Fixed income investors can still find some yield generating opportunities and diversify with bond exchange traded funds.
For instance, Rick Rieder, BlackRock’s chief investment officer of fundamental fixed income, believes that investors should take a look at municipal bonds as they are less correlated to Treasuries, CNBC reports.
“We are overweight municipals,” according to a BlackRock research note. “Heavy supply and rising rates have resulted in negative returns year-to-date. However, municipal fundamentals remain intact and supply pressures should abate. The recent underperformance makes the asset class more attractively valued, particularly in the long end.”
High-quality municipal bond ETFs have done slightly better than Treasuries over recent months after the spike in interest rates. Over the past three months, the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) dipped 1.5%, SPDR Nuveen Barclays Municipal Bond ETF (NYSEArca: TFI) fell 1.5% and Market Vectors Intermediate Municipal Index ETF (NYSEArca: ITM) was down 2.0%. Meanwhile, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) decreased 2.7% over the past three months.
Marc Seidner, PIMCO’s chief investment officer of nontraditional strategies, argues that after the recent rise in rates and selling in the debt markets, bonds look cheap, comparing buying bonds in a rising-rate environment to shopping the day after Christmas. [Some Bond ETFs Still Merit Attention]
The munis bonds also offer relatively attractive yields, especially for those in the higher income brackets. TFI has a 2.25% 30-day SEC yield or a 3.97% tax equivalent 30-day SEC yield for those in the highest income bracket. MUB has a 1.86% 30-day SEC yield and a 3.28% tax equivalent 30-day SEC yield. ITM has a 2.4% 30-day SEC yield and a 3.98% tax equivalent 30-day SEC yield.
However, both Anne Lester, senior portfolio manager at JPMorgan, and Rieder warned that investors should pare down their expectations as the shifting outlook on interest rates means that fixed-income investments may not be as profitable as they have been in the past.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.