The coupon rate will have to be the reward for buying bonds in 2010 since the fixed-income issues won't be producing the spectacular returns that were seen last year, bond managers and consultants say.
“2010 will be the year of the coupon,” said James Sarni, a managing principal at Payden & Rygel in Los Angeles.
Mr. Sarni said investors will be getting the bulk of those returns from the coupons of fixed-income products because spreads have tightened during the past few months and bond prices should be relatively stable.
That's a sentiment shared by other money managers and consultants.
“With Treasury yields still at historically low levels and spreads having returned to more "normal' levels, investors should expect single-digit returns at best,” said Ford O'Neil, Boston-based manager of core-plus portfolios at Fidelity Investments and its Pyramis Global Advisors institutional business.
The best strategy for institutional investors who'll be depending on the coupon rate for their returns is to avoid low-interest Treasuries and agency issues, say money managers and consultants.
“We would expect that over the next decade, core-plus managers are poised to outperform core on due to their heavier weightings to credit, versus the core mandates, which are generally laden with Treasuries and agencies that have low yields due to being risk-free,” said Eric J. Petroff, director of research for Wurts & Associates in Seattle.
For 2010, Mr. Sarni said he believes that corporate bonds rated BBB - still considered investment grade, and the top-rated categories of below-investment grade, BB, as well as emerging market debt, are good picks for investors because they typically offer coupon rates of at least 5%. But he is avoiding junk bonds with more lucrative yields because of their high risk of default.
He particularly likes bonds from companies like DirecTV Inc., debt classified as BB. He also likes debt from Albertsons Inc., another BB issue, which was issued before it was acquire by SUPERVALU Inc. He said both companies have shown they are viable players in their respective categories of telecommunications and supermarkets.
Mr. Sarni said since bonds from BB-rated companies are classified as higher risk and so pay interest rates between 7% and 8%, as much as 200 basis points more than investment-grade offerings, he said.
“We believe that a core-plus strategy will do better relative to core,'' he said. “The higher yield offered on a core-plus strategy is a big part of this view.” Payden & Rygel manages $7.5 billion in core strategies and $5.3 billion in core-plus bonds, both as of Dec. 22.