It’s Down to Banks vs Society

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We are trying to rescue the creditors and restart the world that is dominated by the creditors. We have to rescue the debtors instead before we are going to see the end of this process. — Economist Steve Keen

Bankers Are Willing to Let Society Crash In Order to Make More Money

Editor’s Comment: 

I was reminded last night of a comment from a former bond trader and mortgage bundler that the conference calls are gleeful about the collapse of economies and societies around the world. Wall Street will profit greatly on both the down side and then later when asset prices go so low that housing falls under distressed housing programs and 125% loans become available in bulk. They think this is all just swell. I don’t.

The obvious intent on the part of the mega banks and servicers is to bring everything down with a crash using every means possible. When you look at the offers state and federal government programs have offered for the banks to modify, when you see the amount of money poured into these banks by our federal government in order to prop them up, you cannot conclude otherwise: they want our society to end up closed down not only by foreclosure but in any other way possible. They withhold credit from everyone except the insider’s club.

So now it is up to us. Either we take the banks apart or they will take us apart. I had a recent look at many modification proposals. In the batch I saw, the average offer from the homeowner was to accept a loan 20%-30% higher than fair market value and 50%-75% higher than foreclosure is producing. It seems we are addicted to the belief that this can’t be true because no reasonable person would act like that. But the answer is that the system is rigged so that the intermediaries (the megabanks) control what the investors and homeowners see and hear, they make far more money on foreclosures than they do on modifications, and they make far money on all the “bets” about the failure of the loan by foreclosing and not modifying.

The reason for the unreasonable behavior, as it appears, is that it is perfectly reasonable in a lending environment turned on its head — where the object was to either fund a loan that was sure to fail, or keep a string attached that would declare it as part of a failed “pool” that would trigger insurance and swaps payments.

Steve Keen: Why 2012 Is Shaping Up To Be A Particularly Ugly Year

At the high level, our global economic plight is quite simple to understand says noted Australian deflationist Steve Keen.

Banks began lending money at a faster rate than the global economy grew, and we’re now at the turning point where we simply have run out of new borrowers for the ever-growing debt the system has become addicted to.

Once borrowers start eschewing rather than seeking debt, asset prices begin to fall — which in turn makes these same people want to liquidate their holdings, which puts further downward pressure on asset prices:

The reason that we have this trauma for the asset markets is because of this whole relationship that rising debt has to the level of asset market. If you think about the best example is the demand for housing, where does it come from? It comes from new mortgages. Therefore, if you want to sustain he current price level of houses, you have to have a constant flow of new mortgages. If you want the prices to rise, you need the flow of mortgages to also be rising.

Therefore, there is a correlation between accelerating and rising asset markets. That correlation applies very directly to housing. You look at the 20-year period of the market relationship from 1990 to now; the correlation of accelerating mortgage debt with changing house prices is 0.8. It is a very high correlation.

Now, that means that when there is a period where private debt is accelerating you are generally going to see rising asset markets, which of course is what we had up to 2000 for the stock market and of course 2006 for the housing market. Now that we have decelerating debt — so debt is slowing down more rapidly at this time rather than accelerating — that is going to mean falling asset markets.

Because we have such a huge overhang of debt, that process of debt decelerating downwards is more likely to rule most of the time. We will therefore find the asset markets traumatizing on the way down — which of course encourages people to get out of debt. Therefore, it is a positive feedback process on the way up and it is a positive feedback process on the way down.

He sees all of the major countries of the world grappling with deflation now, and in many cases, focusing their efforts in exactly the wrong direction to address the root cause:

Europe is imploding under its own volition and I think the Euro is probably going to collapse at some stage or contract to being a Northern Euro rather than the whole of Euro. We will probably see every government of Europe be overthrown and quite possibly have a return to fascist governments. It came very close to that in Greece with fascists getting five percent of the vote up from zero. So political turmoil in Europe and that seems to be Europe’s fate.

I can see England going into a credit crunch year, because if you think America’s debt is scary, you have not seen England’s level of debt. America has a maximum ratio of private debt to GDP adjusted over 300%; England’s is 450%. America’s financial sector debt was 120% of GDP, England’s is 250%. It is the hot money capital of the western world.

