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Marilyn Cohen's Best Bonds

05/23/2003 12:00 am EST


Marilyn Cohen

President & CEO, Envision Capital Management, Inc.

Marilyn Cohen, noted columnist for Forbes magazine, has lived through lots of bond cycles, both up and down. She is one of the nation’s leading experts on making bond investing accessible to individual investors. She also wrote the Bond Bible; which makes this complex market understandable to non-professionals. Here's her current outlook on the bond market.

"In order to look into the future in the bond market, we have to look at a real quick snapshot of what’s happened over the past few years. Number 1: The Federal Reserve has had the loosest monetary policy stance ever in the last 40 years. Treasury yields are at four-decade lows. Muni-bond yields are at 35-year lows. The emerging markets have rallied like there is no tomorrow. High yield junk bonds have had the largest rally in any quarter that we have seen since 1991, with money continuing to flow into junk bonds. So, in other words, we’ve had it all these last couple of years. And I think the key comments that I have regarding fixed income market – meaning anything that is bond-related – is that the best is in back of us. The future doesn’t mean that we’re going into a bear market. I don’t believe that at all. But rates are limbo-low."

"Where are we going to go from here? We’re probably going to be in a trading range for the rest of this year. And as day follows night, with all of this stimulus – and now we’re probably going to have additional economic stimulus from the President – rates are going to slowly drift up, probably in 2004 and 2005. So, rather than look for opportunities – because they are not plentiful out there – I think you have to look at re-posturing your portfolio, maybe taking some profits out of your long-term bond funds and moving into the intermediate term sector. The risks are on the downside, not the upside. I don’t believe that there is risk in ‘missing’ the next big thing in the bond market. The risks are #1, being too greedy and not taking some of your profits, and #2, not being careful enough in looking at the maturities of your portfolio (whether they are long-term bonds or long-term bond funds) and the durations of your portfolio."

"When you look at the food chain in bond land, you’re going from Treasuries – which are the safest - all the way down to high yield junk bonds and emerging market debt. There’s no sector that’s been untouched. You’ve had great total returns in every area. I think that what we will see over the next 18 to 24 months is just to continue to collect our coupon income or our dividends from our funds, with probably some very sharp rallies to the downside and then back to the upside. But you don’t want to bet against the US economy for too long and you certainly don’t want to bet against the US consumer for too many years. When the economy starts perking up, interest rates will have to go up so the opportunities in bonds are rather limited. That doesn’t mean that the rate of return of 5% or 6% on corporate bonds isn’t worthwhile."

"For individual bond investors, the market has improved. One of the ways you can check to see if you are buying bonds at the right price, is to go to the Bond Market Association’s Web site (, and there is a new system for corporate bonds where you can see where the bond has traded. However, for those in low tax brackets or have tax-deferred accounts, my favorite bonds are not the standard AAA rated bonds like GE. My recommendations have a little more zing to them."

"The first one is what I think is the retail turn-around story of the last couple of years and that’s J.C. Penney (JCP NYSE). Moody’s has them rated as junk bonds and Standard & Poor’s also has the lowest investment rating. Earnings were just reported at $0.020 a share; the company is doing very well. The company has some 6% coupon bonds due May 15th of 2006, right around par or a little bit under. That’s a 6% yield to maturity. They are non-callable and I think Penney's is going to stay in business for the next three years, so I think these bonds are ‘good money’."

"My next idea is the MONY Group (MNY NYSE). They have some BBB+ rated bonds with a coupon of 7.45% due December 15th of 2005 – really short-term. And because of the problems that many insurance companies have had and the degradation of many of their portfolios, both in stocks and bonds, these bonds are giving a very high yield and I think that the company is on a much firmer footing than expected; their earnings are turning around, and these particular bonds are selling at a little over premium (about 102.5), with about a 6.4% yield. This beats the socks off of money markets and, of course, Treasuries."

"My third idea is more dicey. This is for people who can stand asbestos litigation. The company is Union Carbide, which is owned by Dow Chemical (DOW NYSE). There is a lot going on in the asbestos world, and they do have liability and they have been paying off many of the people who have been suing them. Union Carbide has some 6.7% zero coupon bonds due 4/1/2009 . Still not very long-term. They are still rated A-minus and these bonds are selling below par at around 99½., for a 6.8% yield. I think we will eventually clean up the asbestos situation, and I think that these bonds will be good money. I just emphasize that they are not for the faint of heart because when bad new comes out for any company involved in asbestos, they start to go down."

"For very risk-oriented money, I would also suggest bonds issued by Calpine (CPN NYSE). The company has been through hell and back, as have most of the merchant energy companies. Calpine has some 8.5% coupon bonds due 2011. These bonds have gone as low as the low $40s. They are now trading around $70. I would only buy on a pullback to the high $60s, for around a 16% yield to maturity. So you know you are taking a great amount of risk here. But I do think the company is a survivor and if you have risk capital to spend I think you’ll make a decent return."

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