How to Invest in Bonds Now—Even If Interest Rates Rise

May 18, 2017

The bond market is a tough puzzle to crack right now. High stock prices mean a greater chance of a correction, which makes fixed income as important as ever to own for “ballast,” says Krishna Memani, chief investment officer at OppenheimerFunds. But interest rates on the safest bonds are too low to reward investors with much ­income—and there’s the danger that rising inflation and Fed rate hikes will cause their prices to plunge.

One solution: senior floating-rate loans, which are essentially securitized loans to companies. Their “coupons” are pegged to prevailing interest rates and are regularly reset to ensure their value doesn’t drop even if rates rise. The most popular low-cost exchange-traded fund in this category is the PowerShares Senior Loan Portfolio.

Nicolas Rapp 
Nicolas Rapp 

Fixed-income investors can also benefit from the comeback in emerging markets, and in the growing strength of their currencies, by buying local currency bonds. Emerging-market debt already offers higher yields than those in the U.S. And Memani expects emerging-market interest rates to go down, not up, which could make the bonds more valuable. The low-cost WisdomTree Emerging Markets Local Debt Fund, which yields nearly 6%, has considerable exposure to Russia and Latin America, where Memani is bullish.

This article is part of Fortune’s 2017 Midyear Investor’s Guide feature. For our picks in other sectors, click on the links below:

This article appears as part of the Midyear Investor's Guide package in the June 1, 2017 issue of Fortune.

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