By Andrew Bary

Bonds are beckoning investors again with depressed prices and juicy yields.

Many fixed-income markets have sold off in recent weeks, partly due to fears that the U.S. economy is heading into a recession. As a result, yields on municipal bonds, junk bonds, mortgage securities, and preferred stock are higher today than at the start of 2025.

Investors can now find yields of 8% on junk bonds, 7% on preferred stock, close to 6% on government-agency mortgage securities, and almost 5% on high-grade, long-term municipal bonds. Most U.S. Treasuries yield more than 4%, with 20-year and 30-year bonds yielding nearly 5%. (Bond prices move inversely to yields.)

These yields look particularly attractive with inflation running below 3%. Although President Donald Trump's tariffs may temporarily lift import prices and inflation, his policies could prove deflationary in the longer term by dampening economic growth. Investors anticipate that the Federal Reserve will react to weaker growth this year by cutting short-term interest rates by 0.75 to one percentage point by year end from the current target range of 4.25% to 4.5%.

One favorable development for the inflation outlook is a recent 10% decline in oil prices, which has left U.S. crude trading at $64 a barrel.

Lately, there has been much debate on Wall Street about the merits of a traditional portfolio with a 60/40 mix of stocks and bonds. Returns have been unimpressive in recent years, with Torsten Sløk, chief economist at Apollo Global Management, noting that a 60/40 mix has returned just 2% annualized since the start of 2022.

But for bond investors, starting yields matter much more than historical returns -- and the higher the yield, the better. Current yields are higher today than they have been for most of the past 15 years.

Investors can capture a 6% yield on a mix of taxable bonds, including preferred stock. That could provide a nice compliment to stocks, particularly in tax-advantaged accounts such as 401(k)s and individual retirement accounts. Here is a closer look at five fixed-income sectors.

Municipal Bonds

Barron's evaluated income sectors at the start of 2025 and ranked municipal bonds among the least appealing. That has changed with the market selloff this year.

"Munis have gotten extremely attractive," says Dan Genter, CEO of Genter Capital Management in Los Angeles. "For taxable investors, it's pretty much no decision -- and you don't have to be even in the highest tax bracket."

Most investors buy muni bonds via mutual funds or separately managed accounts, and good managers can often add value relative to big exchange-traded funds such as the $39 billion iShares National Muni Bond (ticker: MUB). Costs matter, and that works in favor of funds like the $77 billion Vanguard Intermediate-Term Tax-Exempt (VWITX).

Craig Brandon, co-head of municipals at Morgan Stanley Investment Management , notes that high-grade single-A- and double-A-rated bonds with 30-year maturities yield close to 5%, comparable to the yield on the 30-year Treasury. "These are some of the highest outright yields we have seen in the market since 2011," he says.

Genter says a 4% muni yield is equivalent to about 8% on a fully taxable bond for individuals in top tax brackets in states like New York and California. High muni historical credit quality is another plus, he says.

There are risks with munis, including heavy new issuance, and the possibility that the federal government will scale back the current tax exemption that muni-bond interest enjoys. But some of those risks are captured in current muni yields.

Preferred Stock

The $300 billion market for preferred stock is a favorite of individual investors because of tax-advantaged dividends. Also, preferred is senior to common stock. Most preferred and common dividends are taxed preferentially at a top federal rate of 20%. Corporate-bond interest is taxed at ordinary income-tax rates.

Preferred yields have risen, and prices have fallen, in 2025, with the iShares Preferred & Income Securities ETF $(PFF)$ down about 5%, including dividends. It now yields about 7%.

Many investors favor so-called $25 preferreds that trade like stocks on the New York Stock Exchange. But $1,000 par issues traded over the counter (and available to retail investors) often offer higher yields. Citigroup has offered a series of $1,000 issues in the past year, including a 6.75% issue now trading around 96 (par value is $100), for a yield of more than 7%.

