The reality for the 2013 bond market in the United States is that interest rates are forecast to remain low throughout the year and continuing until 2015. The Federal Reserve has made this clear – and that is not good news for Treasuries and investment-grade corporate bonds.
In the case of corporate bonds, issuers have been loving the low interest rate environment gifted to them by Ben Bernanke. Issuing commercial paper is cheap these days; again, good for the issuer, not investors.
That means the question becomes why would investors want to own the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD), the largest investment-grade corporate bond ETF? LQD has a trailing 12-month yield of less 3.9%.
By comparison, income investors could grab 70 basis points of added yield by owning individual companies found among LQD's holdings, like the common stock of ConocoPhillips (NYSE: COP) or Verizon Communications Inc. (NYSE: VZ). Also in LQD are shares of AT&T Inc. (NYSE: T), which yield 5.1%.
Of course, higher yields and superior income are available with junk bonds, an asset class that is most easily tapped through ETFs.
However, U.S.-focused junk bond funds come with their own set of issues investors need to consider. Namely, the time to have bought these funds has come and gone. Chasing yield and capital appreciation in high-yield bonds at this point is risky business. Outflows from the corresponding ETFs indicate the smart money is taking their profits and moving on.
Luckily, there are credible alternatives to U.S. corporates and Treasuries for income investors looking to fill out the bond portions of their portfolios.
Finding those alternatives is not hard at all, it is just a matter of leaving the U.S.