Despite Warren Buffett’s famous quip, no investment is forever — and certainly not bonds. During the past three decades, we’ve enjoyed the most spectacular bull market for bonds in 4,000 years of recorded financial history (going back to ancient Babylonia). Interest rates in the United States and other industrialized countries have plummeted, driving bond prices up.
But this is a non-repeatable event. Bond yields can not fall below zero. What’s more, rates on U.S. government debt are now as low as they’ve ever been since the founding of the American republic.
I don’t know — nobody knows — exactly when the pendulum will swing in the other direction, but it will. And when it does, investors holding long-maturity bonds at low yields will be badly hurt.
For example, Build America bonds are long-maturity taxable municipal bonds, backed in part by a federal interest subsidy. When the current mania for government debt subsides, these bonds will lose value shockingly fast.
So, what kinds of bonds should you be buying? Three areas of the bond market still offer reasonable value: high-yield corporates, mortgages and emerging markets. All three still look attractive, but especially the last.
Emerging-markets bonds throw off generous cash yields to compensate you for accepting risk. Among the no-load funds that specialize in this niche, TCW Emerging Markets Income Fund (MUTF:TGINX) is paying 6.7% — worlds away from the skimpy 1.9% you would earn on a 10-year Treasury note.
Buy at $11.25 or less.
For an even higher yield, consider the closed-end Western Asset Emerging Markets Debt Portfolio (NYSE:ESD). ESD currently pays 7.3%. Monthly distributions.
Bear in mind that the price of a closed-end fund can wander a fair distance from the value of the fund’s underlying portfolio (net asset value, or NAV). At the moment, ESD is trading about 9% below NAV.
Thus, you can buy $1 worth of bonds for only 91 cents. My guess is the fund eventually will trade closer to NAV, but there’s no guarantee the discount won’t widen first. Buy ESD only if you understand — and can live with — this possibility.
ESD merits a buy up to $18.90.
