“The Fed is on hold and company balance sheets are in good shape with respect to positioning and timing of debt,” Steinmetz noted. “Companies are sitting on a lot of cash and they’ve boosted productivity. That’s great if you’re a bond investor because the likelihood the company can pay you back grows.”
“Yields have been pushed down by a highly aggressive central bank policy, with the result that yield-oriented investors have been pushed into owning lower-rated credits. As a result, the yields on riskier debt are as low as they have ever been,” adds Fran Rodilosso, fixed income portfolio manager at Market Vectors ETFs. “But the credit spreads, the difference between the yield on a high yield bond and a Treasury security, are actually closer to their historic average.” [Are High-Yield Bond ETFs Overvalued After Big Run?]
Senior loans and emerging markets
Also, senior bank loan ETFs such as PowerShares Senior Loan Portfolio (NYSEArca: BKLN) and Pyxis iBoxx Senior Loan (NYSEArca: SNLN) are paying decent yields and provide some protection from rising interest rates.
“Most investors typically become interested in bank loans when interest rates are expected to rise,” says Morningstar analyst Timothy Strauts. “With the Federal Reserve committed to maintaining low rates for the next several years, current investor apathy to bank loans shouldn’t come as a surprise. But with yields in the high-yield-bond sector near historic lows, bank-loan funds are looking more and more attractive on a relative basis.” [Senior Bank Loan ETFs Yielding 5%]
Finally, Steinmetz at OppenheimerFunds encouraged investors to look to emerging market bonds for yield. Developing countries are in better financial shape, cutting their relative risk, he told MarketWatch.
ETFs for emerging market debt include iShares JPMorgan USD Emerging Markets Bond Fund (NYSEArca: EMB), PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY), WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD), Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC), SPDR Barclays Capital Emerging Markets Local Bond ETF (NYSEArca: EBND). Some of these products hedge their foreign-currency exposure, while others do not. [Why Emerging Market Bond ETFs Could Stay Hot in 2013]
Bond investors can also protect themselves from rising interest rates by moving into funds with shorter durations. Of course, yields here are extremely low, but these ETFs won’t feel the bite of rising rates as much. Short-duration ETFs include PIMCO Enhanced Short Maturity Strategy (NYSEArca: MINT), SPDR Barclays 1-3 Month T-Bill (NYSEArca: BIL), iShares Barclays Short Treasury Bond (NYSEArca: SHV) and Guggenheim Enhanced Short Duration Bond (NYSEArca: GSY).
Full disclosure: Tom Lydon’s clients own HYG, JNK, EMB.