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9 ways to boost the yield on your bond investments

Funds that invest across the fixed-income spectrum may offer higher returns than traditional bonds. Here are 9 options to consider.

  • By Daren Fonda,
  • Fidelity Interactive Content Services
  • – 03/12/2013
  • Investing in Bonds
  • Investing in Mutual Funds
  • Bond Funds
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U.S. Treasury bonds may be the anchor that steadies your portfolio in a market storm, but with bond yields near record lows and bond prices showing signs of weakness, you may be better off looking elsewhere for income.

In the past three months, the Barclays U.S. Aggregate Bond index has lost 0.4%, according to Thomson Reuters. The index yields 1.9%, barely edging the 1.6% inflation rate over the past 12 months. Some analysts worry that interest rates may rise if the economy keeps improving, pushing bond prices lower. (Bond prices and interest rates move in opposite directions.)

Indeed, many bond funds are struggling to stay in positive territory as their older, higher-yielding bonds mature and they reinvest in newer bonds that pay interest at lower rates, says Diane Pearson, an adviser with Legend Financial Advisors in Pittsburgh. Rather than give up on bonds, though, Pearson and other advisers suggest branching out: investing in other parts of the bond market, such as foreign bonds, and using other types of investments to bolster income.

"It makes sense to look beyond traditional bonds," says George Middleton, an adviser with Limoges Investment Management in Vancouver, Wash., who recommends holding a range of income securities both to lower risk and potentially boost returns.

There are plenty of alternatives to plain-vanilla bonds on the market. Options range from debt issued by foreign governments to "floating-rate" bank loan funds, high-yield bonds and mortgage-backed securities. While these investments have risks of their own, they can help diversify a bond portfolio and, in some cases, provide a bit of protection against rising interest rates and inflation, says Joanna Bewick, lead manager of Fidelity Strategic Income fund (FSICX).

"You have to squeeze income out of everything you own," she says. "You need a strategy that hits all the bases."

Granted, you should carefully consider how these investments fit within your portfolio, making sure you don't increase your overall risk. High-yield bonds, foreign debt and some types of mortgage securities are considered risky and can behave more like stocks than bonds. So while they offer higher yields, they come with a price: higher volatility and potential for losses.

A financial adviser can determine if these types of investments make sense for you, taking into account your other investments, tolerance for risk and your overall financial picture.

Here are a few funds to consider, based on our research and interviews with analysts and advisers. Keep in mind, these are only suggestions. You should do your own research before investing.

Foreign bond funds

Foreign bonds can offer a number of advantages for U.S. investors, says Middleton. Yields tend to be higher in foreign markets and foreign bonds have a low correlation to the U.S. bond market, according to research from Oppenheimer Funds. While an increase in U.S. interest rates may pressure U.S. bonds, for example, foreign markets may be impacted much less, if at all.

Indeed, countries such as India, Mexico and Japan are now trying to boost their economies with monetary and fiscal stimulus, according to Blaise Antin, head of government bond research for fund firm TCW in Los Angeles. Even Europe is switching gears from a focus on austerity to promoting growth, he says. These moves may help strengthen local currencies and increase global demand for their bonds.

How much to invest in a foreign fund depends on how much risk you can handle. Funds that invest in local market currencies generally offer higher yields, though they also may pose currency risk. Other funds hold mainly "sovereign" or government debt denominated in U.S. dollars; yields tend to be lower for these funds, but they eliminate most currency risk.

Middleton advises clients to hold 20% to 40% of their fixed-income assets in foreign funds, spread between U.S.-dollar and local-currency funds.

For local market exposure, one fund he uses is PIMCO Foreign Bond Unhedged (PFBDX). Manager Scott Mather is emphasizing currencies in wealthier countries that have their finances in order such as Australia and Canada, along with some emerging market countries such as Mexico. The fund has lost 5.5% this year and yields 1.2%. Its long-term performance has been solid, though, beating 74% of international bond funds over the last three years, according to fund tracker Morningstar.

Other funds with strong records, according to Morningstar, include Fidelity New Markets Income Fund (FNMIX), which focuses on emerging markets, and Templeton Global Bond (TEGBX), a world bond fund that holds a mix of foreign government and corporate debt around the world. Both funds have exposure to foreign currencies, which can be risky. The Templeton fund costs $75 to buy shares on the Fidelity platform.


Fund name 3-year annualized return 30-day SEC yield Annual expense ratio
PIMCO Foreign Bond Unhedged  (PFBDX ) 6.6% 1.24% 0.90%
Fidelity New Markets Income Fund (FNMIX) 11.6 3.80 0.87
Templeton Global Bond Fund (TEGBX) 10.5 5.1 0.72

Source: Fidelity, Morningstar.com


Floating-rate funds

One way to benefit from a rising interest rate cycle in the U.S. is to hold some assets in "floating-rate" bank loan funds, according to the Pittsburgh adviser Pearson. These funds tend to gain value as rates rise, with yields for floating-rate loans now about 5.5% on average, well above Treasurys and quality corporate bonds, according to the S&P/LSTA Leverage Loan 100 Index.

