Best investment ideas: Bonds
Bond prices finally slipped earlier this year after rallying for more than 30 years. Some experts call for further price declines next year. Chris Litchfield, a retired hedge fund manager who is now a private investor in Greenwich, Conn., disagrees.
"The big surprise will be how well bonds do," he says. Litchfield doesn't expect the Federal Reserve to pull back from its $85 billion of monthly bond purchases. Indeed, he expects that buying to increase. The central bank's bond purchases help to push interest rates down and thus, bond prices higher.
"The surprise will be how low rates can go, mostly because our economy will be weak, and the Fed will continue to print money," Litchfield says. "It won't work, but they will keep doing it, because that's all they know to do."
From 2000 to 2012, the average return for bonds beat stocks. Ten-year Treasuries gained 7.21 percent a year on average over that timeframe, compared to a 3.41 percent annualized return for the S&P 500. "My bet isn't that bonds will do better than stocks next year, but will do better than people expect," says Litchfield.
As for sectors of the bond market, Ethan Anderson, senior portfolio manager at Rehmann Financial in Grand Rapids, Mich., likes long-duration municipal bonds of 10-plus years for their attractive yields. Despite Detroit's bankruptcy, the national economy is growing, and some municipal governments have cut costs significantly.