And now that we are finally seeing decelerating debt over there plus the government running on an austerity program at the same time, which means there are two factors pulling on demand out of that economy at once. I think there will be a credit crunch in England, so that is going to take place as well.

America is still caught in the deleveraging process. It tried to get out, it seemed to be working for a short while, and the government stimulus seemed to certainly help. Now, that they are going back to reducing that stimulus, they are pulling up the one thing that was keeping the demand up in the American economy and it is heading back down again. We are now seeing the assets market crashing once more. That should cause a return to decelerating debt — for a while you were accelerating very rapidly and that’s what gave you a boost in employment —  so you are falling back down again.

Australia is running out of steam because it got through the financial crisis by literally kicking the can down the road by restarting the housing bubble with a policy I call the first-time vendors boost. Where they gave first time buyers a larger amount of money from the government and they handed over times five or ten to the people they bought the house off from the leverage they got from the banking sector. Therefore, that finally ran out for them.

China got through the crisis with an enormous stimulus package. I think in that case it is increasing the money supply by 28% in one year. That is setting off a huge property bubble, which from what I have heard from colleagues of mine is also ending.

Therefore, it is a particularly ugly year for the global economy and as you say, we are still trying to get business back to usual. We are trying to rescue the creditors and restart the world that is dominated by the creditors. We have to rescue the debtors instead before we are going to see the end of this process.

In order to successfully emerge on the other side of this this painful period with a more sustainable system, he believes the moral hazard of bailing out the banks is going to have end:

[The banks] have to suffer and suffer badly. They will have to suffer in such a way that in a decade they will be scared in order to never behave in this way again. You have to reduce the financial sector to about one third of its current size and we have to also ultimately set up financial institutions and financial instruments in such a way that it is no longer desirable from a public point of view to borrow and gamble in rising assets processes.

The real mistake we made was to let this gambling happen as it has so many times in the past, however, we let it go on for far longer than we have ever let it go on for before. Therefore, we have a far greater financial parasite and a far greater crisis.

And he offers an unconventional proposal for how this can be achieved:

I think the mistake [central banks] are going to make is to continue honoring debts that should never have been created in the first place. We really know that that the subprime lending was totally irresponsible lending. When it comes to saying “who is responsible for bad debt?” you have to really blame the lender rather than the borrower, because lenders have far greater resources to work out whether or not the borrower can actually afford the debt they are putting out there.

They were creating debt just because it was a way of getting fees, short-term profit, and they then sold the debt onto unsuspecting members of the public as well and securitized their way out of trouble. They ended up giving the hot potato to the public. So, you should not be honoring that debt, you should be abolishing it. But of course they have actually packaged a lot of that debt and sold it to the public as well, you cannot just abolish it, because you then would penalize people who actually thought they were being responsible in saving and buying assets.

Therefore, I am talking in favor of what I call a modern debt jubilee or quantitative easing for the public, where the central banks would create ‘central bank money’ (we cannot destroy or abolish the debt, which would also destroy the incomes of the people who own the bonds the banks have sold). We have to create the state money and give it to the public, but on condition that if you have any debt you have to pay your debt down — no choice. Therefore, if you have debt, you can reduce the debt level, but if you do not have debt, you get a cash injection.

Of course, this would then feed into the financial sector would have to reduce the value of the debts that it currently owns, which means income from debt instruments would also fall. So, people who had bought bonds for their retirement and so on would find that their income would go down, but on the other hand, they would be compensated by a cash injection.

The one part of the system that would be reduced in size is the financial sector itself. That is the part we have to reduce and we have to make smaller.  That is the one that I am putting forward and I think there is a very little chance of implementing it in America for the next few years not all my home country [Australia] because we still think we are doing brilliantly and all that. But, I think at some stage in Europe, and possibly in a very short time frame, that idea might be considered.

