This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Beyond Bonds: Buyer Beware

NEW YORK ( TheStreet) -- As we exit the low interest rate era and return to rising rates, bonds and other fixed income instruments will come under selling pressure. This means in 2014 investors will be hunting for bond replacements in order to help safeguard their portfolio without having to account for falling bond prices and volatility.

Some investors will migrate to one or more of the hybrids -- floating rate securities, step-up bonds and Treasury inflation protected securities. However, I'm seeing sophisticated investor moving into some questionable alternatives (in my mind) and I just want to highlight the downside and risks associated with those instruments.

In particular, I'm seeing investors discussing master limited partnerships, interest rate linked structured notes and bank loan products as if they were interchangeable with bonds. They're not and here's why.

Master Limited Partnerships

Master limited partnerships have become increasingly popular with investors seeking high yield investments in a low-interest rate environment. Generally, most, although not all MLP earn the majority of their "income" from energy related activities -- think oil or natural gas pipelines and you've pretty much got it.

To date, these have been investor "darlings." Two of the largest, the Kayne Anderson MLP (KYN) and JPMorgan Alerian MLP ETN ( AMJ ) are up significantly this year. Each is trading at a premium to its net asset value.

MLP investors, like any other partnership, are considered unit holders. MLP investments receive different tax treatment than ordinary income producing investment. As such, MLP investors receive a K1 instead of a 1099, potentially negating certain tax deductions. Most significantly, MLP "income" is typically a combination of actual income and return of the investors' own principal. As such, the "true" MLP yield can be significantly lower than their cash-flow implies.

The takeaway: Given the lower "real" yield that is produced, as interest rates rise, the attractiveness of the MLP income potential is likely to decline.

Interest Rate Linked Structured Notes

Interest rate linked structured notes provide investors and speculators the ability to "bet" on the direction of a specific benchmark interest rate, for instance LIBOR or the ten-year Treasury. In November, Goldman Sachs (GS) alone sold $1 billion of these floating rate instruments.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,283.28 +17.29 0.10%
S&P 500 2,010.80 -0.56 -0.03%
NASDAQ 4,575.72 -17.7050 -0.39%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs