Defensive strategy number 3: Get more fixed income



3. Know where to get more fixed incomeWhile most fixed income looks expensive, there are some places to hide. On a relative basis, investment grade and municipals offer some yield and have generally exhibited much lower volatility than equities. By way of comparison, the trailing one-year volatility on a broad US or global fund is approximately 12% to 14%, while the iShares Investment Grade Corporate Bond fund (LQD) and the iShares National AMT-Free Muni Bond fund (MUB) have a trailing one-year volatility of 5%

Article continues below advertisement

Market Realist – The graph above shows the yields for investment grade corporate bonds (LQD), 10-year U.S. government bonds (IEF), and the municipal bond index (MUB). As you can see, both the municipal bonds (or munis) and the investment grade corporate bonds offer much better yields than the Treasuries. Currently, their yields stand at 4.1%, 4.0% and 2.5% respectively. The first two are much more attractive than the Treasuries.

As the economic recovery gathers steam, the possibility that the corporate bonds will default diminishes. This makes them even more attractive relative to the Treasuries (TLT). In that scenario, even high yield bonds (HYG) (JNK) turn attractive.

In the last article in this series, you’ll learn why Treasuries can be used as an ultra-defensive strategy.


More From Market Realist