Banks are the largest issuers of preferred, and most $25 bank securities, including the Wells Fargo 4.75% issue, yield more than 6%. Among the highest-yielding preferred is MicroStrategy's recent 10% issue $(STRF)$, now trading on the Nasdaq around $89 for an 11.25% yield. The high yield reflects the lack of conventional earnings at the big Bitcoin holder, but the company, known as Strategy, has plenty of asset coverage for its preferred, offering security to investors. It has about four times as much Bitcoin as debt and preferred stock.

Mortgage Securities

The mortgage market deserves more attention from retail investors, given its combination of ample yields and high credit quality.

Investors can now get roughly 6% yields on an ETF such as the $2 billion Simplify MBS $(MTBA)$ with minimal credit risk, as it buys Fannie Mae 30-year mortgage securities that are widely viewed as carrying implicit government support.

The Simplify ETF's current yield is two percentage points higher than the larger, $36 billion iShares MBS ETF $(MBB)$ because it owns securities with higher coupon rates of about 5.5%, compared with an average of about 3% for MBB.

Harley Bassman, the managing partner of Simplify, says investors in the two ETFs face a trade-off. The Simplify ETF has less upside due to the risk that homeowners will pay off the underlying loans if rates fall. The iShares ETF has a lower yield but more upside due to lower prepayment risk.

There is a 1.35 percentage point differential between agency mortgage and Treasury yields, up from 1.25 points at year end. The 10-year Treasury now yields about 4.3%.

Longtime mortgage securities manager Jeffrey Gundlach heads the $30 billion DoubleLine Total Return fund (DBLTX) that invests about half of its assets in agency MBS and the other half in privately issued MBS that carry more credit risk. The fund yields close to 6%,

Junk Bonds

There is a little more "high" in the high-yield market now. The yield gap between junk bonds and U.S. Treasury securities has widened to four percentage points from just under three points at the start of 2025, based on the ICE BoA high-yield index.

There is greater recession and default risk than at year end, due to falling consumer and business confidence and the Trump tariffs. As a result, investors can now get 8% yields in the sector.

The largest junk ETF, the $20 billion iShares Broad USD High Yield Corporate Bond $(USHY)$ , tracks the BoA index and yields close to 8% with an annual fee of less than 0.1%.

Closed-end funds such as the BlackRock Corporate High Yield $(HYT)$ are yielding about 10%, partly because of leverage equal to nearly 25% of assets. Closed-end funds often have comparable yields to popular private credit funds that buy junk-equivalent loans to small companies. The BlackRock fund carries less risk and leverage and has a liquid portfolio.

Treasuries

There has been turmoil lately in the normally placid Treasury market, fueled by speculation that foreign investors were registering displeasure with Trump's economic policies by dumping Treasuries.

Another risk is huge U.S. budget deficits, including $1.3 trillion of red ink in the first six months of the current fiscal year, ending in September.

But Treasuries still offer sleep-at-night security, a potential hedge against a weaker economy, and some tax benefits because interest is exempt from state and local taxes.

The 30-year Treasury yields 4.8%. Shorter-date maturities such as the three-year are close to 4%. ETFs offer a good way to play the sector due to low fees and liquidity. Treasuries trade in an over-the-counter market that can befuddle individual investors.

The largest Treasury ETF is the iShares 20+ Year Treasury Bond $(TLT.AU)$ with a yield of about 4.5%. Vanguard Intermediate-Term Treasury $(VGIT)$ has a rock-bottom fee of 0.03% annually, yields 4%, and has an average maturity of about five years.

Treasury inflation-protected securities, or TIPS, are a good compliment to regular Treasuries. TIPS pay a fixed-rate, now 2%-plus for 10- to 30-year securities. They are also indexed to inflation. The inflation "break-even" is relatively low at about 2.25% -- meaning that if prices rise by more than 2.25% annually over the life of the bonds, investors will do better with TIPs than regular Treasury bonds.

Big ETFs include iShares TIPS Bond $(TIP.AU)$, with a seven-year average maturity, and iShares 0-5 Year TIPS Bond $(STIP)$, with a two-year average maturity.

Given higher yields throughout the bond market, now is a decent time to consider adding fixed income to portfolios.

Write to Andrew Bary at andrew.bary@barrons.com

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April 18, 2025 15:01 ET (19:01 GMT)

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