Bill Gross -- perhaps the most famous and successful bond investor in history -- had a recent quote that made me chuckle.
Talking to The New York Times about interest rates, Gross said, "Americans have assumed the roller coaster goes one way. It's been a great thrill as rates descended, but now we face an extended climb."
Now, I might have a dry sense of humor... but I didn't laugh because I find interest rates funny.
It's just that Bill's quote hit close to home (no pun intended). I bought my first house in 1981... a newly built duplex in Wappingers Falls, New York. My mortgage rate: 17%. I'm well aware of the "roller coaster."
But I have to agree with Bill Gross. It's been a long ride down for interest rates. For example, mortgage rates peaked a couple of years after I bought my house and haven't even sniffed double-digits for two decades. I'm betting many won't know how to react -- much less invest -- if and when rates rise.
That's why I've been a bit disturbed by the recent numbers I've seen. The bond market has received record inflows during the past few months -- pushing up prices and pushing down yields (always remember that bond prices and bond yields move opposite of each other).
Fed up with paltry rates on holding cash, investors have been putting billions into bonds. In particular, there has been a "flight to junk" -- investors want to make a decent return without putting cash into stocks, so they're buying higher-yielding junk bonds. Demand has been so high that there was $60 billion in new issuance of junk bonds in the first quarter, a record according to Fitch Ratings.
But with interest rates on the rise -- remember that they can't go lower from here -- pressure will be put on bond prices. This is one of the reasons Bill Gross sees the bull market in fixed-income ending. I've got to tell you, I think he's spot on.
So what to do?
I've started looking more toward yields powered by equities. Of course, with the recent run-up in the market, quality dividend yield opportunities are getting a little more scarce.
That's why closed-end equity funds are becoming more attractive. These funds can use a few "tricks" to boost their yields. This includes writing covered calls, using a dividend-capture strategy, and employing leverage. Funds can also reach foreign markets, which yield considerably more on average than the U.S. markets.
The result is higher yields, powered by equities instead of bonds.
Of course, you might even be wondering about buying stocks given the already lengthy bull market. You've definitely got to be picky. Funds holding high-yielding utilities, telecoms, and the like should continue to be a great place to ride out all but the roughest storms.
And with the interest rate roller coaster starting to ratchet higher, I think now's the time to start looking toward income from equities.