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Higher yields? Try emerging markets

Look to emerging markets for higher bond yields

ERIN E. ARVEDLUND
Inquirer.com, January 29, 2014

For the last 30 years or so investors achieved three things when buying, say, 10-year U.S. Treasury bonds: income, stability, and an offset to stock market volatility in their portfolios.

They could accomplish all three goals with that one bond.

Those days are over. Still, there are alternatives, says Douglas J. Peebles, chief investment officer and head of Fixed Income at AllianceBernstein in New York.

Today, “if you only want to offset volatility, there’s nothing wrong with the 10-year Treasury,” as proven seemingly every time the stock market drops, says Peebles. “But it offers very little income. You have to find some other bond to buy” to solve that problem.

Currently, the 10-year Treasury yields 2.75 percent, barely ahead of the inflation rate of 2 percent, which leaves investors with a measly real return of just 0.75 percent.

For income, Peebles says, Europe and emerging markets debt look attractive from a valuation standpoint. “We like to sell when bonds are expensive and buy when they’re cheap,” he says, exercising the old adage. In particular, AllianceBernstein’s fixed-income department likes European corporate bonds and is examining which emerging market debt to start buying.

For example, some Brazilian bonds boast yields in the high teens, nearly triple what corporate bonds are yielding in the 4 percent to 5 percent range. The fixed-income team favors Brazil, but is avoiding Argentina and Venezuela for client portfolios, because of instability and poor economic policy decisions in those countries, Peebles adds.

Emerging markets are cratering in part due to tapering, or slowing, by the Federal Reserve of its latest bond-buying program, called quantitative easing, or QE. The first round of quantitative easing in the financial crisis helped restore bond markets; the second round helped boost real estate values and emerging markets, and the third round boosted the developed U.S. equity markets, which is why the S&P 500 rallied over 30 percent in 2013.

But the taper of QE? “Any change in liquidity has an impact on the riskiest markets first – which are the emerging markets. We’re seeing it right now,” Peebles explains of the sell-off.

For income, Peebles recommends investors try a multi-sector bond fund with higher yields, such as AllianceBernstein’s High Income Fund (ADGAX). Full disclosure: I’m an alum of Wall Street and worked at Bernstein’s Private Client division. You can read their research at AllianceBernstein’s blog (http://blog.alliancebernstein.com).

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