Tags: Malkiel | emerging market | muni | bonds

Wealthfront's Malkiel: Consider Emerging Market, Muni Bonds

By Dan Weil   |   Friday, 03 Jan 2014 07:09 AM

With U.S. stocks having soared last year while bonds declined, many investors will want to rebalance their portfolios to maintain their desired stock and bond allocations.

The Standard & Poor's 500 Index generated a return of 29.6 percent in 2013, while the Barclays U.S. Aggregate Bond Index dropped 2.02 percent.

"Normally investors rebalance by selling stocks and buying bonds" in this environment, Burton Malkiel, chief investment officer of Wealthfront, writes in The Wall Street Journal. "But these are not normal times in the United States or other developed nations."

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Governments are keeping interest rates low. In the United States, the Federal Reserve's tapering of its bond purchases and strong economic growth could send high-quality bonds to big losses, says Malkiel, a father of the index investing movement.

"It is possible, however, to find some bonds with relatively generous yields and some bond substitutes that can provide a portfolio with somewhat greater stability and increased yearly income," he explains.

That includes emerging market bonds from countries with moderate debt and good fiscal balance, he adds. That also includes U.S. municipal bonds, which are good bargains now, he says.

As for bond substitutes, Malkiel recommends, high-quality stocks with growing dividends, such as AT&T.

Others are enthusiastic about muni bonds too.

"There are munis that are attractively priced," Guy Davidson, director of municipal investments at AllianceBernstein, tells Institutional Investor. "The reason why is that they are in two scary areas — either lower credit quality or longer maturity."

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