Worried About Stocks? Bulk up on Bonds
It's the loudest sound on Wall Street - louder than the shouts of stock traders.
The sound is the deafening silence from a stock market bubble that refuses to burst.
With the stock market pushing record highs, many analysts and investors have steeled themselves for either a break or a leak in the bubble - a major correction.
But financial planners see an antidote: bonds.
"Bonds today are a pretty safe harbor," says Penny Bond, a financial planner in Saint Louis Park, Minn. Investors should put their uninvested money in bonds until the next correction, then steadily reenter stocks, says Ms. Bond.
But bonds are attractive in their own right - as more than just a comparatively low-risk shelter from equity fallout.
Economists generally agree that interest rates should drift lower this year, giving bond investors a lift.
The yield on the 30-year Treasury should ebb from 5.6 percent today to 5.25 by year end, says Ed McRedmond, senior analyst at A.G. Edwards in St. Louis. When yields fall, bond prices rise.
The Fed has not changed rates for 15 months, even though inflation has melted well below 2 percent.
"Pressure is building on the Fed to lower rates, and it is just a matter of time before they do," says Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc. in Chicago. "Lengthening duration [meaning long-term bonds] remains the appropriate strategy."
The downward pressure on rates comes from several fronts:
* Turmoil in East Asia, especially declining regional currencies, has led to a flood of cheap imports and a powerful deflationary tide.
"If it wasn't for the crisis in Asia, we'd have higher rates," says Richard Babson, of investment management firm Babson-United near Boston.
* The US economy is slowing. After torrid, 5.4 percent growth during the first quarter, it should grow 1 percent in the second quarter and 2 percent for the second half, says Bruce Steinberg, chief economist at Merrill Lynch.
Fewer exports, especially to Asia, should pull about 1.5 percentage points from growth, he says.
Moreover, the continued strike at General Motors Corp. and a dramatic slowdown in inventory buildup will also moderate growth.
* Wage inflation appears to be in retreat. Job growth slowed last month; unemployment rose to 4.5 percent; wages edged up only 0.1 percent.
"There is a good shot of an easing by December," says Mr. Steinberg.
Investors have many ways to invest in bonds. If you have more than $10,000 you can "ladder," buying bonds of different durations - two, four, and seven years, for example. You then buy another long-term bond when the short-term bond comes to maturity.
Or, mutual fund investors can pick from a stable of corporate and government bond funds. Vanguard offers some of the most popular bond funds because of a reputation, with a solid performance and low fees.
Closed-end bond mutual funds, traded on the New York Stock Exchange, often yield a bit more than open-ended funds.
Whereas managers of open-end funds must keep a portion of assets in cash in order to meet redemptions, managers of closed-end funds handle a fixed amount of shares. Consequently, they can forgo cash and put all their assets in higher yielding bonds.
Moreover, the expense ratio of closed-end bond funds is lower because there is little or no back office staff handling sales and redemptions as with open-end funds, notes Mr. McRedmond. If held more than a few months, the slightly higher yield of closed-end funds compensates for the fee brokers charge when purchasing the shares.
McRedmond recommends two closed-end corporate bond funds: Van Kampen American Capital Bond Fund, yielding 7.1 percent, and Vestaur Securities Investment Grade Bond Fund, yielding 7.3 percent.