As Yields Rise, Let's Take A Stroll Down Bond Boulevard

But maybe we should take a contrarian approach. Almost everybody should own at least some bonds. Yields have improved significantly. The benchmark 10-year Treasury yield, which fell to 0.52% in August 2020, is now at 1.99% . For those who want bond exposure, there’s plenty of inexpensive exchange-traded funds (ETFs) on offer from firms like BlackRock, manager of the iShares funds, and Vanguard Group.

For instance, if you want a proxy for the entire U.S. Treasury market, there’s iShares U.S. Treasury Bond ETF (symbol: VTI ) is down 8.3% in 2022, while the iShares fund is off 4.1%.

The broad U.S. bond market, as measured by iShares Core U.S. Aggregate Bond ETF (BND ), with a bit over $80 billion of investor assets.

Where else might you seek income? Some individuals, particularly those in high tax brackets and who live in high tax areas, look to the municipal bond market. You don’t need a broker to go out and find you individual muni bonds. Instead, you might take a do-it-yourself approach, which is cheaper and easier, and buy a fund like iShares National Muni Bond ETF (effectively higher since you shouldn’t owe federal income taxes on the interest received.

Continuing down the bond boulevard, let’s check out corporate bonds. Today, iShares Broad USD Investment Grade Corporate Bond ETF (3.02% . But be warned: Corporates, even the high-quality segment, can decline when stocks fall.

What about high-yield debt, otherwise known as junk bonds? A fund like iShares iShares iBoxx $ High Yield Corporate Bond ETF (HYG ) contains low-rated bonds that might default during bad economic times. Will investors be compensated for taking that risk? The yield to maturity on the iShares fund is 5.59%, which should help offset the money inevitably lost to bond defaults. Still, stock investors don’t get much of a diversification benefit from junk bonds, which almost always decline when the S&P 500 drops.

Meanwhile, if we want to head overseas, we might check out a fund like iShares International Treasury Bond ETF (negative interest rates on their debt over the past few years, plus the dollar strengthened in the currency market, depressing the return of foreign investments for U.S. holders.

What if I told you that a 6% yield was there for the taking? I’m not talking about super-safe Series I 13.3% peak to trough in the past year, dividends included. If you own an international bond fund, you may already have an allocation to emerging market debt.

Investing in bonds is easier than ever, thanks to so many low-cost ETFs. In fact, the amount of choice can seem overwhelming. Perhaps the simplest approach is to own U.S. and international broad bond market index funds. That way, you have exposure to all areas of the global bond market, from government bonds to high-quality corporates to junk bonds and even emerging market debt.

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Unsure how to proceed? You might take your cues from the allocation of Vanguard Target Retirement 2030 Fund (VTHRX ). It has a 35% allocation to bonds and cash, with some 24% invested in the Vanguard Total Bond Market Ii Index Fund Investor Shares (VTBIX) and almost 11% allocated to Vanguard Total International Bond Fund (VTILX). Investors with a high risk tolerance might put less into bonds, while more conservative individuals could go higher than the Vanguard fund’s 35% exposure.

Written By: Mike Zaccardi, CFA, CMT