2020 INVESTING OUTLOOK

INCOME INVESTING Jeffrey R. Kosnett

Stand By Your Bonds

I
’m expecting another good year for such as AT&T and real estate invest- positive, says Doug Baker, who man-
bond and bond-style investments ment trusts, or with high-interest, ages various closed-end funds for
in 2020. Not as spectacular as 2019, BBB-rated corporate bonds, munici- Nuveen, including NUVEEN PREFERRED
but rewarding enough to feel confident pals and preferred stocks. (Techni- AND INCOME TERM FUND (SYMBOL JPI), which
about sticking with what’s working. cally, preferreds pay dividends, but has a 2019 total return through Octo-
A year ago, my plea to stand by your as a practical matter they are senior ber 31 of 30.7%. Baker says tight or
bonds in 2019 appeared stubborn if fixed-rate debt.) tighter bond supplies, continuing high
not reckless. Late in 2018, long-term The headache for income investors demand and constant refinancing of
Treasury and other interest rates were in 2020 is not likely to come from higher-rate debt are all positives.
surging (with prices moving in the op- accelerating losses, but from the chal- Risk is mainly sector-specific. An
posite direction), the Federal Reserve lenge of finding fewer worthy choices indicator called the junk-bond distress
was tightening short-term credit, and for new investments. Rates are low— ratio is at a three-year high. But ex-
economic growth was running closer but remember, most of the rest of the clude energy and the ratio (the propor-
to 3% than the tame 2% that’s the world is dealing with negative yields. tion of junk bonds trading at inflated
sweet spot for fixed-income portfolio Investors can still find fresh high- interest-rate spreads over Treasuries)
returns. Popular and expertly man- yield (so-called junk) bonds yielding falls below where it ended 2018. The
aged funds such as Baird Aggregate 4% and bank preferreds delivering average junk fund returned over 10%
Bond, Dodge & Cox Income, Loomis 4.75%. Knee-jerk thinking holds that in 2019. Don’t count on a 10% return
Sayles Bond and Vanguard Total Bond such yields are risky and a sign that again in 2020, but don’t rule it out.
Market finished 2018 with rare and the end of the boom is nigh. My in- This happy talk doesn’t mean to
unexpected losses—slim, bearable ones, terpretation is that Toll Brothers, abandon all discipline. A rule of thumb
but losses nonetheless—while banks Fifth Third Bank and the like have is to look for bonds or funds with a yield
were ratcheting that is greater than their duration,
rates on insured which measures interest-rate
savings accounts sensitivity. The lower the
to beyond 2% with I’D BE SCARED IF I THOUGHT THAT duration, the smaller the
the Fed as their INTEREST RATES WOULD SHOOT UP loss if rates rise. OSTERWEIS
partner. STRATEGIC INCOME (OSTIX) and
ACROSS THE BOARD AND THAT THE
But my reasons PGIM SHORT DURATION HIGH YIELD
for ignoring the CREDITWORTHINESS OF BORROWERS (HYSAX) both have durations
naysayers in 2019 IS WILTING. BUT I JUST DON’T SEE IT. of less than 2, yields
remain the same pushing 4% to
for 2020. Extended 5%, and long
bull markets don’t records of
go over a cliff. They transition and no trouble placing success. I
wither away over months, often years. such borrowings, also think
I’d be scared if I thought that U.S. in- and if you hap- tax-exempt
terest rates are finally set to shoot up pen to be one bonds will
across the board and that the credit- of their in- continue
worthiness of borrowers is wilting. vestors, to rock
But I just don’t see it. The globalized you’ll get the world in
POON WATCHARA-AMPHAIWAN

“lower for longer” rate argument I’ve paid in 2020—more

embraced for 10 years lives on. full and on munis in a
on time. future column. ■
Where to reach for yield. That means it’s Fixed-
JEFF KOSNETT IS EDITOR OF
safe and effective to stretch for yield, income funda- KIPLINGER’S INVESTING FOR
INCOME. REACH HIM AT JEFF_
whether with high-dividend stocks, mentals are still KOSNETT@KIPLINGER.COM.

36 KIPLINGER’S PERSONAL FINANCE 01/2020

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