Retail investors who replace high-quality intermediate and municipal bonds with bank loans and other high-yield debt fearing the Federal Reserve will raise interest rates could be vulnerable to stock market crashes and other calamities, according to a Charles Schwab investment strategist.
“People are overthinking fixed income,” Kathy Jones, fixed-income strategist with the Schwab Center for Financial Research, said at the company’s annual advisor conference in Washington, D.C.
Jones said she foresees Fed bond purchases continuing at high levels for years and that its efforts to raise interest rates will stretch over a longer period than has been conjectured.
“The heavy hand of the Fed is going to be with us for a very long time,” she said.
The Schwab strategist predicted 10-year Treasury yields will be in the 3-percent to 4-percent range for the next couple of years.
As the Fed targets 2-percent inflation, Jones said there are ample opportunities for retail investors to beat that rate with investment grade corporate bonds and municipal securities.
She cautioned high-yield bonds have gotten expensive and risky
On another topic, Jones said TIPS have gotten more attractive.
“For investors who want to protect against inflation, TIPS are a good place to look,” the fixed income expert said.