John Hancock Preferred Income Fund (HPI), iShares IBoxx $ Invest Grade Corp Bd Fd (LQD): Are Bonds Too Cheap?

Like bonds, preferred stock receives coupon payments ahead of equity holders. Like traditional equities, preferred securities hold a subordinate position to a company’s bonds.

The recent spike in interest rates has caused this fund to crash, sending its yield past 9%.

It’s understandable for investors to flee from fixed income in times of rising rates, but the yield on the John Hancock Preferred Income Fund (NYSE:HPI) is now 650 basis points better than the yield on the 10-Year Treasury Bond. Cash still pays nothing, so the John Hancock Preferred Income Fund (NYSE:HPI) may offer a great opportunity to income investors looking for yield.

The Foolish takeaway
The Federal Reserve may apply the brakes on its massive stimulus program as soon as next month. The possibility alone has shaken the confidence of the capital markets. Higher interest rates have resulted in lower bond prices over the past several weeks, and if rates are set to rise further, this trend may continue.

At the same time, it’s also possible that the Fed will not completely cut off the spigot, considering that unemployment is still painfully high and GDP growth is nothing to brag about. Should the Fed decide to continue quantitative easing, we’ll likely look back on the current environment as a buying opportunity for bonds.

Investors who need income, such as those in or nearing retirement, should continue to hold bonds and consider buying now that prices are at more advantageous levels.

The article Are Bonds Too Cheap? originally appeared on Fool.com and is written by Robert Ciura.

Robert Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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