How to Invest in Today’s Low-Rates-for-Longer Bond Market

Finding yield in a bond market anchored to near-zero interest rates is a tough challenge for investors, made even harder with the Federal Reserve’s latest rate and economic projections.

The median expectations of its policymaking Federal Open Market Committee indicates that the central bank won’t be raising short-term rates until 2024 unless labor market conditions improve dramatically and inflation tops 2% for some time to average 2% over the long term.

Investors need to choose their bonds carefully and possibly consider alternatives for income, according to presenters at Morningstar’s virtual annual conference, taking place Wednesday and Thursday.

In the U.S. corporate bond market, yields, however, remain relatively high compared to bonds in the EU countries, the UK and Japan, said Mohit Mittal, a managing director and manager of multi-sector portfolios at Pimco. “There is still value on a relative basis” and “spreads have the potential to narrow over the next 12 to 24 months,” which would help boost prices, Mittal said.

But he cautions that “sector and issue selection” will be key. He doesn’t expect a broad-based spread rally.

Rick Rieder, BlackRock’s global chief investment officer of fixed income, cautions that there’s more risk in the bond market today from leverage, which has been rising, and from riskier assets than from inflation, the traditional bugaboo for bonds.

An aging population coupled with long-term economic effects of the COVID-19 pandemic will blunt inflation and inflation expectations.

“I’m not worried about inflation but … if people believe there will be more inflation that could  affect investments,” Rieder said. He and Anne Mathias, a senior strategist for Vanguard and  member of the firm’s Fixed Income Group, both see a role for inflation-protection assets in investor portfolios.

Inflation protection, at current values, “is low-cost insurance for a portfolio,” said Mathias.