3 Bond Funds to Build on a Summer Rally | Kiplinger

3-bond-funds-to-build-on-a-summer-rally-|-kiplinger

bonds

The market expects consistently lower inflation to arrive sooner rather than later. That’s great news for these three bond funds.In the past 60 days, the consumer price index topped 9% before settling back a bit, the Federal Reserve raised short-term interest rates three-fourths of a percentage point with promises of further hikes, apartment rents kept soaring at double-digit rates, and much more. You could sense the fixed-income markets detonating in a bonfire for the ages.

Wrong. Since June, we are instead enjoying a noteworthy bond rally. This makes sense and could persist. 

As economic growth slows (or stays negative) and falling oil and other commodity prices filter through the economy, there is no reason for medium- and long-term interest rates to be high. The Fed’s statements and rate hikes are intended to blunt inflation. This rally tells us that markets expect consistently lower inflation to arrive sooner rather than later. 

Accordingly, the yield on a 10-year Treasury bond has plunged from 3.5% on June 14 to as low as 2.6% in early August. This built up the net asset value of a typical Treasury fund by more than 4%. (Yields and prices move in opposite directions.) Other bond averages, such as high-yield (junk) corporates and taxable municipals, have gained (or regained) even more. How can this be, with all the trepidation about stagflation – amplified by the shrill politicking in this election year? And how should we manage our yield-seeking dollars?

First, do not put them all in the bank. Banks are not following the Fed’s rates up the ladder. And bonds are secure as long as you get paid on time and in full. There are no worrisome credit troubles, bank failures, mass foreclosures or other echoes of the financial crisis. Second, although bonds’ and bond funds’ principal values sank early this year, that enabled alert bond-fund portfolio managers to accumulate higher-coupon assets and boost their cash distributions. This is visible across all categories, maturities and credit ratings. 

Take the Vanguard GNMA Investor Fund (VFIIX). In January, it distributed $0.00824. Annualizing that and dividing by the (then) net asset value of $10.54 reveals a yield of roughly 0.94%. In August, the same fund distributed $0.02103, more than twice as much, on a NAV of $9.89 (up from a low of $9.36 on June 14). The current yield is 2.5%, and the total return is 4.6% since June 14 through August 5. As mortgage rates fall gradually, that should boost NAV some more as fixed-rate mortgage pools become more valuable until and unless loan rates drop enough to unleash massive new refinancing. That will be a while. 

Turn to Dodge & Cox Income (DODIX), a solid core fund that holds mixed high-grade bonds. It pays quarterly, and in December 2021, it issued $0.057 a share on a NAV of $14.05, a 1.6% yield. After falling to $12.44, the fund has rallied to $12.90 and pays $0.077, for a 2.4% yield.

Swinging over to high-yield bonds, look at the Fidelity Capital & Income Fund (FAGIX). After losing 15% earlier this year, the fund cut that loss in half in a few weeks while raising its monthly distribution regularly; based on the last payout, its yield is up to 4.3% after starting the year barely over 3%.

These are three funds that I know many of you own and that have served investors wonderfully for a long time. I could cite hundreds of others. To give up on proven investments over a mild economic downturn and a couple of weak quarters is shortsighted.

Watch Out! RMDs Can Trigger Massive Medicare Means Testing Surcharges

retirement planning

Watch Out! RMDs Can Trigger Massive Medicare Means Testing SurchargesSaving too much in tax-deferred retirement accounts could mean you’ll pay hundreds of thousands more than necessary on Medicare premiums in retirement…

August 29, 2022

Your Guide to Roth Conversions

Special Report

Tax Breaks

Your Guide to Roth ConversionsA Kiplinger Special Report

February 25, 2021

What Are the Income Tax Brackets for 2022 vs. 2021?

tax brackets

What Are the Income Tax Brackets for 2022 vs. 2021?Depending on your taxable income, you can end up in one of seven different federal income tax brackets – each with its own marginal tax rate.

August 15, 2022

Don’t Give Up on the Eurozone

mutual funds

Don’t Give Up on the EurozoneAs Europe’s economy (and stock markets) wobble, Janus Henderson European Focus Fund (HFETX) keeps its footing with a focus on large Europe-based multi…

August 30, 2022

Hedge Funds’ 21 Top Blue-Chip Stocks to Buy Now

Investing for Income

Hedge Funds’ 21 Top Blue-Chip Stocks to Buy NowWhat is the reputed smart money up to lately? We explore the 21 most popular blue-chip stocks among the hedge fund crowd.

August 29, 2022

10 Best Bond ETFs to Buy Now

ETFs

10 Best Bond ETFs to Buy NowThe bond market has struggled in 2022, but investors with a longer-term view should consider these bond ETFs to balance their portfolios.

August 18, 2022

The Berkshire Hathaway Portfolio: All 45 Warren Buffett Stocks Ranked

stocks

The Berkshire Hathaway Portfolio: All 45 Warren Buffett Stocks RankedThe Berkshire Hathaway portfolio is a diverse set of blue chips, and increasingly, lesser-known growth bets. Here’s a look at every stock picked by Wa…

August 16, 2022


Leave a comment

Your email address will not be published. Required fields are marked *