Research Affiliates head Rob Arnott says bonds offer the best non-stock investing option now.
“The opportunities that are the most interesting outside of the stock markets are the bonds of those selfsame companies,” Arnott told CNBC.
"You have investment-grade corporates yielding about 4 percent more than the stocks of the companies that issue those bonds."
High-yield and convertibles are yielding about 15 percent more, Arnott says, and stocks can only overcome those yield gaps by growing at those margins.
Arnott points out that investors should factor in their tolerance for risk when deciding which type of bond to purchase.
“High yield and convertibles represent the low hanging fruit, the really interesting areas — but investment-grade corporates are currently priced very, very attractively,” he says.
Among investment grade corporates Arnott especially likes Pimco High Yield and Pimco Investment Grade Corporate issues.
NYU economist Edward Altman says investors may experience the largest default rate on junk bonds, which are currently yielding an average of 17 percent.
Altman considers a 12.3 percent default rate among high-yield bonds likely this year, and would not find a 15.4 percent or even 18.3 percent default rate surprising.
"You hear yields are attractive," Altman told professionals who manage investments for wealthy people at a recent CFA Institute conference, The Chicago Tribune reports.
"Well, good luck to you,” Altman says. “You'll do well if there are not too many defaults.”
“But we are predicting double digits.”
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