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Hey, Yield-Starved Investors: What Are You Doing?

Bonds and bond funds trade at some of the lowest yields on record. Why are investors putting up with measly yields? Partly because inflation is so low, and partly because they're frightened of everything else in the investment world.

But low yields in bonds has spilled over into stocks, too. Traditional dividend dynamos like Altria (NYSE: MO  ) and Verizon (NYSE: VZ  ) have seen their share prices spike and their yields fall in recent years as the hunt for income grows vicious.

What are yield-hungry investors getting themselves into? I asked Charles Schwab chief investment strategist Liz Ann Sonders. Here's what she had to say (transcript follows):

Sonders: I'm not so sure if the reason why investors continue to put money in fixed income is optimism about the potential return in fixed income. I think it's vestige fear of just about any other risk asset, so at least they, in their mind, they know what they're getting. Unfortunately I think a lot of investors don't realize that what they're getting in real terms is a guaranteed loss in the case of certain Treasury securities.

But again, there are other places one can go within the fixed income sphere. You know, high quality corporate credit where you get a pickup in yield, but I think one of the interesting things that you're seeing as it relates to the equity market is that there is that fear, but there's also that desire for income, and I think that's why some investors are now looking toward the equity market, but staying in that income sphere within the equity markets. So one of the reasons why defensive names and industries and sectors have done well may be a combination of the fact that as you tiptoe in, you want to kind of keep those defensive characteristics, but that's also generally where the yields are to be found.

Not only that, but some of the move that we've seen into the equity market has actually come from bond funds that have enough of a hybrid mandate that they can move into the equities sphere if there's an income component to what they're buying as well. 

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  • Report this Comment On April 21, 2013, at 6:46 PM, SkepikI wrote:

    <a lot of investors don't realize that what they're getting in real terms is a guaranteed loss in the case of certain Treasury securities.>

    Not to mention the guaranteed loss in NOMINAL terms for many fixed income securities when either rates decline or investors get weary of risking several years of income for nothing.

    These days a decline of 2,3,4% in value will wipe out the annual income from most fixed income funds. If you earn 4% Nominal return on your bond or bond fund (not unusual today) a single year decline of 4% value leaves you at zero. For many long term bonds or bond funds with durations in the range of 12 an interest rate drop of 1/2% will drop the value just about 4%...very risky and unstable. Avoid value drops for 3, 4 or more years... well, you get a stunningly limited return for that, and can lose it all in one serious drop.

    Investors continue to turn a blind eye to the fearsome risks they are running for inadequate returns in bonds and bond funds....under-compensation for risk always leads to disaster....always.

  • Report this Comment On April 22, 2013, at 11:19 AM, SkepikI wrote:

    oops, fat fingered the 3. should be "interest rate drop of 1/3%" or alternatively "1/2% will drop the value just about 6%" even worse.....

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