Fixed-income investors should not chase after yields as returns do not reflect risks. Instead, people should stick to quality, like investment-grade corporate debt and bond-related exchange traded funds.
With benchmark 10-year Treasury yields back down to about 1.8%, there is a greater chance of rates rising than falling lower. [The ETF Income Conundrum: Balancing Yield and Risk]
“Long term, there is only one direction rates can go from here,” Lane Jones, chief investment officer at Evensky and Katz/Foldes Financial Wealth Management, said in a CNBC article. “Our approach is to remain defensive and not reach for yield.”
Many may look at high-yield corporate bonds as an attractive alternative to the paltry yields in U.S. government bonds. For example, the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) has a 6.11% 30-day SEC yield and iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) has a 5.52% 30-day SEC yield. [Corporate Bond ETFs: Oil-Induced Default Risks Are Overblown]
Additionally, some may think that these junk bond ETFs may be cheap, especially after the recent pullback late last year. However, the yield premium over Treasuries and investment-grade corporate bonds remain historically low.
You’re not getting paid much for the extra risk,” Jacob Wolkowitz, investment manager at Accredited Investors, warned.