A Great Bang-for-Your-Buck Bond Fund

Investing for yield, or income, is nothing new. Bond investors have long earned sizeable returns this way.

But more recently, yield’s “stock is up,” you could say…

It’s been all the rage as investors have been forcibly pushed out of traditional, fixed-income products thanks to near-zero, inflation-defeated rates that pay far too little to even justify the time it takes to hit the buy button.

The sudden increase in demand for such investments is both good and bad. It’s good because new products – ETFs, mutual funds, etc. – now give investors an efficient way to invest in this space. It’s bad because, as investors follow each other like lemmings off a cliff, prices can get bid up to expensive levels.

That’s why we view the recent selloff in many bond funds as a gift to investors wanting to buy in… and not as cause for concern as many would believe.

Build America Bond funds, which came on the scene in 2009 as part of the American Recovery and Reinvestment Act, are much like municipal bond funds. They invest in municipal bond projects and offer investors monthly or quarterly payouts. And, they have the added bonus of having a portion of the payments backed by the federal government.

But as the trend caught on, price increases kept some investors waiting on the sidelines. Now, you have a chance to buy in at an attractive level. Take a look…

See larger image

After topping out at nearly $22 in August 2012, Nuveen’s Build America Bond Fund (NBB) fell sharply in May 2013 as rates shot higher in anticipation of the September Fed taper that never came to fruition. Nearly all bond funds dropped. And most are now turning higher again.

Take a look at NBB…

It’s just found solid support around $17.50. This is the level that also acted as support in early 2011, before NBB went on to rally to $22, or more than 25%.

Are we setting up for the same move again?

I think so.

With a much diminished chance of a Fed taper in 2013, I think bond funds will rally into year end. Buying into NBB today is a great way to play this move.

The green plot above is the iShares 7-10 year Treasury bond fund (IEF), which is currently trading at a 6% discount to its April 2013 peak. Meanwhile, NBB dropped further on the way down.

That means a move back up to its April peak of $21.90 puts more than 18% in profit potential overhead.

Simply put: As interest rates drift lower, you’ll get more bang for your buck buying NBB than a comparable Treasury bond fund.

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Categories: Markets

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.