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Stand by your Bonds in 2019

If you're a bond investor, 2019 will not be a time for sweeping changes ­– and perhaps not even mild adjustments – to your fixed-income plan advises Jeffrey R. Kosnett, Kiplinger's Personal Finance, www.Kiplinger.com.

“Bonds and other debt investments are doing what they're supposed to: paying interest in full and on time, and smoothing out swings elsewhere. So, with just a couple of exceptions, there's no reason to quit the bond market in 2019. The exceptions are long-term Treasuries of 10 years or more, which don't yield enough relative to other opportunities, and bonds in suffering emerging markets, which you should absolutely avoid.

Outside of those two categories, U.S. dollar-denominated debt should deliver a total return, including the yield and any price changes, that's a percentage point or two better in 2019 than it was in 2018.

With risk-free cash now paying 2 percent or more, you may wonder why you shouldn't park all of your money in greenbacks or the equivalent, especially given the Federal Reserve's repeated short-term rate bumps and talk of further tightening. But I don't feel the urgency – and neither do the advisers and bond strategists I consult – to convert existing bond holdings (including funds and ETFs) into cash and to take the loss that would entail. The yield on those holdings is likely to be higher than what you'll find at the bank, many funds are raising distributions, and bonds are a proven buffer against stock market dives – which have again become uncomfortably common.

Other technical and fundamental factors remain favorable or at least neutral for bonds. Municipals are faring well because the supply of new issues is tight while demand is burgeoning from high-income investors in high-tax states, who face a new federal cap on deductions for state and local tax payments. Fidelity Intermediate Muni (FLTMX), a member of the Kiplinger 25 list of our favorite funds, is a fine choice for fund investors.

High-yield bonds are also prized now as a short-term or medium-term investment. Junk-heavy funds, such as Osterweis Strategic Income (OSTIX, yield 3.7 percent) and PGIM Short Duration High Yield (HYSAX, 5.2 percent), have a duration – a measure of interest-rate sensitivity – of 2.3 or less. That means if interest rates rise by one percentage point, the funds' value will roughly fall by 2.3 percent or less.

Carl Kaufman, who runs Osterweis, says, "I think rates will oscillate on a slightly rising path" in 2019. But given yields on these funds that are more than twice their duration, we expect they will stay in the green in the year ahead.”

Editor’s Note: Jeffrey R. Kosnett is a senior editor at Kiplinger's Personal Finance magazine, www.Kiplinger.com.

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