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Eurozone Recession in Overdrive

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Editor’s Comment:

France, Italy, Spain All at record lows in GDP

Mish Shedlock nails it in the article below. We are reminded again that where the banks get control of political policy, every avenue will be explored before Governments do the right thing — or the country explodes into chaos and a new Government is born. For those who have studied French history, these reports sound earily like the conditions that preceded the French Revolution and the bloodbath that followed. Rioting is commonplace. And the rioters are not just expressing outrage; they have lost faith in the their government, their currency and their prospects. Japanese seminars abound on how to store money and move to other countries. Malasia looks good to them. 

And here in the United States, the steam keeps building under the lid while the banks, realtors and other groups try to convince us that the recession, and the mortgage crisis that brought it on, is over and will NOW recover. Despite years of such “prosperity is just around the corners’ spinning, and some people still believe it when they hear it, we know from history, including our own, that revolution of one sort or another, doesn’t take a majority of citizens to get involved. In fact, every major revolution in every major country occurred with a small band of “fringe” people leading the way until their sucesses attracted the mainstream people who thought they could ride the storm and survive the aftermath.

Over the next 60 days, long-term unemployment benefits are over in this country. GDP is in for another hit. That was money going into the hands of people who were spending it the moment they received it. The full multiplier effect has been keeping our economy floating and now THAT is going away. 

Home prices are now at their lowest level since 2002 and all responsible analysts tell us that housing prices are going down another 15% and I think they are right. The economies of the world are crashing because the people have no money to spend. Even the employed are underemployed and can’t make enouogh money to pay for housing and other major purchases except on a much lower scale. 

We are in a depression, not a recession and the fact that this Depression is not yet as bad as the Great Depression should not lull us into a false sense that this is just a cycle that will run its course. It isn’t. This is the end of modern commerce unless we do something about it. And the ONLY thing left to do is to provide a mechanism where the middle class is suddenly redeployed with cash in their hands to buy things and cause commerce to renew. Don’t look to China or India either which are experiencing sharp decines in GDP. 

There is only one piece of currency that will restore the middle class . Iceland proved it as have other countries. FORCE BANKS TO REDUCE HOUSEHOLD DEBT. Between the mortgage chicanery and credit cards, government borrowing on terms they didn’t understand, and most banks that were “in the game” without knowing the rules, the money is gone. It isn’t the bank that has been robbed, nor government spending that is ripping the economies of the world apart. It is the banks themselves that siphoned off all our currency and our liquidity, and won’t put it back. They have lost their franchise through greed. It is time to nationalize the banks and then let them operate privately as utilities regulated as though they provide the lifeblood of the world.   

The “anti-regulators” are mere apologists for the new aristoracy that has pulled off a coup d’etat and pulled the wool over the eyes of the media and the public.

Eurozone Retail Sales Crash: Record Declines in France and Italy, Overall Revenues Drop at Near Record Pace

by Mike “Mish” Shedlock

Retail sales in France, Italy, and the eurozone as a whole hit the skids according to Markit. Retail sales in Germany were positive, but barely.

Steepest Decline in French History

Further sharp fall in French retail sales during May

 Key points:

  • Month-on-month decline in sales matches April’s survey-record
  • Steepest year-on-year decline in series history
  • Purchase price inflation eases to near-stagnation

Sales fell on an annual basis at the steepest pace recorded since the inception of the survey in January 2004. Margins continued to be squeezed amid an intense competitive environment, despite purchase price inflation easing to near-stagnation.

The headline Retail PMI® registered 41.4 in May, matching April’s survey-record low. French retailers indicated that actual sales came in well below previously set targets during May. The degree of undershoot was the greatest since February 2010.

Record Declines in Italy

Record year-on-year decrease in Italian retail sales in May

 Key points:

  • High street spending down sharply, albeit at weaker monthly rate
  • Job shedding steepest in series history
  • Discounting and cost inflation reduce profitability

Summary:

The Italian retail sector remained in contraction during May, with sales again falling sharply in spite of widespread discounting. Cost pressures meanwhile grew from April’s recent low on the back of rising transport costs, thereby adding more pressure to margins. Consequently, firms shed staff at a marked and accelerated rate that was the steepest since data were first compiled in January 2004.

High street spending across Italy contracted sharply on the month during May, albeit at a slightly slower rate than that registered during April. This was signalled by the seasonally adjusted Italian Retail PMI® posting at 35.8, up from 32.8. Sales fell for the fifteenth month straight, and panellists continued to highlight low consumer confidence and falling disposable incomes as the main factors behind the decline.

German Sales Show Slight Growth

German retail sales return to growth in May

 Key points:

  • Retail PMI points to marginal month-on-month rise in sales
  • Like-for-like sales higher than one year earlier
  • Wholesale price inflation eases markedly

The seasonally adjusted Germany Retail PMI rose from 47.4 in April to 50.7 in May, to indicate a marginal increase in sales on a month-on-month basis. That said, the rate of expansion was lower than those seen throughout the first quarter of 2012. Companies that reported a rise in sales since April generally noted that more favourable weather conditions had resulted in higher customer footfall.

Survey respondents indicated that actual sales fell short of initial targets for the second month running in May.

Sharp Drop in Overall Sales, Revenues Decline at Near Record Pace

Eurozone retail sales continue to fall sharply in May

 Key points: 

  • Retail PMI improves to 43.3, but still signals steep monthly drop in sales
  • Near-record annual fall in sales
  • Wholesale price inflation slows sharply

Summary of May findings:

The Eurozone retail sector remained firmly in contraction in May, according to PMI® data from Markit. Sales fell sharply on a month-on-month basis, and revenues compared with a year ago were down at a near-record rate. There were signs of easing pressure on retailer’s purchasing costs, however, as the rate of purchase price inflation slowed sharply to a 19-month low.

This should bury the notion the eurozone recession will be short and shallow.


Even the Chinese Know It

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Editor’s Comment:

AUSTERITY MEANS “PROTECT THE BANKS AND SCREW THE PEOPLE”

The Financial Times ran an article 2 days ago about the Chinese being encouraged to spend more aand save less. I’m no fan of China’s political system, or even its economic policies (which come to think of it are the same thing, as Von Mises points out). As we look around the world and see Iceland prospering, China’s growth slowing to a mere 8% while our REAL GDP is still negative or by the reckoning of most economists, headed into downward territory. These propering countries who have concentrated on stmulating the rate of commerce (i.e. the economy) are the countries that are reducing debt (Iceland is now at the point where more than 25% of household debt has been eliminated not with spending fiscal stimullus money but with pressure on the idiots that got us into this messs- the banks.

Then look at the countries who are effectively governed by the banks, directly or indirectly— like US and Europe. They stand in stark contrast to Iceland and China. We are headed into what is called a “double dip” recession as though we would have hands up with ice cream cones in them, but the truth is that these recessions is literally taking food, medicine, and clothes off the table while they send their children into schools that are no longer able to teach and are located in neighborhoods that are less safe from criminal activity and the occoasional warehouse fire all because of “austerity.” Such neighborhoods are also less familiar and less appealing than the ones they got thrown out of after being tricked into using a home in which generations of their family grew up as the source of cheap capial encouraging, cajoling and pushing them with literally midnight visits to get them to sign on the dotted line to purchase a defective, fraudulent loan products whose purpose was to fail.

As we look at those countries who have adpted the politics and economics of austerity (“less spending” or “spending cuts” as it is known in the U.S.) the consequences could not be more clear — austerity, spending cuts, less spending, get the government out of the way are all slogans  that are leading us into disaster. And they are all spoken by people who are owned and controlled by the banks. And at the risk of offending my readers with political statements, Obama was exactly right when he said that the purpose of government was not to turn a business profit like Romney said he did (my sources tell me that Mitt was a figurehead running for president and they were making him look good, not that he was actually of any value). Obama correctly points out that government’s purpose is to maintain a society in which everyone gets a fair shake and a fair shot at the brass ring. Thus government is not for the rich who already got wealthy but for those who have not yet  achieved wealth. And this is because history teaches that no society has ever endured without a strong middle class.

This country needs to revive its economy by having more people spend more money. The obstacles to that are that too many people have no money, no  credit and no jobs. This is the time to divert the corporate welfare of farm subsididies and oil subsidies and the like to those programs that will give all our citizens a fair shake and a fair shot at success.

