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With U.S. Treasury Yields Rising, Income May Need To Come From Foreign ETFs

The yield on a ten-year treasury bond is very close to recovering 2%. That may sound ridiculously low when placed in a historical context. On the other hand, funds like iShares 10-20 Year Treasury (TLH) have logged -2.1% returns year-to-date, precisely because the 10-year’s yield has gained 0.25% in 4 short weeks.

On a day when domestic stocks pushed to another 5-year high (1/29/2013), popular yield producers labored to post slightly negative returns. Keep in mind, though, all of the assets in the table below have been year-to-date winners.

10-Year Yield Near 2% Spooks Income-Oriented ETFs
1/29/2013 YTD
% %
SPDR Barclays Capital High Yield (JNK) -0.34% 1.28%
WisdomTree Emerging Market Corporate (EMCB) -0.21% 0.28%
Pimco 0-5 Short Term High Yield Corporate (HYS) -0.08% 1.27%
iShares S&P National Muni (MUB) -0.06% 0.73%
PowerShares CEF Income Composite (CEF) -0.04% 3.94%

Certainly, the death of bond ETFs has been greatly exaggerated. Nevertheless, a 10-year yield that climbs above and stays above 2% in the near-term could have a decidedly adverse impact on income funds of all stripes.

Before sticking a fork in each of your non-stock holdings, however, realize that it may not take much for bond bulls to recover some mojo. For instance, Wednesday’s Fed meeting conclusion may reinforce that the central bank is nowhere near concluding its quantitative easing, bond-buying program(s). Moreover, if the Fed is still revving up its bond-purchasing engines, and the Bureau of Labor Statistics reports unusual weakness in Friday’s employment report, safety-seekers may determine that the bond selling is overdone.

Could bond prices see a rally? Sure they could. Then again, I am not interested in accumulating treasuries for the possibility of price potential.

What does interest me? Funds like PIMCO 0-5 Short Term High Yield Corporate (HYS), Emerging Market Corporate (EMCB), Emerging Market Local Currency (EMLC), Market Vectors Preferred Ex Financials (PFXF) and iShares National Muni (MUB) still interest me. That’s because… an exuberant stock market notwithstanding… they all contribute to a well-balanced portfolio.

Some individual investors may be asking themselves why they should have any bonds whatsoever. If price appreciation is marginal and if yields are negligible, couldn’t you forget them altogether? My answer to that is to recognize the existence of hedging.

Banks, pensions and a variety of hedge funds need to hedge against stock and commodity risk. And that means they’re still going to acquire treasuries. In fact, some are required to maintain a certain level of the so-called “risk-free” asset. When you combine institutional demand with Fed policy, it’s difficult to imagine an immediate set of circumstances where a rapid rise in treasury yields kill all fixed income vehicles.

And there’s more. While the stock market may be all the rage in recent months, budget debates, $100 oil and/or declining economic growth could potentially dampen enthusiasm. Even if the “expected” does not conspire to create a bit of stock selling or treasury buying, the “unexpected” may.

For all of these reasons, I would encourage risk-takers to balance their riskiest desires (think homebuilders and small caps) with a helping of equity income producers. I like international REITs via SPDR DJ International REIT (RWX), iShares Emerging Market Minimum Volatility (EEMV) as well as non-traditional equity income resources like iShares MSCI Australia (EWA).

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