2018 was a difficult year for investors, but fixed income investing did better than expected given multiple rate hikes. The coming year looks set for volatility and, while stocks being down may somehow help bonds, the possibility of more rate hikes does impose limits on fixed income investors. But one thing most analysts seem agreed upon, no one has a clear sense of what is ahead. Here are some ideas and insights for fixed income investors moving into 2019.
Dividend Investor 101
Given that interest rate hikes tend to be bad news for fixed income investors, the Fed’s four rate hikes in 2018 were key news items. Overall fixed income had a better than expected year, according to Seeking Alpha’s Dividend Investor 101, with bonds initiating surprise end-of-year rallies in a negative environment. Municipal bonds actually made money with SPDR Nuveen Barclays Municipal Bond ETF (TFI) returning 2.6 percent. The SPDR Bloomberg Barclays High Yield Bond ETF (JNK) scraped junk bond’s bottom with a -4.00 percent return.
Dividend Investor 101 expresses concern that he or she is seeing investors that seem to be moving toward not pricing in rate increases for 2019 given that one or two still seem quite likely. Volatility is also quite likely to increase.
Pro tips from Dividend Investor 101:
“For those pursuing the buy-and-hold to maturity strategy…reinvesting money will give you a slightly better yield with some more interest income to spend this year.”
For a safer investment, “stick with short-dated investments for 2019” in the form of one to two-year CDs or Treasuries which now sometimes beat long-term rates.
For those comfortable with volatility, muni bond ETFs are encouraged. Taxable and non-taxable munis are recommended for high-income tax brackets and taxable munis for lower or zero income tax brackets.
Three taxable municipal bond recommendations are:
– BlackRock Build America Bond Trust (BBN)
– Guggenheim Build America Bonds Managed Duration Trust (GBAB)
– Invesco Build America Bond Portfolio ETF (BAB)
Schwab Market Outlook
Kathy A. Jones takes a look at the 2019 Schwab Market Outlook for fixed income investments. Overall, Schwab feels that 10-year Treasury bond yield may have hit a peak at 3.25 percent. It expects more short-term rate hikes but does not expect a lot more from longer-term yields. And, in what is likely to be the big theme for 2019, volatility is likely to rise.
Schwab expects two to three rate hikes in the coming year. Volatility is especially expected in riskier areas including bank loans and high-yield bonds. Limiting exposure or focusing on higher credit quality should help. Municipal bonds seem likely to do well in this environment with much demand for tax-exempt income.
Jones has three suggestions to consider:
As bond yields rise, add to portfolio duration to capture additional income.
Move up in corporate credit quality.
Focus on muni bonds in the five to eight-year section of the yield curve to avoid taking on added credit risk.
AB notes that 2018 was a difficult year full of change. Global growth began strong and then pulled back as the age of cheap money slowed and interest rates rose. And in the last quarter, “markets staged a prolonged sell-off encompassing nearly every major asset.”
2019 could be just as turbulent given that financial markets are in transition “from an unusually supportive environment to a more volatile one of slower growth, reduced liquidity, and heightened political risk.” AB focuses on three themes to navigate what will continue to be a “challenging” environment.
AB expects two rates hikes in 2019 though pointing out that it takes a more positive view on the economy overall. AB does not expect a recession in the U.S. or internationally. AB also has confidence that the Fed can produce a slowdown as opposed to a hard landing. More generally, AB expects a slowing of major economies to trend levels of growth as opposed to a contraction.
Yet there are also systemic risks of which to be concerned. The Fed could change its approach, the U.S. deficit is a concern, the U.S.-China trade war is unpredictable with many possible negative outcomes, Brexit and other EU dramas could definitely worsen and market liquidity will probably worsen.
AB advocates being a selective investor, definitely in but careful about one’s involvement. Key point: “With yields now higher for both government debt and credit, the return potential for fixed income is bigger than it’s been in quite a while.” There are many potential opportunities for investors who are doing their homework and being careful about acquiring assets.
Closing insight from The Fortune Teller
Seeking Alpha’s The Fortune Teller maintains the biggest risk for 2019 is the general agreement that yields cannot go higher than the point they have reached.
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