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Record yield spreads have already
begun to narrow, and some bonds and bond
funds have produced impressive
equity-like returns in recent months.
For example, which of these closed-end
bond funds is up close to +50% since
October and sports a yield that is over 20%?
A.) BlackRock
Corporate High Yield Fund (COY)
B.) Helios Select
Intermediate Fund (HSICX)
C.) John Hancock Government
Income A (JHGIX)
D.) Thrivent Core Bond A (AAINX))
E.) Van Kampen Limited
Duration A (ACFMX) |
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Published:
March 11, 2009
The
correct answer is 
(A.) BlackRock Corporate High
Yield Fund (COY)
The BlackRock Corporate High
Yield Fund (NYSE: COY), a closed-end
fund invested primarily in
high-yield bonds, is up close to
+50% since October and sports a
yield that is over 20%
Most view the bond market as the
staid province of only the most
conservative, risk-averse investors.
After all, we've all heard the
statistics -- in his widely read
book Stocks for the Long Run,
Wharton Professor Jeremy Siegel
calculates average stock and bond
market performance over the period
from 1871 to 2001. His conclusion:
stocks have offered a +6.8%
annualized gain after inflation
compared to just +2.8% for bonds.
That simple statistic led many to
ask why anyone would bother to
invest in bonds at all.
But, as is so often the case,
statistics don't always tell the
whole story. Average gains for
stocks over many decades may be
superior, but there have been long
periods where stocks have
underperformed bonds. For instance,
the JP Morgan Global Aggregate Bond
Index (GABI) has performed nearly as
well as the S&P 500 over the past 20
years. Even better, the GABI index
is far less volatile than the S&P
500. Over the past 20 years,
investment-grade bonds have
generated about the same returns as
the S&P 500 with about one-quarter
the risk. And over the past decade,
GABI has handily outperformed the
S&P 500, producing average
annualized gains of +4.7% compared
to -2.6% for the S&P 500. The worst
year for the GABI index in the past
decade was a -1.1% return in 1999, a
mere blip in comparison to last
year's -37% tumble for the S&P.
With these points in mind, all
investors should consider allocating
at least a small portion of their
portfolios to bonds or bond funds.
They can offer stability and income
in times of broader stock market
turmoil, and there's a kicker: many
high-quality, investment grade
corporate bonds are offering yields
in excess of 10%. And high-yield
"junk" bonds issued by companies
with lower credit ratings offer even
higher yields.
There are a number of ways to invest
in the bond market. Investors can
buy individual bonds through their
brokers, but an easier approach is
to purchase a closed-end or
exchange-traded funds (ETF). These
funds trade on the major exchanges
just like stocks and offer the
benefit of broad diversification
across a wide variety of bond
issues, sectors and even countries.
With these points in mind,
StreetAuthority editor-in-chief Paul
Tracy believes that now is an
outstanding time to increase your
exposure to the bond market. In his
latest issue of the Market Advisor
newsletter, Paul profiles two of his
favorite plays on this market,
including one that is trading a
discount to the value of the bonds
it holds and another that boasts a
16.2% yield but a 0.72% expense
ratio. To learn the names of these
funds, and to learn more about the
Market Advisor newsletter,
please visit this link.
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