Earlier this month the 10-year Treasury note hit a record low yield of 1.46%. At some point in the not-too-distant future these yields will move higher, which means bond prices will turn lower. Investors should be looking for bond alternatives now. But what alternative choices do bond fund investors have now?
Unless you feel the end of the world scenario is about to play out, bond yields will be increasing and, if you recall your basics on bond funds and interest rates, you know that bond prices move in the opposite direction as yields. If rates are rising, prices are falling. This scenario is not a question of if, it is a question of when and by how much.
Alternative Bond Fund Choices
There is no doubt that most bond funds that are in 401(k) plans and IRAs in America today are significantly exposed to US Treasuries. This means that there is no escaping declines in value unless some fixed income alternatives can be found.
The first alternative choice you have for your fixed income allocation is to consider adding a multi-sector bond fund with experienced management. Such a fund exists in Loomis Sayles Bond (LSBRX). Multi-sector bond funds have a "go anywhere" objective that means the fund manager can search for compelling bond ideas and seize almost any opportunity they find... all over the world. Manager of LSBRX, Dan Fuss, has been managing bond portfolios for 50 years and his team is also extremely experienced.
You can also look for other bond funds that are able to invest in bonds with credit ratings below investment grade (also known as junk bonds) and/or bond funds from emerging markets countries. This flexibility enables a bond fund manager to invest in bonds other than US Treasuries, which are high credit quality and relatively "safe," but low yields combined with inevitably falling prices in the near future is not a good combination.
Venturing beyond the typical bond funds that hold significant levels of US Treasuries can carry additional market risk, but remaining in Treasuries carries its own specific form or risk called interest rate risk, which is the risk of falling bond prices due to the rise in interest rates.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.