2 Bond Funds for a 0% World

07/20/2011 2:30 pm EST

Focus: FUNDS

Richard Band

Editor, Profitable Investing

Bond funds should stay strong as long as the Fed does not raise rates, says Profitable Investing's Richard Band, who has two favorites he shares in this exclusive interview with MoneyShow.com.

Richard, you focus a lot on income investing. Your subscribers and your many followers are very interested in bonds and income, and you really focus a lot on it. So, what do you see now in the bond market for people to pay attention to?

Well Howard, it’s really a two-part story. The first part is, of course, in the long run interest rates will certainly go up, because inflation is headed higher at some point and they just can’t stay so close to zero. That’s the long run.

But in the short run, it could be a completely different picture, and I think the surprise in the short run will be that bond yields will actually go down over the summer months.

That’s interesting, because as you know Bill Gross—the much-ballyhooed Bill Gross—pulled out totally from the Treasury market just before Treasuries started a nice rally.

Isn’t that interesting? And Howard, also we were hearing from other gurus, like Jimmy Rogers and even Warren Buffett, who thought that bonds were a bad place to be, but it was actually a good time to buy bonds in February.

I think basically the market has been reflecting on what would happen after the quantitative easing program ends. So since February, rates have been going down, anticipating what will be, I think, a slowdown in the economy over the summer months…and that’s really why yields drop.

Well, that’s exactly what happened after QE1, isn’t it? That’s why Bernanke thought they needed QE2.

Exactly, and we may need a QE3 if things go on this way. Although I certainly hope not, because if the economy can’t stand on its own two feet, we’re in much deeper trouble than any of us would like to imagine.

So, if you think bonds are okay in the short run, where should people be? I know you were recommending shorter-term bonds a few months ago. Are you still recommending those?

Well, I recommended a mix of bonds. I think it’s fine to have some short-term bonds through something like the Weitz Short-Intermediate Term Income Fund (WEFIX).

And that is W E I T Z right?

Right, a good short- to intermediate-term bond fund.

But in the next few months, I think we’re going to see some nice action in, for example, the mortgages. Mortgage paper seems to be attractively priced, relative to Treasuries.

Yields are high there, so I’m buying some mortgage funds. My favorite there is the Double Line Total Return Bond Fund (DLTNX), which is a mortgage fund.

Then, for longer-term bonds, I would even dabble a little bit in the municipal sector. The municipal sector—much hated and feared.

Right. Any funds there that you particularly like?

In the municipal sector, I really like the closed-end funds. These are funds that trade on the New York Stock Exchange, just like ordinary shares of stock.

They usually trade at a premium or discount to asset value.

Right, and of course being a cheapie, I like to buy discounts, not premiums. The Nuveen family has a number of them. So does the BlackRock family.

I suggest that people look at funds with the word "quality" in them. You know why? The reason would be that the quality funds focus on the higher-grade bonds. I don’t want to get involved in municipal projects that are going bankrupt.

So, I want high-quality municipal bonds, and Nuveen and BlackRock funds are paying in some cases upwards of 7% tax-free, and that is nice if you are in the upper tax brackets.

So, very, very quickly, this is a short-term to intermediate-term play? Or something that people should be…

I’m going to play it as long as the Federal Reserve does not tighten credit. In other words, as long as they stay with this zero-interest-rate policy, which might be another year, and certainly I think it will be through the end of 2011 and it might even run into 2012.

So, as long as the Fed is not raising short-term interest rates, it’s not tightening credit, I think it’s safe to own some of these very high-yielding securities like closed-end municipal bond funds.

Seven percent—that works out to 10% for a person in the top tax bracket, the equivalent of a 10% taxable bond.

Subscribe to Profitable Investing here…

Related Articles on FUNDS