We already own quite a bit of preferred shares issued by Annaly Capital Management (NLY), but I'm re...
2 Better Bets Than Treasuries
08/23/2011 1:30 pm EST
Instead of sinking your cash in ever-lower government bonds, you can take advantage of these much higher yields, as explained by Bond Smart Investor's Marilyn Cohen in this exclusive interview with MoneyShow.com.
Marilyn, I know you follow the bond market religiously. Is there any money left in bond land?
You know, Karen, if you would have asked me that three months ago or six months ago, I would have said, oh, gosh, no. Rates have continued to go down and prices have continued to go up, so the answer is yes there are some opportunities.
Are they as easy to find as they were? Absolutely not, but now the Federal Reserve has made it very clear rates are going to stay low until mid 2013. So even if we just go sideways in interest rates, if you can collect a big fat juicy coupon pretty safely, then there's value there.
Big fat juicy coupons are different things to different people. 2% doesn't move me very much.
That's exactly right. You're talking about 2% in Treasuries because that is a 2% interest-rate environment.
One of the rules of bond land is there's two ways to make money: You either take interest rate risk or you take credit risk. So 2% on a ten-year Treasury or 2.5%, that isn't where I want to be.
I'd rather buy a company that's turning itself around, has got a good balance sheet now, and has a good business model. It may be junk or it may be split-rated—one rating agency thinks it's junk, the other rating agency thinks it's investment grade. That's where I want to be with my money and my clients' money.
You mentioned the rating agencies. Should we put much stock in them, particularly since they missed a lot of things, particularly in the housing market? I know a broke clock is right twice a day, but really...
Well, I think that they have tried to turn themselves around. It's easy for people that aren't reading their reports and looking at their work every day like we do.
They have been much more proactive in the muni front. They have been much more proactive and quick to make decisions, rather than keep that timeline just going to infinity for corporate bonds.
So the answer is they have really tried to revamp the way they do business and how they communicate their opinions. My long-winded answer is I think they are doing a significantly better job.
Yes, they besmirched themselves, they got into areas they shouldn't have ever gotten into, and they really blew it. But the country is forgiving, and for us to continue to say they're doing business like they did in the past, I think is not being realistic, because the people that are saying that aren't reading what they're doing.
They're not the end all, don't misunderstand me. But they're doing a far better job than they did in the past.
Okay, they've cleaned up their act a little bit.
They are still cleaning.
How about going back to the corporate-bond arena. Do you see anything out there that you'd like for individual investors?
I do. I love Ford (F). Ford Motor, Ford Motor Credit, that company has been on fire. It's been on fire because their CEO is smart and his execution has been great.
I've been recommending Ford bonds now for over two years. They have been upgraded at least twice. Their balance sheet is in good shape.
Anybody who has driven a Ford knows that it is a superior product now. Yes, they were the beneficiary of what happened in Japan, but they're not a one-trick pony. I like the bonds—not the 30-year bonds, not the 20-year bonds. I like the bonds due in 2015.
They have a couple of issues. What kind of yield can you get? 5.5%, or 5 and 5/8%, on a credit that is turning itself around, whose CEO's goal is to become investment grade again. They've paid down expensive debt, issued less expensive debt. I think the whole story is compelling.
Any other ones that you like?
Well, I do like Sallie Mae (SLM), although it is a financial. Sallie Mae has learned very, very well how to navigate around the most hostile Obama administration. I mean, there was a time during the credit crisis we thought they were all going to go out of business, Sallie and...you know...
Oh absolutely, and Fannie and Freddie obviously didn't make it, but Sallie did.
The balance sheet is in good shape. They've got a lot of cash on the balance sheet. I don't like that they're going to be doing dividends, but that's the reality when you're making money.
Sallie has a lot of different kinds of bonds that I think create a lot of value for investors. You can buy Sallie Mae bonds due in 2015 and earn yourself anywhere between 5.25% to 5.5% in a 2% interest-rate environment...and it's something that's going to mature in four years, with a Fed that says that we're going to keep rates low until 2013. I think that's a win/win.
Related Articles on BONDS
The Vanguard High-Yield Tax-Exempt Fund (VWAHX) seeks a high and sustainable level of income that&rs...
Bonds have been a pretty reliable source of gains for years now, but there’s more uncertainty ...
We are adding a new position to our funds, a Canadian ETF investing in loonie-denominated floating r...