Their big ideas include: More exposure to international government bonds, more non-government securities, and more emphasis on long-term bonds whose rates will rise less sharply, and which will lose less principal value, as central banks begin to nudge short-term rates higher.
"The amount most investors earn in income will be more than they lose when prices go down," Tipp said.
Tipp made several key points:
- One reason U.S. yields went so low is that other countries' rates went even lower, pushing the trading value of their existing bonds even higher. That has eased sharply in recent weeks, with 10-year German bond yields rising to 0.61% from an April low of 0.05%. But European debt is still cheap enough to keep a lid on U.S. rates.
- The smart play in sovereign debt will be to move offshore, where central banks are maintaining already low rates (as Britain announced today) or cutting them (as China did this weekend). He even is betting on the European periphery, thinking that debt from countries like Italy and Spain may carry a better balance of risk and reward.
- Investors in Treasuries should move toward longer maturities, such as 10-year or even 30-year paper, avoiding short-term issues that will react more strongly to moves in the Fed funds rate, he said.
- However, the moves in the U.S. won't be that sharp from here on out, Tipp says, because the Federal Reserve has clearly telegraphed that rates are going higher, letting the markets begin to boost rates on its own. That should head off sharp spikes like those that handed Treasury investors a total-return loss during the 1993-94 tightening cycle, he said. The comparable loss in this cycle may have been 2013's 2.0% dip in the Barclays Aggregate Bond Index, he says, set off when the Fed gave its first signs of tightening monetary policy.
At BlackRock, Rosenberg's advice is similar.
First, don't get too worked up. "Most money made in bonds is from income,'' he says. And the gains in income will offset most, if not all, of the losses in principal from a well-designed bond portfolio.
Like Tipp, he says the play in government bonds is to look outside the U.S., pointing to Australia as a country whose central bank is likely to maintain very low rates to manage its economy's exposure to slowing growth in China. And like Tipp, he thinks longer-term U.S. bonds will do better than shorter-term Treasuries as rates begin to rise
Think about "unconstrained" bond funds that will be more free to react to economic developments with a mix of investments, including currency bets, because their charters let them emphasize government bonds less than other funds. But unconstrained funds are hardly automatic winners: A large number of them, including Bill Gross' Janus Global Unconstrained Bond Fund (JUCTX), have underperformed the market. And many of them come with sales loads. The best performer in this group over the past year has been Eaton Vance's Global Macro Absolute Return Advantage Fund (EGRAX) according to Morningstar data.
His best advice about bonds is: Keep your perspective.
People own bonds because they want an investment that will provide relatively steady, unspectacular returns whether the economy is good or bad -- one reason the Barclays Aggregate Bond Index rose throughout the aftermath of the financial crisis, and over the course of the 1990s boom. What varies is how much they beat stocks by, or how much stocks beat them by.