US treasuries are “the most overvalued asset in the world, bar none [and] don’t make any sense relative to inflationary expectations down the road.”
– Bill Gross, Portfolio Manager, PIMCO Total Return Bond Fund, the largest bond mutual fund in the world
Investing for income is a perennial challenge. With cheap money everywhere, the yields on traditional income investments are a thin gruel. Add in inflation and for the most part it’s a losing proposition: purchasing power will be eroded more than the income you are receiving, resulting in a net loss of real wealth.
This weekend Barron’s wrote a piece titled “Bonds Are Back in the Game” (subscription required) making the case for some junk bonds, convertible debt, mortgage backed securities and municipal bonds.
I’ve been getting a lot of questions lately about the convertible debt being issued by financial institutions. These seem somewhat attractive to me. For instance, B of A and Citi recently issued convertible bonds that are yielding around 7% and offer some upside if the stocks can recover.
Higher quality mortgage backed securities are starting to look interesting as well. Jeff Gundlach of the TCW Total Return Bond Fund (TGLMX) has been picking up some of the top rated tranches of prime and Alt-A mortgage backed securities which are yielding 8%. Gundlach gets it and so I think investing with him could be a safe way to generate some real income. His TCW Total Return Bond Fund is currently yielding 5%.
In an article from two weeks ago on utilties, “High Yielding Elecrtic Utilities Power Players For Your Portfolio” (subscription required), Barron’s makes the case for utility stocks. I think you can just buy the S&P 500 Utilties ETF (XLU) which is currently yielding about 2.9%.
There are some ways to generate decent yield while protecting your capital from inflation. The best investments currently available appear to be convertible bonds issued by financial institutions, high quality mortgage backed securities (go with Jeff Gundlack with the TCW Total Return Bond Fund (TGLMX) if you are interested in this) and utility stocks. Splitting your income investments evenly among all three classes will give you a yield of about 5% with pretty good protection of principal from inflation.
If anybody wants to read either of these articles send me an e-mail and I’ll send you a copy.