Get Defensive with Your Income

07/07/2011 3:00 pm EST

Focus: BONDS

Richard Lehmann

Publisher, Forbes/Lehmann Income Securities Investor

Rates will likely rise over the next several months, meaning fixed-income investors need to look at liquidating some of their positions and rotating into more interest-sensitive vehicles, says Richard Lehmann of the Forbes/ISA Closed End Fund & ETF Report in this exclusive interview with

Richard Lehmann joins me today in the studio to talk about this very hard environment for finding income. What are you doing, Richard?

Well, right now we’re thinking more defensively than offensively in terms of trying to get income. There are still some opportunity areas. Unfortunately, most of the high-income areas are very vulnerable to changes in interest rates that I think are on the horizon here following the end of QE2 in June.

What do you think has been the track record of quantitative easing, the stimulus? Does it work?

Well, that is a whole conversation in itself, because QE2 is the last phase of the Fed program to resuscitate the banking industry. It’s actually the deflation of the carry-trade bubble, which was built up over the last couple of years as a means for recapitalizing the banking industry.

In August, Ben Bernanke indicated to the bankers that the inflation is coming, and it’s time to get out of the carry-trade positions... because the problem with a carry trade is you cannot be in it when rates start to go up, because you’ll lose all the ground that you’ve made.

There’s a tendency then, if everybody perceives that the game is over, to all rush for the door—and what happens within that situation is that rates go up overnight, practically, because everybody wants out. QE2 is about basically Bernanke promising to provide $600 billion to deflate the carry-trade bubble and allow everybody an orderly retreat at current market prices.

This is one of the reasons, I think, that we have the low rates that we’re seeing today. It's that the Fed is subsidizing the long-term rate until the carry-trade bubble has been deflated.

So, we just hold off until QE2 is over and unwound.

Well, in terms of looking for income, yes. I think you’re going to see rates go up over the next six months. Therefore, now is the time to be looking at liquidating some of your positions, especially in fixed-rate securities, because they’re the ones that are going to take a hit, when rates go up.

There are a lot of alternatives that individuals should be pursuing. For example, adjustable-rate securities, commodity-linked securities, and those that are linked to the stock market, because the stock market adjusts to inflation much better than the fixed-income markets.

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