Like Iceland, the way to increasing the value of our currency, the way to prosperity is to reduce household debt. And the biggest item here that not only decreases household debt but increases household wealth is to return the homes that were wrongfully foreclosed and not to give a pittance of money to the victims with a slap on the wrist to those who stole the home with a credit bid when they were not only not the creditor, but they had never invested a dime in purchasing the loan. That used to be illegal. Wait a minute, it still is illegal. So why are we allowing the banks to continue this charade and why does the government, including Obama’s administration, drag its feet in taking apart these monsters that destroyed our economy? Why is the administration assume that the 7,000 OTHER banks and credit union wolld not prosper and enter into tacit agreements to keep the government afloat while we wait for the stimulus to take effect?

There is no expert or pundit that says we are wrong. All the banks have been able to do is to roll out doomsday sayers who say that if we follow the law we will be headed for disaster. Well take a look.  Disaster is here. And the Dow Jones Industrial Average is not a proper indicator or substitutute for people who can’t put food on a table that is now located in a dwelling that the rest of us would not even consider — their car.

We choose instead to protect the banks at all costs and we call that austerity because where else is the money going to come from except the banks who siphoned it out illegally? That is our policy, our politics and our economics. And while our soldiers risk life and limb because their country called them to duty, their families were being foreclosed, some at the precise moment they were taking a shot in the leg or heart for us. Is this the society we sent them to fight for?


Whose Risk Is It Anyway?

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Editor’s Comment:

Now that securities analysts are looking at investments the way I was trained to see them, it is now possible to see the way the mortgage bond market should have operated, why it didn’t operate according to industry standards and why it is continuing to drain the economies of the U.S. Economy and the economies and societies of the western world.

There are two general types of risk in any investment. The first type is return of principal and the second type is the rate of return. The rate of return is the amount of money paid to the investor in addition to the principal. In today’s markets the two main contenders for investment money are equities (stocks) and liabilities (bonds). The price of an investment depends upon risk more than anything else: “is this price worth the risk that I will get my money back along with the targeted rate of return (interest in the case of bonds).

The inescapable rule has always been and always will be that if an issuer is seeking investment capital they must pay higher and higher interest rates for every degree of increased risk. If the risk is return of capital they are junk bonds. If the risk is that the rate of return (interest) on bonds may vary from the stated or targeted return, that too will increase the cost of capital to those issuers seeking investment capital.

My conclusion is that mortgage bonds have so destabilised the markets and confidence in the bond markets, that they are difficult to evaluate using common sense industry standards. Sure enough we see here that the slightest move away from the bonds with the absolute lowest risk of return of principal results in huge jumps in the cost of capital. And if the issuer of that bond is downgraded to a higher risk, their bonds will take a beating. Each beating amounts to a reduction in the open Market price paid for the bond — which means that the investor who bought at or near par value is now considered likely to receive less of his principal back and most probably will take a “haircut” on both principal and interest.

The obvious solution is to remove mortgage bonds from the bond Market through whatever means are necessary and to show the world that such bogus bonds will not be tolerated in the U.S. Or anywhere else. Yet we continue to kick the can down the road. Not only have we failed to give recognition to what world bankers have understood for four years — that mortgage bonds are worthless — we compound the problem by having government entities sell these “securities” under circumstances that ought to land any issuer or broker in jail.

The U.S. Government and the U.S. treasury have become co-conspirators in the largest economic crime in human history and to add insult to injury they think we are all too stupid to see it. Francois Hollander as the new president of France stands as living testimony that the people will neither be apathetic nor stupid on the issue of the Banks and finance. As leader of the socialist party, the election if this marginalised candidate sent Sarkozy packing for Hollande’s arrival on May 16, 2012, which is less time than the ordinary eviction takes in the United States.

Pretending the mortgage bonds have value is hurting us. Failing to get restitution to the victims of this fraud is hurting us even worse because it is retarding our efforts at economic recovery. And the failure of all three branches of government to assure that this fraud will end, that stolen property and money will be returned, and that criminal perpetrators will go to jail is perpetuating a widening income inequality that often presages social upheaval. If we keep going like this, the United States of America might become a confederation of regions. China will become the next bully on the block and we will all be learning mandarin whether we want to or not.

