With interest rates sure to rise, be cautious on bonds
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Dear Mr. Berko:
I have exactly $33,651.27 to invest for income, and I’m torn between buying a 5.5 percent or 6.0 percent Triple-A corporate bond or buying several low-rated junk bonds with 10 percent to 12 percent yields. Please tell me what you think interest rates will be a year from now. I know if I buy Triple-A bonds at 5.5 percent and rates rise, their values will fall – and that really concerns me – or I could buy a five-year CD paying 4 percent without risk to principal. I can tolerate high risk, because this money represents a settlement that I will get every year for 10 years.
W.L., Port Charlotte, N.C.
Dear W.L.:
According to my math, there’s a 71 percent probability that interest rates will begin to rise before the first quarter of next year. There’s almost a 100 percent certainty that interest rates will rise – and by more than a little bit – by the end of 2010. Some respected analysts think that rates on long-term treasuries could rise to 7 percent or possibly 9 percent by 2011 or 2012. And frankly, considering this country’s huge deficit (over $2 trillion for 2009) and its enormous national debt (over $12 trillion this fiscal year), the supply of U.S. debt significantly exceeds galactic demand.
China and Japan are seriously concerned about the market value of the trillions of dollars of our bonds they own. Right now, higher interest rates seem to be the only solution to protect those nations against the very real possibility of a decline in U.S. bond values.
So in my opinion and in the opinions of knowledgeable analysts, I’d certainly stay away from Triple-A long-term corporate bonds and a 4 percent, five-year CD. Because you are comfortable with risk, the following very risky issue could make a big difference in your income and mitigate the principal risk in your portfolio.
Qwest Communications (Q-$3.73), home ported in Denver, is a $12.5 billion revenue telecommunications company. Q provides local, long-distance wireless and data services within its 14-state service area. Q also provides long-distance services outside its service area, as well as broadband, voice and data communications. Qwest has been profitable since 2006, and last year the board initiated a 32-cent dividend that offers a 9 percent current return.
I’m not enthusiastic about the common stock, because I see barely perceptible growth, nearly zero earnings growth and timid principal growth. I do, though, anticipate a healthy and growing free cash flow. I expect a continued, steady-Eddie, level revenue stream via Q’s new Wi-Fi access for high-speed Internet customers, and an expanded FTTN network that will broaden video content offerings.
But I would definitely invest half of that $33,651.27 in the ML Depositor Preferred Trust 8 percent Qwest Capital certificates (PJA-$15.05) with a 13 percent yield and invest the remaining half in Triple-A corporate bonds. PJA’s par value is $25; it’s rated B-plus; the dividend is $2; it’s callable at $25, and it matures in February 2031. If interest rates rise, the value of this junk preferred will be cushioned by its current high return. And if rates remain low, I believe other investors who seek higher yields will be attracted to this issue. So purchase 1,000 shares and enjoy what I believe is a sound high yield.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. © Copley News Service
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