|
Published: April 19,
2010
Bill Gross -- perhaps the most famous and
successful bond investor in history -- had a recent quote that
made me chuckle.
Talking to The New York Times about interest rates, Gross said,
"Americans have assumed the roller coaster goes one way. It's
been a great thrill as rates descended, but now we face an
extended climb."
Now, I might have a dry sense of humor... but I didn't laugh
because I find interest rates funny.
It's just that Bill's quote hit close to home (no pun intended).
I bought my first house in 1981... a newly built duplex in
Wappingers Falls, New York. My mortgage rate: 17%. I'm well
aware of the "roller coaster."
But I have to agree with Bill Gross. It's been a long ride down
for interest rates. For example, mortgage rates peaked a couple
of years after I bought my house and haven't even sniffed
double-digits for two decades. I'm betting many won't know how
to react -- much less invest -- if and when rates rise.
That's why I've been a bit disturbed by the recent numbers I've
seen. The bond market has received record inflows during the
past few months -- pushing up prices and pushing down yields.
Fed up with paltry rates on holding cash, investors have been
putting billions into bonds. In particular, there has been a
"flight to junk" -- investors want to make a decent return
without putting cash into stocks, so they're buying
higher-yielding junk bonds. Demand has been so high that there
was $60 billion in new issuance of junk bonds in the first
quarter, a record according to Fitch Ratings.
But with interest rates on the rise -- remember that they can't
go lower from here -- it's going to put pressure on bonds. This
is one of the reasons Bill Gross sees the bull market in
fixed-income ending. I've got to tell you, I think he's spot on.
So what to do?
For my real-money portfolio in my premium newsletter,
The Daily
Paycheck, I've started looking more toward yields powered by
equities. Of course, with the recent run-up in the market,
quality yield opportunities are getting a little more scarce.
That's why closed-end equity funds are becoming more attractive.
These funds can use a few "tricks" to boost their yields. This
includes writing covered calls, using a "dividend capture"
strategy, and employing
leverage. Funds can also reach foreign
markets, which yield considerably more on average than the U.S.
markets.
The result is higher yields, powered by equities instead of
bonds.
Of course, you might even be wondering about buying stocks given
the already lengthy bull market. That's why you've got to be
picky. Funds holding high-yielding utilities, telecoms, and the
like should continue to be a great place to ride out all but the
roughest storms.
And with the
interest rate roller coaster starting to ratchet
higher, I think now's the time to start looking toward income
from equities.
Amy Calistri
Editor
StreetAuthority's
Stock of the Month
The Daily Paycheck |
