Bond ladders are a way of creating your own adjustable-rate income stream, by buying a series of bon...
What Bond Investors Need to Do Now
05/03/2013 8:30 am EST
Last year was good for some bonds, but Louis Navellier has some advice on how bond investors should proceed in the year ahead.
So Louis, it wasn’t a great year for the bond market last year.
It was fine for corporates. Munis have had a spread problem, but they are heating up with the tax increases, and the government finances are getting better.
But you know, we’re in the bond business. We raise $1.2 billion a year in bonds. We package them in something called a unit investment trust. We just buy them, ladder them over what we call the sweet-spot yield curve, and people hold to maturity.
We like to do that because there is nothing wrong with bonds until the spread gets in the way of your return. So we try to buy them with tight spreads and we hold to maturity, so you have no what we call exit or transaction costs on the way out.
Everybody gets the same amount of interest every month, and you get your principal back as the bonds mature. We like investing in bonds that way. If you buy a bond fund, you want to make sure rates are falling, and you want to make sure that fund never has a run on the assets.
One of the things that has happened out there in corporate America...they are raising $2 trillion a year in the bond market, and they are using a lot of new debt to pay off old debt. So there are high-yield funds that now that the maturity is shortened, they don’t have quite the risk they once did, because of all the bond refinancing going on out there.
Are you seeing any junk coming to market these days?
Oh, yeah. They’ll sell anything. If it has the spread, they’ll sell it. They sold municipal junk...you know Poway, California, was selling a $140 million offering to rebuild the schools. By the time the town pays them back, it will be over $1 billion, because there was no interest for 20 years. It was kind of like a hybrid-zero thing.
So the city commission just kicked the can down the road for somebody else to deal with. And you know, we will say how could you sell that—I didn’t sell it—but how can that be so? Well, there is a spread, and somebody made money selling it. That’s how it goes.
And they had takers for it.
Sure. Well, yeah, they probably say you should diversify your portfolio with this. Obviously it was at a deep discount. But what a disaster!
It’s just you’ve got to be really careful in the muni markets. I mean, general obligation bonds are inherently safer than revenue bonds, but if you buy revenue bonds, you just want to make sure the sewer or the hospital or the sports stadium it was tied to is working.
So for an individual investor, would you recommend that they stay more with the corporate bond market?
Yes...well, it depends on the tax bracket. I mean, there is a joke in California where the more messed up the state gets, the higher the muni yields will get. And they love it because munis are second in line after schools for money, so there are a lot of people that want chaos and anarchy in California to get the muni yields up.
Sure. What do you think about the ratings on munis now? Do you think their agencies are doing a good job with those?
They are doing better. They are doing better, but the real problem is revenue bonds. The spread could be a year’s interest sometimes. Meredith Whitney really messed up that market; I mean, she scared a lot of people, and so you could drive a truck through the spread.
And so in that case, maybe a muni fund is better. But if the fund gets hit with redemptions, the manager we had was picked off on the spread...I mean, you can lose a tremendous amount of money in the bond market if the manager is forced to sell at the wrong time or if rates go up. So I think you’ve got to be really careful.
Investors need to do their homework.
And get some good advice.
Even in bond ETFs, some people are getting out at the wrong time. Their transaction costs under the surface could really cause principal growth.
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