High-quality bonds form the base of a fixed-income portfolio. Issuers include major governments, government agencies and companies that are the strongest financially. The bonds have low credit risk; there's little chance that the issuers would be unable to pay interest or principal as promised.
Earnings for All
- 35 Ways to Earn Up to 11% on Your Money
- Short-Term Accounts: 1%-2%
- Muncipal Bonds: 2%-3%
- Investment-Grade Bonds: 3%-4%
- Foreign Bonds: 3%-5%
- High-Yield bonds: 3%-6%
- Dividend-Paying Stocks: 4%-6%
- Real-Estate Investment Trusts: 4%-9%
- Closed-End Funds: 4%-9%
- Master Limited Partnerships: 8%-11%
For most of the period from 2010 through mid 2016, long-term interest rates fell while the Fed kept its benchmark short-term rate near zero. With the Fed now hiking, the bellwether 10-year Treasury note yield has risen from 1.4% in mid 2016 to nearly 3% recently, lifting yields on other high-quality bonds.
The risks: A key determinant of long-term bond yields is the inflation rate, because inflation erodes the value of fixed-income yields. If investors begin to fear that inflation will rise, they're likely to demand higher yields on new bonds–depressing the value of existing bonds.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
How to invest: Vanguard Total Bond Market ETF (BND, $79, 3.0%) is a solid choice for a diversified bond holding, says Miriam Sjoblom, a bond-fund analyst at Morningstar. The portfolio tracks the Bloomberg Barclays U.S. Aggregate Bond index of high-quality bonds, which include Treasury, corporate and mortgage issues. The fund's annual management cost is a mere 0.05% of assets. Its duration is 6.1.
For investors who prefer actively managed funds, Dodge & Cox Income (DODIX, 3.0%) has a "thoughtful long-term approach to investing and an attractive price tag," says Morningstar analyst Sarah Bush. The management cost is 0.4%, compared with an average of 0.8% for similar funds, and the portfolio duration is 4.2. Another actively managed pick: DoubleLine Total Return Bond (DLTNX, 3.4%), a Kip 25 member. Most of the bonds in the portfolio are mortgage-backed securities, the specialty of DoubleLine founder Jeffrey Gundlach. The fund's duration is 3.8.Cullen Roche, head of advisory firm Orcam Financial Group, recommends a small stake in the longest-term U.S. Treasury bonds, using iShares 20+ Year Treasury Bond ETF (TLT, $118, 3.0%). Such long-term bonds carry high volatility risk (the ETF's duration is 17.5), but Roche views them as insurance against a geopolitical or global economic crisis. Long-term Treasuries have been the asset investors flock to in times of great fear. "There's no reason to think that has changed," he says.
-
Best Cold Weather Places to RetirePlaces to live Some like it hot; others not so much. Here are the 12 best places to retire if you can't stand the heat.
-
Getting Divorced? Beware of Hidden Tax Traps as You Divide AssetsDividing assets fairly in a divorce means looking beyond their current values and asking whether they'll create tax liabilities — or tax breaks — in the future.
-
CPI Report Keeps the Fed on Track: What the Experts Are Saying About InflationCPI Disinflation in key areas of consumer prices should help the Federal Reserve stick to its policy path of gradual cuts to interest rates.
-
Blowout December Jobs Report Puts Rate Cuts on Ice: What the Experts Are SayingJobs Report The strongest surge in hiring since March keeps the Fed on hold for now.
-
Fed Sees Fewer Rate Cuts in 2025: What the Experts Are SayingFederal Reserve The Federal Reserve cut interest rates as expected, but the future path of borrowing costs became more opaque.
-
CPI Report Casts Doubt on Rate Cuts in 2025: What the Experts Are Saying About Inflation
CPI November Consumer Price Index data sealed the deal for a December rate cut, but the outlook for next year is less certain.
-
Rebound in Jobs Growth Keeps Fed on Track: What the Experts Are Saying
Jobs Report No nasty surprises in the November payrolls data leaves a quarter-point cut in play.
-
October CPI Report Hits the Mark: What the Experts Are Saying About Inflation
CPI While the current pace of rising prices appears to have leveled off, the expected path of rate cuts has become less certain.
-
Fed Cuts Rates Again: What the Experts Are Saying
Federal Reserve The central bank continued to ease, but a new administration in Washington clouds the outlook for future policy moves.
-
Market Reaction to Election Results: What the Experts Are SayingJobs Report Election uncertainty has been removed from the list of investors' worries, helping equities soar.
