Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

John Hancock Preferred Income Fund (HPI), iShares IBoxx $ Invest Grade Corp Bd Fd (LQD): Are Bonds Too Cheap?

As the economy slowly recovers from the worst financial crisis in decades, it’s getting likelier by the day that the Federal Reserve will soon wind down its stimulus programs. In an effort to boost the economy, the Fed embarked on initiatives such as holding short-term rates at zero and purchasing billions in long-term bonds every month.

John Hancock Preferred Income Fund (NYSE:HPI)

Now, fears that the Fed will soon draw down its stimulative asset purchases have sent the bond markets reeling. Longer-term rates are spiking, and as a result, bonds are plunging.

With economic data signaling a modest recovery, perhaps the Fed is overly optimistic. Do bonds represent a decent investment at current levels? Or is the sell-off just beginning?

A disastrous month for bonds
Bonds all across the risk spectrum are taking it on the chin in August. The market’s “taper tantrum” resulted in higher rates across the board and, by extension, lower bond prices.

The sell-off has not been limited to lower-quality bonds. Highly rated corporate bonds are also suffering. The iShares IBoxx $ Invest Grade Corp Bd Fd (NYSEARCA:LQD) lost 4% through the first three weeks of August.

The yield on the  iShares IBoxx $ Invest Grade Corp Bd Fd (NYSEARCA:LQD) is now near 4% — its highest level since early 2011. Considering that the 10-Year Treasury Bond yields just 2.8%, investors are getting a fairly attractive opportunity.

From an underlying credit-quality perspective, though this fund looks strong. Almost 60% of the iShares IBoxx $ Invest Grade Corp Bd Fd (NYSEARCA:LQD)’s holdings are rated “A,” “AA,” or “AAA.” As a result, investors don’t have a great deal of credit risk to worry about.

Even high-yield bonds, which were already sporting generous yields before interest rates started surging, have lost value in recent weeks.

The SPDR Barclays Capital High Yield Bnd ETF (NYSEARCA:JNK) has dropped sharply in the past few months and now yields 6.5% — its highest yield since early 2012.

Investors should note that high-yield bonds have worse credit ratings than higher-rated issues. At the same time, 6.5% is nothing to sneeze at, and investors are at least being handsomely compensated for the heightened level of risk.

Meanwhile, preferred stocks haven’t been spared any carnage. “Preferreds,” which carry elements of both bonds and stocks, have taken a beating in August. Consider the John Hancock Preferred Income Fund (NYSE:HPI), which has lost more than 16% of its value in just three months.

Preferred stock is commonly known as a hybrid security that displays characteristics of both debt and equity securities.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.