NEW YORK (FMD Capital Management) -- Income investors face a brave new world in 2014, punctuated by real interest rates trending higher and the Federal Reserve slowly reducing the pace of quantitative easing measures. This has led to fears of a massive shift from traditional fixed income to equities and alternative investments. In fact, many have abandoned bonds altogether and have sworn off owning them for the foreseeable future.
On the flip side, many stalwart income seekers have shifted to short-duration or credit-sensitive holdings, which have thrived in 2013.
The key to success in 2014 will be to strike a balance between credit, duration and sector exposure to achieve positive returns in fixed income. It can't be discounted that retirees and other conservative investors need income, diversification and low volatility. Bonds shouldn't be ignored. Rather, hold them strategically, with the knowledge that there may be speed bumps along the way to your investment goals.
These are my thoughts on opportunities and risk in bonds over the next 12 months.
Most investors perceive rising interest rates to be the biggest risk to bond holders over the next year. And there are a number of ways that ETF investors can combat rising rates. One such method would be to purchase a rising-rate fund such as the ProShares 20+ Year Short Treasury ETF (TBF). This fund essentially moves in the same direction as long-term interest rates and can hedge off a portion of the volatility in your fixed-income portfolio.
At this stage, it's important to remember that interest rates have already risen considerably since their 2013 low. They will more than likely continue to meander through 2014 with a variety of ups and downs along the way. If you are planning on shorting treasury bonds, make sure that you do so with a risk management approach that takes into account the potential for deflation.