It’s now official, the Federal Reserve is fueling up for its anti-inflationary rate hikes.
The Fed’s reasoning for raising interest rates is well documented. The question is how best to manage it in your investment portfolios? Should you adopt a bunker mentality and settle for having money? Maybe buy treasury bonds yielding next to nothing? No and no.
Credit quality within the corporate bond sector has improved significantly. US corporate deleveraging has led to improved balance sheets, so bond safety is better. And, for companies that haven’t deleveraged much, they’ve certainly called or offered high-coupon bonds and refinanced into lower-yielding bonds, making their debt servicing more manageable.
Here are four suggestions for living the Fed’s waiting game. Kinder Morgan, the energy pipeline and storage company, has bonds with 3.5% coupons due January 15, 2023 (CUSIP: 49456BA73) rated Baa2 by Moody’s, BBB by S&P and Fitch. Depending on your purchase price, these bonds yield between 0.75% and 1.00%. Not a windfall of returns but much better than money market funds at 0.01%.
Microchip technology, the company that manufactures and markets microcontrollers, mixed-signal analog ICs and Flash-IP, has bonds with a coupon of 4.333% that mature June 1, 2023 (CUISP: 595017AP9). These are senior bonds rated Baa2, BBB-. They yield around 1.65% at maturity.
Reliance Steel The 4.50% bonds due April 15, 2023 yield between 1.46% and 2.00% depending on the price you pay (CUSIP: 759509AE2) and are rated Baa2, BBB, BBB+.
Williams Enterprises is an energy infrastructure company that owns and operates midstream gathering assets and gas pipelines, to name a few of their specialties. Williams has a $1 billion bond issue, (CUSIP: 96950FAM6) 4.30% due March 4, 2024, redeemable December 4, 2023, yielding 1.64% at call and 1.94% at maturity . It is rated Baa2, BBB, BBB and has a strong balance sheet with positive free cash flow.
With inflation at 7%, earning 1.64% isn’t great, but it’s better than the measly 1 basis point brokerage firms pay to store your money.
The longer inflation stays high and the longer your money stays in cash, the faster your purchasing power erodes. So do something about it. There will come a time when bond yields of all types will become attractive again. Beat what your money market is paying for in the meantime.