In the US, investors seek income beyond traditional bonds
In the US, amid bond market volatility and rising rates, investors are seeking sources of current income beyond traditional bonds. As CNBC Top News reports, financial advisers do not recommend abandoning bonds entirely in diversified portfolios, but some are shifting investments into instruments with shorter maturities, including ultrashort bonds.
Among alternative income sources, experts cite insurance-linked securities, energy partnerships, ETFs with covered-call strategies, dividend stocks, real estate investment trusts, preferred stocks, asset-backed securities and merger-arbitrage strategies. At the same time, higher income from such instruments may mean greater risk, while concentrating funds in a single sector can increase a portfolio's vulnerability.
Insurance securities and stocks
One option is catastrophe bonds, or cat bonds. They allow insurers, reinsurers and governments to transfer natural-disaster risks to capital market investors. According to CNBC, this asset class often delivers returns ranging from mid- to high-single-digit percentages, and its performance is not directly linked to traditional financial markets. However, in years with numerous disasters and substantial insurance payouts, returns may be negative.
Dividend stocks and real estate funds can also generate regular income, but they are not direct substitutes for bonds. Dividend stocks have higher volatility and market risk, while publicly traded REITs are continually repriced by the market, which generally makes them more volatile than bonds. Preferred stocks can provide expected current income and generally have priority over common shares, but they are also sensitive to interest rates.
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Master limited partnerships, or MLPs, typically invest in energy sectors, including oil, gas and transportation. They can offer high dividend payouts, but Janney Montgomery Scott Chief Investment Officer Michael Crook considers them less attractive amid rising rates because such investments are sensitive to interest rates.
Arbitrage and asset-backed lending
Merger-arbitrage strategies use the price difference between a merger announcement and the completion of the deal. Morningstar describes their risk-and-return profile as similar to that of bonds: upside potential is limited, but losses can be substantial if a deal falls through.
Another area is lending backed by real assets, including railcars, gas wells and other tangible collateral. Such private investments often have terms of one to three years, shorter than a typical investment-grade bond. According to Stuart Katz, head of investments at Robertson Stephens, asset-backed lending opportunities can provide tax-deferred returns of 6–10%. At the same time, they carry liquidity risks, risks of asset depreciation and problems with collateral recovery.
