Another option for times when you don't know what's going on: laddering. Laddering bonds or certificates of deposit can moderate the risk of rising interest rates and inflation by spreading investment dollars over a range of maturities.

For instance, an investor with $10,000 to put into bonds could invest $2,000 in bonds with a range of maturities at one-year intervals, up to five years. As each bond matures, the principal could be funneled back into the ladder at the furthest rung, or five years out. After the first cycle, the ladder will be made up of five-year bonds with a bond maturing every year.

"I still believe in laddering because you just don't know," Hopwood says.

More than ever, there's no magic bullet in the bond market.

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