Four Safe Money Strategies For Retirees In '09

February 10, 2009

With Treasuries seemingly priced at bubble proportions, a few other types of bond ETFs figure to provide a smoother ride in a new year.


Last year proved to be a veritable nuclear winter for all investment asset classes except U.S. Treasury Bonds. The ongoing, massive worldwide flight to safety has rendered retired investors bewildered and struggling to find true safety and reasonable rates of return.

Investors are wondering if Treasuries will be king of the hill again in 2009. Not likely, according to Pimco Chief Investment Officer Mohamed El-Erian, who advises against owning those types of bonds since they look very expensive at this point. Andrew Bary punctuated that same sentiment in a recent Barron's piece, exclaiming: "A flight to safety has created a bubble in Treasury Bonds. Get out now!"

So, with Treasuries priced to "bubble" proportions, what asset classes might provide relief to beleaguered investors in search of steady income and safety of capital in 2009?

A growing number of experts suggest the following four asset classes may indeed fill that bill.

  • Mortgage-Backed Securities
  • Treasury Inflation Protected Securities (TIPS)
  • Municipal Bonds
  • High-Grade Corporate Bonds

Mortgage-Backed Securities

Yields on mortgage-backed securities (MBS) have been declining ever since the Fed's November 2008 announcement that it would purchase up to $500 million of Ginnie Mae, Freddie Mac and Fannie Mae home mortgage-related bonds. But with the first purchases just beginning in January, current yields of this battered asset class still look attractive relative to historical levels. Additionally, with the Fed's intervention, mortgage-backed securities now offer effectively the same Federal guarantee as U.S. Treasuries, but with higher yields. Consider iShares Barclays MBS Bond Fund (NYSE: MBB), iShares Barclays Agency Bond Fund (NYSE: AGZ) and SPDR Barclays Capital Mortgage Backed Bond ETF (NYSE: MBG).

Treasury Inflation Protected Securities (TIPS)

There is little doubt that fears of inflation have recently shifted to forecasts of accelerated economic de-leveraging and to the growing risks of worldwide deflation. This reversal in sentiment has sent TIPS prices plummeting and has driven yields higher. The growing likelihood in the next several years, however, is that burgeoning Federal stimulus programs will lead inflation higher, perhaps to unprecedented levels rivaling the late 1970s, when inflation peaked above 14%. TIPS will thrive as inflation heats up.

Bill Gross, in a January 19, 2009 interview with Barron's, said he expects big payoffs in TIPS within the next six months, as the de-leveraging cycle slows and asset managers are reliquified. He explained that TIPS "can go up 10% to 20% in price, simply on the basis of optimism that deflation has been averted." Take a careful look at iShares Barclays TIPS Bond Fund (NYSE: TIP). Also, consider SPDR Barclays Capital TIPS (NYSE: IPE).

Municipal Bonds

Tax-free municipal bond yields are near historically high levels. Fueled by hedge fund margin calls and unwinding leverage in the highly liquid "tender-option bonds" market, municipal bond prices plummeted to historic lows in November 2008. Although prices have recovered and yields have waned since the bottom, municipals still offer remarkable value compared to U.S. Treasuries.

Even in this current era of growing revenue shortfalls at state and local municipalities, defaults by investment-grade municipals are rare. During the Great Depression, municipal defaults averaged less than 3%.

With today's 3-4% tax free distribution rates, investment-grade municipals look like a bargain (a 4% tax-free yield for a taxpayer in the 35% Federal tax bracket is the taxable equivalent yield of a certificate of deposit or Treasury bond paying 6.2%).

Municipal Bond ETFs worth considering include PowerShares Insured National Municipal Bond Portfolio (NYSE: PZA), iShares S&P National Municipal Bond Index Fund (NYSE: MUB) and SPDR Lehman Municipal Bond ETF (NYSE: TFI).

For Californians who believe Gov. Arnold Schwarzenegger will eventually "terminate" California's rising deficits, the iShares S&P California Municipal Bond Fund (CMF) looks like a good bet. Additionally, Tom Lydon, the Newport Beach, Calif. editor of "ETF Trends," astutely points out that President Obama's administration intends to direct much of its $800 billion stimulus package to infrastructure spending at state and local levels. It makes political sense that California will be high atop the list of states receiving Federal assistance.

For the ultimate in credit safety, look at Market Vector's Pre-Refunded Municipal Index ETF (PRB). PRB is the first ETF investing 100% in "pre-refunded" municipal bonds. Pre-refunded municipals are issued to pay off existing, high-rate bonds. These "pre-res" are fully collateralized by U.S. Treasury securities, making them the only municipal bond class 100% fully guaranteed by the U.S. government.

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