How to Play the Bond Market Now

Many pros are bracing for higher interest rates but are willing to shoulder some risk of defaults

By MICHAEL A. POLLOCK

Bond investors, pick your poison.

Interest rates are pitifully low for old standbys like Treasurys and highly rated corporate bonds. But the risk factor increases so rapidly the more one tries to reach for higher returns that it is hard these days to know how to allocate fixed-income dollars. Before investing, one has to carefully weigh and compare risks including rising rates, possible defaults, currency swings and liquidity.

To get the best balance of risk and return, the answer may be mixing various types of taxable and municipal bonds for maximum diversification.

In the current climate, many pros also suggest that investors say yes to moderate credit risk but limit their exposure to an eventual rise in rates.

Here’s how to strike a good balance between risk and reward in today’s bond market:

Know the two basic types of bond risk and how those risks compare

Many people mistakenly believe bonds are entirely safe. Actually, bondholders continually face two major threats to the value of their investments: interest-rate risk and credit risk.

The first stems from expectations that stronger economic activity will fan inflation, eroding returns on securities that pay fixed rates of interest—as most bonds do. Such worries can spark selling. And as prices fall, that pushes up yields, which move the opposite way. You might not be affected if you hold individual bonds and don’t sell before maturity, although rising yields do entail an opportunity cost: You’re stuck with low rates while newer securities would offer better returns. But if you own a bond fund, the risk is greater: Funds don’t have a final maturity and lose value as long as rates are rising.

The other key concern, credit risk, results from fears that a bond issuer can’t make interest payments or repay principal at maturity. The trade-off is higher-risk issuers have to pay higher interest to lure bond buyers, boosting investors’ income if the bond doesn’t go bad.

Robert Hall, a fixed-income fund manager at Boston-based MFS Investment Management, is among those who say it makes sense now to base bond-investment decisions more on credit risk than on rate risk.

Most bond professionals believe rates are going to climb eventually. But “trying to anticipate rates has been a losing game,” says Mr. Hall. During the economic recovery so far, U.S. rates have remained near historic lows because of strong global demand for lower-risk investments and central-bank actions to keep rates low in order to spark growth.

Assessing an issuer’s credit risk is an easier exercise, by comparison. “You can get your hands around credit risk” by scrutinizing an issuer’s financial reports, Mr. Hall says.

Some investors have been taking more credit risk this year. According to fund tracker Morningstar Inc., MORN -0.66% high-yield funds—which hold below-investment-grade, or “junk,” bonds—attracted nearly $15 billion through March. Tax-exempt and emerging-markets funds, where credit risk also plays a big role, saw good inflows, too.

To temper rate risk, climb lower on the corporate credit ladder.

Corporate bonds are rated according to perceived default risk. And the more default risk a bond carries, the less it tends to trade in sync with U.S. Treasurys. That means a portfolio of lower-rated bonds isn’t as vulnerable to any broad rise in rates.

Currently, 10-year investment-grade corporate bonds yield around 3%, or about one percentage point over 10-year Treasurys. That yield premium doesn’t adequately compensate for the principal loss they could suffer if rates were to spike, says Mr. Hall of MFS.

He arrives at this conclusion by doing some basic bond math. This involves computing a bond’s so-called duration, or interest-rate sensitivity, which is determined by its yield and time left until maturation. For a highly rated 10-year corporate bond, the sensitivity measure is about 7. If you multiply 7 by a hypothetical percentage-point increase in yields, you get the amount by which the bond’s price is likely to fall in response.

So, for the 10-year corporate in question, if rates rose by one percentage point, the impact would be a 7% decline in the value of your investment before any interest is paid.

But if you move lower on the ratings ladder to double B, the top tier for high-yield, below-investment-grade bonds, you’ll get around 6% to 7% in yield and a rate sensitivity around 4. If yields rose one percentage point, such bonds might still have a positive return after interest.

Another reason to own lower-rated corporate issues is that default risk has been falling, says Sabur Moini, a high-yield bond manager at Payden & Rygel, Los Angeles. As more investors have warmed to lower-rated bonds, their issuers “have done a very good job at reducing debt, keeping costs low and building up cash balances,” he says.

