"Of Mutual Interest"-John Waggoner, Mutual Fund Columnist at "U.S.A. Today"
Tuesday, November 27, 2007SUSIE GHARIB: Tonight`s "Of Mutual Interest" commentator says when it comes to bond funds, don`t chase the yield. He`s John Waggoner, mutual fund columnist at "U.S.A. Today."
JOHN WAGGONER, MUTUAL FUND COLUMNIST, USA TODAY: Sometimes painful events can teach important lessons. Never peak into the nest of a large bird of prey. Making your own fireworks is not a good thing and never reach for yield in your mutual funds. Reaching for yield simply means buying investments whose income payouts are much higher than average. The current carnage on Wall Street and in some bond mutual funds, is a good example.
Like all good financial disasters, this one started with financial professionals. Low interest rates made housing more affordable, but it also made investments in mortgages boring. Who wants a 5 percent yield? So Wall Street pros invested in shaky mortgages, called sub-prime mortgages, which offered much higher yields. When the real estate bubble popped, sub- prime borrowers defaulted, saddling investors with losses. They had reached for yield. The bond funds with the biggest losses the past 30 days are those that have offered the highest yields. High-yield bond funds, which invest in bonds issued by shaky corporate borrowers, are down about 3 percent, including reinvested dividends. Emerging markets` bond funds are down about 2 percent.
The bond funds that are holding up the best invest in government securities, particularly TIPs, or treasury inflation protected securities. Why? Because when the whole world looks like its melting down, investors flee to the rock-solid credit of the United States government. They sell junk, no matter how high the yield and they buy quality, no matter how low the yield. The time to tiptoe in to high-yield funds is after a meltdown, not when everyone is rushing to them. But don`t rush -- bonds may still have some melting left to do. So the next time you look at a fund whose yield seems too good to be true, remember -- don`t reach for yield. I`m John Waggoner.
