large number of investors are turning to surer holdings such as Treasury bonds. In turn, that has raised the value of Treasuries in the market. Whenever the Federal Reserve lowers rates, investors have a sign that the economy isn’t doing particularly well, and then, again, they turn to Treasuries. We look for the Fed to begin lowering rates, and thus five- and 10-year issues will provide the best total return.
How does this translate for individual investors?
Typically, bond story recommendations are hard for individual investors to put to use. Instead of paying a brokerage fee, investors pay a markup for bond trades. That’s why I would generally recommend investors look at bond mutual funds. However, I think these selections provide a good entry point in the bond market.
The first is a high quality municipal bond. The current market offers a very good opportunity to invest in five- to 10-year insured general obligation bonds that are issued by municipalities to cover expenses and finance specific projects. They are a safe investment and individual investors can check reports issued by credit rating agencies such as Standard & Poor’s, Moody’s, or Fitch to verify the solvency of the local government issuing the bond. On top of that, there is another layer of security in the form of an insurance to back the bond that local governments are required to purchase. The average yield for the municipal bond sector according to the Lehman Brothers index for the group is 4.23%. Plus the investment gain is tax-free. For instance, someone in the 35% tax bracket would have to find an investment that returned a guaranteed 6.5% in order to match a municipal bond yield of 4.23%.
What’s your second favorite idea?
Treasury STRIPS, or Separate Trading of Registered Interest and Principal Securities, are a great interest rate play. Essentially, they are a Treasury bond investment that does not offer interest payments but instead appreciates in value over time. They also offer an opportunity to appreciate in value when interest rates fall. Currently a Treasury principal strip that matures Nov. 15, 2021, yields 5.27% and is priced at $47.52 (Note: An investor who purchases the strip at $475.20 can cash the bond in for $1,000 when it matures in 2021.)