Mix in some municipals for possible tax savings.

Last year, muni prices plummeted as investors fled the sector amid fears of surging defaults by financially strapped local governments. Now, although prices have recovered somewhat, munis still offer very good value, says Dan Genter, who heads RNC Genter Capital Management in Los Angeles.

The interest that munis pay is exempt from federal income tax, and generally also from state tax in the state of issuance, so munis historically have yielded only about three-fourths as much as taxable Treasurys. But in an unusual situation, munis now yield about the same as Treasurys. That makes them cheap—not only to people in the top tax bracket, but to everyone, says Mr. Genter.

At around 2.5%, the current yield of top-quality, intermediate-maturity munis is the after-tax equivalent of nearly 4% on a taxable bond for an investor with a 33% marginal federal tax rate. The after-tax equivalent could be higher if federal tax rates increase next year, as scheduled under current law.

As muni investors have been focusing more on credit risk, the market has been trading less in sync with Treasurys. That means munis other than those with long maturities could offer some protection against any broad rise in Treasury yields, says John Miller, co-head of global fixed income at Chicago-based Nuveen Asset Management.

Illustrating the divergence, Nuveen All-American Municipal Bond returned 5.1% in the first four months of 2012, even after Treasury rates blipped higher in March. In contrast, the iShares Barclays 7-10 Year Treasury IEF -0.02% ETF returned just 0.6%, according to Morningstar.

Own emerging-markets bonds for yield and diversification.

Bonds of emerging-markets nations such as Brazil and Malaysia have yields five percentage points or more above those of government bonds in developed countries. And owning such bonds essentially means you are lending money to governments that are in a stronger position to repay it than governments of many developed countries, says Robert Stewart, a managing director and emerging-markets specialist at J.P. Morgan Funds in London.

The chief downside to these bonds is their volatility. These nations may have stronger growth prospects and smaller debt burdens than the U.S., for example. But at times of financial uncertainty, investors tend to rush back to the perceived safety of U.S. Treasurys.

Last September, as Europe’s financial woes prompted a flight to safety, the average emerging-markets bond fund tracked by Morningstar posted a negative 7.5% return for the month.

The answer for many investors is to add a modest helping of emerging-markets bonds to your plate—perhaps around 5% to 10% of your overall bond allocation, says Mr. Stewart.

Volatility-averse investors should choose a fund that invests mostly in U.S. dollar-denominated bonds because in uncertain times, bonds denominated in local currencies may be hurt more by flight to safety than those issued in U.S. dollars.

For instance, about 90% of the bonds owned by TCW Emerging Markets Income are denominated in dollars. The fund, which yields 6.5%, has large holdings of bonds issued in Brazil, Mexico and Russia.

To simplify things, consider funds with a diverse mix of securities.

Because institutional players dominate the credit markets, people with less money to invest who want credit exposure are usually better off owning mutual funds than individual bonds. Funds offer much better liquidity than individual corporate bonds, meaning that it is easier to buy and sell a position.

You could get moderate credit exposure through a fund in Morningstar’s multisector bond-fund grouping. Such funds invest in a mix of U.S. government, corporate and high-yield securities and periodically adjust holdings based on market conditions and manager expectations. Multisector funds also may have some holdings of non-U.S. bonds.

Among strongly performing multisector funds, Loomis Sayles Bond recently had about 60% of its holdings in corporate debt securities for an average portfolio credit rating of double-B and a moderate interest-rate sensitivity of 5.5. The fund also had about a third of its portfolio in non-U.S. securities. Over the 10 years through April, it ranks in the top 6% of Morningstar’s multisector group, with an average annual total return of 10%.

Michael Collins, who oversees multisector fund strategies at Prudential Investments, believes it is unclear whether U.S. rates will rise significantly in the near future. Still, in the funds he helps manage, Mr. Collins has been loading up on high-yield bonds because of the cushion they can provide against rising rates. Says Mr. Collins, “High-quality bonds don’t pay much, and you potentially have a lot of downside there.”

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