Bonds: ‘Steady Eddies’ caught in the storm

Bonds have long been regarded as the “Steady Eddies” of investment portfolios, said Jeff Sommer in The New York Times. Even when they fluctuate, “they are expected to rise in value when stocks decline, buffering a portfolio’s returns in a rocky market.” But now long-term corporate bonds are down 18 percent through October, according to Morningstar’s Ibbotson Associates. “That’s worse than any full-year decline on its records going back to 1926.” High-yield bonds have fallen even further. Investors are shunning bonds that show even “the slightest whiff of risk,” and this climate of uncertainty has played havoc with the investment strategies of even the most risk-averse. “When your safe haven comes under attack, you’re really in trouble.”

Investors are yearning for the good old days, when bonds were boring—and safe, said Russell Pearlman in SmartMoney. “We’ve never had the problems in the money markets, bond markets, and the banking system like we do now,” says Dan Fuss, whose signature fund, Loomis Sayles Bond, is down 27 percent this year. “This is really a panic.” Still, investors often seem to be overreacting. Case in point: General Electric. The AAA-rated company issued a 30-year bond in January that’s now selling for 71 cents on the dollar. “That’s crazy,” says Fuss. Such discrepancies make this “the best buying opportunity” for investment-grade corporate bonds Fuss has seen in 50 years.

You’re going to have to get your hands a little dirty and take a few chances, said Carolyn Bigda in Money. Every category of bond fund is yielding less this year, with the exception of government bonds. But plowing all your money into Treasurys would be foolish—they’re yielding a measly 4 percent. Instead, make sure your portfolio includes a fund that invests in high-quality corporate bonds. “Confidence will eventually return, especially after investors realize that investment-grade bonds are yielding 8.9 percent.” Municipal bond funds are also a good deal. Historically, tax-exempt muni bonds have yielded slightly less than Treasurys. “Today they’re paying around one percentage point more.”

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