Ryan Fitzwater: Hello and welcome to Market Wake-Up Call. I’m Ryan Fitzwater. I’m the Research Director here at The Oxford Club, and today I get to host because I’m interviewing Steve. Steve, welcome to my show.

Steve McDonald: Well, thanks so much, Ryan. It’s nice to be here.

Ryan Fitzwater: So there’s been a major sell-off in the bond market, especially following the Fed’s most recent rate hike. Many now believe the bond bubble has started to pop. So is this bubble popping, and what does it mean for investors?

Steve McDonald: Well, the Treasury bonds are selling off – Treasury bonds and the bills and notes – which is actually a good thing on two levels. The broad market is not selling off, but Treasurys are – but it’s a good thing, as I said, on two levels.

First, the mechanical rotation that’s supposed to happen between the bond and the stock market is finally working as it should. For the last eight years, bonds have been going up in price and, at the same time, so have stocks. This isn’t supposed to happen, but we’re into a more normal environment now where bonds are dropping in price, which means the yields are going up and stocks are going up.

So the professionals and the institutions are moving money out of the guaranteed investments – which is usually an indication of a fearful environment – and into the stock market because there’s more of a – what’s the word – a better feel for the stock market going forward for the economy since the election.

The other level where this is a good thing, the sell-off in Treasurys, is that if you’ve been waiting for guaranteed investments, I think you’re going to get some decent yields this year.

So yeah, there’s a sell-off. It’s not in the broad market. It’s in Treasurys. In fact, the corporates have been doing quite well. Those will always track improvements in fundamentals and in the stock market. So the Treasurys are selling off. Corporates are doing quite well.

Ryan Fitzwater: I think one of the points to emphasize is how investors view the B-word, the B-word being bonds. When most people think of bonds, they think of the puny Treasury yields in the 1% to 2% range we’ve seen over the last couple years, but what many don’t realize is they can get yields in the 5%, 9%, 10%, even 11% range. So how do they do that, Steve?

Steve McDonald: Even during the horrible period that we’ve had for about seven or eight years, this zero interest rate market, we’ve been able to earn between 5% and 20% in our corporate bonds. That’s where you’ve got to go. If you want the safety of bonds, you’ve got to be in corporates right now. Munis and Treasurys are paying so little in most cases. They’re just not even worth doing.

As I said, I think that’s going to change this year, but for right now you’ve got to be in corporates. Corporates are really interesting because you get the guarantee of a bond. You aren’t government guaranteed as you are with a Treasury, but you get a written contract from a company that says, “If you will lend us your money over a period of years, as long as we’re in business,” which is not usually a problem, “we will pay you your interest, and at the end of that period we’re going to pay you your principal.”

I think right now in the portfolio that I manage, we’re averaging about 6.5% in what I call our conservative portfolio, BB and higher, and we’re around 11% in our BB- and lower bonds. So there’s a lot of money to be made in these things. Most people aren’t familiar with the possibilities here. The average person, if you ask them about bonds, thinks of savings bonds.

So there are lots of possibilities in corporates. Lots of yield and, in fact, I expect that yield to improve this year as well. So that’s where people really ought to be with their money if they’re looking for the security of bonds.

Ryan Fitzwater: So, Steve, investing in bonds is somewhat complicated for individual investors in Wall Street, and their brokers have made it this way. Why is that?

Steve McDonald: Well, it’s not complicated. Buying a bond or managing a bond portfolio is no different from doing a stock portfolio. It’s exactly the same thing. A few new terms, but Wall Street has made it more difficult and brokers will make it difficult because they get paid nothing. When the little guy, the small investor, you and me and my readers, want to buy one, two, five bonds, most firms will say, “I’m sorry. You’ve got to buy 10” or “You have to buy 20.”

I had a reader write to me the other day who said his broker said he had to buy 50 bonds, $50,000 in one position. One of the things I try to do in this service is to educate people because you don’t have to buy 10 bonds; you don’t have to buy 20 bonds. It doesn’t have to be complicated. It is no different from entering a stock symbol.

As I said, I try to educate my readers because the brokers will tell you, “You can’t do this.” If you go to a broker with $10,000, $20,000, $50,000, they’re going to put you in a bond mutual fund. And let me tell you something, Ryan. The worst thing you can do in this market right now is own a bond mutual fund. Those poor folks are going to get crushed. In an environment like this where interest rates are going up, that’s the worst thing in the world you can do.

So not only do they make it more difficult, but they put you in a place that they don’t understand either. They don’t understand the implications. So what I really try to do is educate people, make this easy, make my email available to them and I always say, “Before you make a mistake, email me with a question. Let’s make sure you have it straight before you do something that’s going to cost you money.”

The potential here is fantastic. Most people won’t touch it because they’re confused and they’re turned off frankly by Wall Street and, to be honest with you, I don’t blame them.

Ryan Fitzwater: Well, there you have it, everyone. Buy individual bonds. Avoid bond funds. I couldn’t agree more, Steve. Thanks again for coming to my show.

Steve McDonald: You’re welcome, Ryan. Thanks for having me.

Ryan Fitzwater: Of course. And thank you all for joining us. We’ll see you again next time on Market Wake-Up Call.

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