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SPRING 2003

INVESTING FOR GROWTH

Joan Payden: Bullish on Bonds


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With yields the puniest they've been in decades, can investors still make money in bonds? You bet. Joan Payden, the founder of Payden & Rygel, a $50 billion money-management firm in Los Angeles, figures the right mix of bonds can deliver returns in the neighborhood of 6% to 8% in 2003.


She recommends building a portfolio with securities from opposite ends of the credit spectrum. At one end, she favors 10-year U.S. Treasuries, which yield around 4%, and government-backed mortgage bonds, at around 5%. At the other end, she is partial to high-yield, or "junk" bonds.

Payden isn't put off by Treasuries' yields recently dipping to their lowest level in 44 years. It's their safety that's important. "If something bad happens in the world, there'll be a flight to quality," she says. Besides, Payden believes, the threat of deflation may be serious enough to prompt the Federal Reserve to cut interest rates once again in the next few months. If that happens, Treasury bond prices would rise.

Payden thinks junk bonds -- those rated B or BB and yielding 8% to 9% -- offer the best value in the fixed-income arena. Investors, she says, are more than compensated for the risks if they stick to the higher-quality junk. Many of these bonds have been issued by small but fairly solid companies who have had no choice but to turn to the high-yield market to raise funds. Bank financing is hard to get in this tough environment.

Elsewhere, Payden warns investors to steer clear of investment-grade corporate bonds. If there's another Enron or WorldCom-like corporate blowup, bondholders will get singed, she says. Besides, with some high-quality corporate debt yielding barely one percentage point more than comparable Treasuries, she says, the additional risk isn't worth it.

MARCH 24, 2003




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