Floating-rate funds invest in loans taken out by companies to fund their business or make an acquisition. Interest rates tend to rise and fall with short-term benchmark rates, and the loans are usually backed by collateral, providing investors with some protection if the company defaults. Another plus: Bank loans don't move in the same direction as the bond market, according to Morningstar. If bond prices decline due to rising interest rates, for instance, bank loans would probably increase in value.

The downside to bank loans is that they're more volatile than bonds, according to Morningstar. Most bank loans are taken out by companies with heavy debt loads and credit ratings below investment-grade. When default rates increase, the loan market tends to sell off. Bank loans plunged by 30%, on average, in the 2008 panic. Today, the default rate is about 1.4%, below the historical average of 3.3%, according to S&P Capital IQ, and it has shown few signs of increasing.

Pearson recommends bank loans for around 5% of her clients' fixed-income assets. Some top-ranked funds in the category, according to Morningstar, include RidgeWorth Seix Floating Rate High Income Fund (SAMBX), Oppenheimer Senior Floating Rate Fund (OOSCX) and Fidelity Floating Rate High Income Fund (FFRHX). Each fund has beaten the category average over the last five years, according to Morningstar, and yields range from around 3% to 5%. The RidgeWorth (SAMBX) and Oppenheimer (OOSCX) funds cost $75 to buy shares on the Fidelity platform.


Fund name 3-year annualized return 30-day SEC yield Annual expense ratio
RidgeWorth Seix Floating Rate High Income Fund (SAMBX) 6.8% 4.39% 0.62%
Oppenheimer Senior Floating Rate Fund (OOSCX) 6.7 4.50 1.52
Fidelity Floating Rate High Income Fund (FFRHX) 5.7 2.72 0.71

Source: Fidelity, Morningstar.com


Strategic income funds

If you're unsure how to invest, you may want to consider a "strategic income" fund. These funds range widely, holding anything from foreign bonds to bank loans to mortgage-backed securities. While they usually stay within set parameters — holding, say, no more than 35% in high-yield bonds — they have latitude to adjust the mix, depending on where they see the best opportunities.

One top-performer, according to Morningstar, has been Metropolitan West Strategic Income Fund (MWSTX). Mortgage-backed securities make up nearly half its assets, and annual returns beat 98% of peers over the last three years, according to Morningstar.

Lately, the fund's three managers have been trimming mortgage securities and corporate bonds after big price gains last year. "The environment calls for a degree of caution," they wrote in a recent shareholder letter. One risk they see is rising interest rates as the Federal Reserve eventually winds down its bond-buying programs. The fund isn't highly sensitive to rising rates, though, with an average duration of 1.7 years.

The downside: A sell-off in mortgage-backed securities would likely hurt performance. Plus, the fund can be volatile: It lost 28% in 2008, trailing 99% of rivals, according to Morningstar. The expense ratio is almost double the category average.

Another option: Fidelity Strategic Income Fund (FSICX), which beat 72% of rivals over the last five years. Morningstar analyst Sarah Bush describes it as a "solid choice" that has built up a "respectable record."

Run by a team of bond sector specialists, led by Bewick, the fund's standard mix is 40% high-yield, 30% U.S. government and 30% foreign bonds, split between emerging and developed markets. Bewick is now emphasizing high-yield debt and other types of corporate bonds and holding less Treasurys. With U.S. rates potentially heading higher, she sees better opportunity in the corporate market. "In this environment, it's all about finding the best coupons and payments that can be sustained," she says.

The risks: About 13% of the fund is in foreign-currency bonds and the fund could lose some value if those currencies weaken. The fund is also somewhat sensitive to rising rates with an average duration of 4.8 years (meaning the fund's price could lose 4.8% for every percentage point increase in rates).

Neuberger Berman Strategic Income Fund (NSTTX) also invests opportunistically, holding securities in 13 categories from inflation-linked bonds to emerging market debt. The fund beat 89% of peers over the last five years, according to Morningstar, making it one of the top performers in the multi-sector bond category.

Bank loans now play a significant role in the portfolio, making up 13% of assets. And the managers are emphasizing areas that should continue to do well in a gradually improving economy, including high-yield debt and mortgage securities tied to housing and commercial real estate.

One drawback: The fund is more volatile than the Barclays U.S. Aggregate Bond Index, according to Morningstar, and annual fees are above the category average.


Fund name 3-year annualized return 30-day SEC yield Annual expense ratio
Metropolitan West Strategic Income Fund (MWSTX) 9.9% 3.29% 2.10%
Fidelity Strategic Income Fund  (FSICX) 7.9 3.02 0.70
Neuberger Berman Strategic Income Fund   (NSTTX) 8.5 2.02 1.11

Source: Fidelity, Morningstar.com


Daren Fonda is Senior Writer and Investing Columnist with Fidelity Interactive Content Services, a provider of objective investing content on Fidelity.com. He does not own any of the securities mentioned in this article.

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