Schwab: Here's how to play bonds with rates rising


Investors looking for opportunities in bonds might want to think more like Clark Kent than Superman.

With the Federal Reserve poised to raise interest rates and default rates expected to climb, fixed income will continue to present opportunities though they might not seem quite so exciting, according to strategists at Charles Schwab.

Playing a 'blah' market
Search for shareholder yield
Advising an aging population

While 2015 has been a challenging year for bonds, investors continue to pour money into fixed income funds, adding $95.3 billion despite the ever-present threat of tightening monetary policy.

The key, said Kathy Jones, Schwab's chief fixed income strategist, has been value.

"The difference is really credit is priced better now," Jones said Wednesday during an interview at Schwab's IMPACT 2015 conference in Boston. "Whether it's priced well enough is the question, but it's priced better than it was. That maybe presents some opportunity."

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Bonds overall have been about flat year to date, with the exchange-traded fund up just 0.24 percent. However, returns have varied greatly among sectors and strategies.

Read More The sectors most vulnerable to rising rates

Generally, longer-duration strategies have gotten crushed as have high-yield bonds. The SPDR Barclays High Yield Bond ETF has tumbled about 5.1 percent in 2015.

"If you're a long-term investor, if you are not an aggressive investors and you can't really stomach volatility, you might want to stick with higher quality," said Collin Martin, a Schwab director of fixed income. "It worries us that investors are going (into junk) who shouldn't belong there."

While Martin said there is good yield to be found in junk, Schwab advocates investors take a more barbell-oriented approach to bonds. Default risk is rising on high yield, particularly with oil and mining companies, making a venture into the sector risky.

Read More Investors are 'really pessimistic': Schwab

One side of the barbell would be cash, short-term bonds and floating rate investment grade, with intermediate term, corporates and U.S. Treasurys on the other side.

Jones also said more conservative municipal bonds, particularly focusing on general obligation debt rather than tied to projects, are mostly solid.