These days, strategists suggest that emerging market (EM) bonds offer a unique blend of current yield and price appreciation potential. That’s because of divergent central bank policies. “Real [i.e., inflation-adjusted] interest rate differentials with these bonds look elevated relative to developed market bonds,” says PIMCO’s Kiesel. His firm offers dozens of fixed-income funds, including the PIMCO Income Fund (PONPX).

He thinks the Federal Reserve, the European Central Bank and the Bank of Japan have completed their interest rate easing cycles now that they have largely closed their economic output gaps. In contrast, still-high levels of unemployment in places like Brazil, paired with falling rates of inflation, means that “many EM central banks will lower rates from here.” And if interest rates in places like Brazil, Argentina and Mexico fall, as Kiesel predicts, then those nations’ bonds will rise in value.

Should investors hedge their currency exposure with EM bonds? Surely, if they believe that the dollar will strengthen from current levels against other currencies. But “even after rallying recently, many EM currencies are still favorably valued, compared to a few years ago,” says TIAA’s Nick. His firm offers the TIAA-CREF Emerging Markets Debt Fund (TEDHX), as well as the five-star rated TIAA-CREF Bond Plus Fund (TCBHX).

“There are ample reasons to like EM local-currency bonds,” adds Nick. “Many EM nations are seeing their growth prospects improve and [default] rates have been steadily dropping,” which leads his firm to an overweighting in EM bonds these days.

Lisa Hornby, a fixed-income portfolio manager at Schroders, also likes selective EM bonds and downplays currency risk. “We’re not looking at dollar strength for the foreseeable future.” Right now, she is also a fan of selective CLOs (collateralized loan obligations) for their high ratings and floating nature. She also recommends short-term asset-backed securities, which are most closely associated with mortgage bonds. With $11 billion in assets, the iShares MBS Bonds ETF (MBB) is a very liquid choice.

Indeed, the housing sector is a clear pocket of opportunity for fixed-income investors, suggests PIMCO’s Kiesel. “We’re still very constructive on the housing market. And non-agency mortgage bonds are among the few bonds that have price upside,” he says.

Kiesel notes that 94% of all mortgage bonds lack an investment-grade rating. “But they’re mis-rated because rating agencies were burned in the past [and] are now arguably overly conservative in their ratings.” As a result, the yields on such bonds are more robust than the current low mortgage default rates would seem to justify.

Are Munis at Risk?

Right after the 2016 election, municipal bonds (“munis”) fell out of favor on concerns that Congress would soon deliver tax cuts that would reduce the advantages of tax-free bonds. As hopes for tax cuts faded, muni bond prices rallied back.

But major changes may still yet come to the tax code, highlighting the ongoing risk to munis. Schroders’ Hornby thinks it’s important to be selective. “For clients with tax-sensitive portfolios, there are still some idiosyncratic opportunities with Illinois and New Jersey bonds,” she says. Her firm offers the Hartford Schroders Tax-Aware Bond Fund (STWTX). The fund managers at the Nuveen High Yield Municipal Bond Fund (NHMAX) have also favored bonds issued by Illinois and the city of Chicago.