As more Americans reach retirement age, demand for fixed income is higher than ever. Supply, however, is harder to come by. While U.S.Treasurys were once the bedrock of retirement income, consistently low yields are sending retirees into riskier investments.
Larry Yates, 73, is a retired teacher who manages his own portfolio. "You've got to put yourself at risk if you don't want everything to be eaten up by inflation. I'm conservative, but I'm not going into a bunker here," said Yates. "Our portfolio needs to be growing."
With this, Yates unintentionally hit on a popular trend among retirement fund managers. Being "conservative" doesn't mean what it used to. Today, achieving a return on principal rather than return of principal, requires more risk.
This, in any case, is the prevailing strategy among retirement fund managers in the U.S.
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Among mutual fund bond funds -- the most common retirement investment vehicle -- the most popular asset class in 2012 was corporate bonds. Yet high yield bonds and emerging market bonds saw the second- and third-largest net asset allocations, according to year-to-date Morningstar estimates.
Traditionally considered inherently risky assets, high yield bonds, emerging market bonds, and high yield municipal bonds attracted $28 billion, $19 billion and $11 billion, respectively, so far this year, Morningstar said. By comparison, Treasury in-flows are nonexistent.
Retirees and their fund managers are clearly on the hunt for higher yields.
"People are afraid of running out of money. Many retirees looking to grow their principle are choosing more aggressive funds," said James Martielli, senior investment analyst at Vanguard, the largest mutual fund company in the U.S. "It's not a guarantee, but the biggest driver of relative performance is overall risk."
Martielli's comments came as Vanguard's competitor BlackRock released a bullish outlook on certain "risky"assets, including high yield and U.S. municipal bonds,according to its 2013 outlook report.
As for 2012, here's a snapshot of YTD returns:
High-yield corporate bonds: Traditionally known as junk bonds, these historically have a higher default rate than investment grade corporate bonds. In the last 12 months, they have increased 6.48 percent, according to the Merrill Lynch High-Yield Index .
High-yield muni bonds: Bonds issued by municipalities or states with a sub-investment grade credit rating. SPDR Nuveen S&P High Yield Municipal Bond ETF is a representative of this market, up 11.9 percent over the past 12 months.
Emerging market bonds: These bonds are issued by emerging market countries and/or companies. Yields can vary widely by country, but the most popular index, the J.P. Morgan Emerging Market Bond Index, posts a 15.5 percent return for the past 12 months.
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Suffice it to say these options all trump 1.65 percent, the current yield on 10-year Treasurys. Yet many experts warn that retirees, especially, should not be chasing yield. After all, conventional wisdom says high-yield assets are high-yield because they have a greater likelihood of default.