|Intermediate Term Bonds (Treasuries Blue, Corporates Red)|
In a conservative allocation such one is just looking for minimal price fluctuation such that total return = yield for the short term bonds and a price risk that is high enough to offset price fluctuations for the intermediate term bond fund…with some potential for upside.
- GNMA bond funds: these funds are short duration and the instruments carry the full faith and credit of the US Government but have yields above treasuries. Although recent total return has been hurt by the vagaries of Fed purchases of mortgage securitie they still merit considering in asset allocation. Current 30 day sec yield is 1.69%
- Short term investment grade corporate bonds…a little more credit risk than the above for a bit higher yield and a bit more price volatility
- Short term high yield bonds. For those willing to take on more credit risk short term high yield (SJNK) looks quite attractive. The yield is around 4.25% and the price has proven to be very stable. All an investor is looking for in this area of the bond market is minimal price movement allowing the investor to capture the yield.
- Intermediate term bonds. For those willing to take on a bit of interest rate risk as a “hedge” against going all in on a view of rates going higher in the near term there is one sector of the intermediate bond market where risk/return look reasonable. Build America Bonds essentially muni bonds with the Federal government assuming partially the cost of debt payments. In other words these bonds offer a cushion against possible price declines due to higher interest rates and good potential for price increases should rates move down a bit BAB currently yields a bit over 4%/
- Treasury bills instead of money market. Investors who currently have some holdings in money market funds might consider a tbill etf like SHY as an alternative. Money market funds are not credit risk free in 2008 a major money market fund “broke the buck” fell below $1 in net asset value. Although the Fed effectively bailed out the fund and its investors to protect the $1 net asset value, there is no guarantee this will occur in the future. On the other hand treasury bills are a crisis hedge. Despite their near zero current yield they are likely to rise in price in a financial crisis. In 2008 SHY had a total return of 6% while money market returns guaranteed no price fluctuation but paid virtually zero interest making total return = yield . And money marke funds carry more credit risk than treasury bills. Thus treasury bills act as a bit of a “crisis hedge”.
- ” Combining some treasury bills with short term high yield in their portfolio. This would be a “barbell strategy “with regard to credit risk while retaining low interest rate risk. As rough example a 50/50 split between SJNk and SHY would yield a bit over 2.55% Of course increasing the weighting of SJNK would raise yield--(and increase credit risk—risk and return are (almost) always linked at the hip.