BOSTON (TheStreet) -- Many Americans are relieved, though angered, that Congress worked out an 11th-hour deal so the world's largest economy avoids defaulting on its debt.But the situation is even worse than they may have feared. After legislators stop playing political games with the nation's debt limit, they will face calls to revive the economy, which has slowed dramatically. Restricting borrowing and raising taxes, which is likely, will put an even larger damper on the economy. With such dire circumstances, investors now have an appetite for U.S. Treasuries and dividend stocks as they count on income in tough times, says Jason Brady, co-portfolio manager for the Thornburg Investment Income Builder Fund ( TIBAX). Investors' reaction to recent economic data reenforces the need for better risk management and dependable income.
Because of the economic uncertainty, Brady says investors now have to put the debt-limit drama in the rearview mirror and focus on fundamentals. "This has been theater the whole way through," Brady says of the U.S. debt debate. "In Europe, the debt is much worse and the market is forcing the conversation, while in the U.S. we're having this debate when we really don't need to. Solutions are being forced upon some European countries by a market that will no longer fund those countries." For that reason, U.S. Treasuries have remained attractive to investors throughout the debt debate and even in the face of a possible downgrade by credit-ratings agencies. On the other hand, bonds in Italy and Greece have rallied sharply higher as prices have plunged. "Clearly, the market wants U.S. Treasuries," Brady says, noting the falling yield on the 10-year Treasury. "You really need something that is a big and liquid market in order to be a safe asset. Ironically, you need something that has a lot of debt in order to be safe. The U.S. Treasury still fits the bill." As Brady works to generate income from a variety of different sources, he has turned to dividend-paying stocks for the steady stream on payments as well as potential capital appreciation. The obvious flight-to-safety trade has been the 10-year Treasury, and finding other sources has become harder, he says. "It's been pretty lackluster growth and, being in the business of providing income to folks, it has been difficult," Brady says. "You have more and more people who need income. From my perspective, it's a job that in the last few years has been rewarding, but it has been harder." One bright spot among the wreckage has been global telecom. "In terms of relative valuation, we're finding more opportunities," Brady says. "Global telecom is a pretty low volatility business that is income-orientated. It definitely still has growth." The Thornburg Investment Income Builder Fund has investments in several telecom stocks that reward investors with generous yields. They include Australia's Telstra, the U.K.'s Vodafone ( VOD), Spain's Telefonica ( TEF), AT&T ( T) in the U.S., China Mobile ( CHL) and France Telecom ( FTE).
While many of these companies have American Depositary Receipts in the U.S., Thornburg owns shares in each company's respective domestic market. Brady says investors often discount the prospects of telecom stocks because they're growing by 5% to 10%, half the pace of many growth stocks. Yet, many of these names are yielding as much as 10%. "Add those two things together and compound that income over time, and it starts to get pretty interesting," Brady says. Leaning on income in tough times is a solid defensive strategy, especially with so much unknown in the market. Brady notes that Standard & Poor's was looking for a bigger deal that more concretely addresses spending issues, which could lead to a downgrade of the coveted triple-A rating for the U.S. "To what degree the market penalizes the U.S. for getting downgraded, that remains to be seen," he says. And with expectations of GDP growth above 3% as stimulus programs expire clearly off the table, Brady wonders how the market will react in the aftermath of incentives that haven't worked. "The scariest thing about this discussion is that we're spending a lot more than we're taking in," Brady says. "We've put this massive amount of stimulus in and a really scary thing would be if it was working. We're talking about cutting that back notably, so you'd have a very slow growth economy or in a recession without that government spending. Look at the GDP number from Friday." -- Written by Robert Holmes in Boston. >To contact the writer of this article, click here: Robert Holmes. >To follow Robert Holmes on Twitter, go to http://twitter.com/RobTheStreet. >To submit a news tip, send an email to: firstname.lastname@example.org.