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Mutual Fund Commentary

The Fed’s decision to keep rates unchanged reduced market uncertainty to a certain extent, which in turn boosted investor sentiment. No immediate rate hike chances drew investors more towards purchasing bond securities like Treasury notes. Rising demand of treasury notes raised their prices, which eventually weighed on their yields. Additionally, worries over weak economic growth also weighed on Treasury yields.

Given the decline in yields in Treasury notes, dividend seeking investors might think of focusing on investing in mutual funds with strong yields.

Rates Unchanged in September

At its two-day policy meeting last week, the Fed decided to keep key interest rates unchanged. The FOMC in its policy statements said that argument for a rate hike “has strengthened.” However, the central bank preferred to wait for “further evidence of continued progress” before raising rates.

Although, the Fed hinted that interest rates might be increased by this year end, a liftoff is unlikely before the FOMC’s policy meeting in December. Additionally, Fed Chairwoman Janet Yellen’s comments fueled December rate hike chances even more. Yellen said, "conditions in the labor market have strengthened” and although “inflation remains low” it is expected to reach the 2% target in coming months.

Her statements also indicated that the majority of the policymakers are rooting for a December rate increase. Nevertheless, no rate hike this month strengthened investments in safe bets like Treasury notes, which impacted its yields negatively.

Treasury Yields Down to 1.56%

Additionally, Deutsche Bank AG’s (DB - Free Report) shares are down more than 50% for the year as the bank faces a $14 billion fine from the U.S. Justice Department. It is expected that the recent problems in Germany’s biggest bank might weigh on treasury yields which could negatively impact Fed’s December rate hike prospects.

Investment in Treasury notes rose following the Fed’s decision to keep interest rates unchanged and Deutsche bank woes. The yield on the 10-year Treasury note fell to 1.56% for the first time since September 8 following a rapid growth in its demand. Additionally, yield on the 30-year Treasury note declined to 2.27%.

Even the global bond market seemed to lack sheen. The yield on 10-year Japan bond fell to 0.09%, while the yield on the 10-year German bond was down at 0.1%.

Economic Growth Concerns Prevail

Even the key economic data remained sluggish. According to the Institute for Supply Management, its manufacturing index dropped from 52.6 in July to 49.4 in August. Also, the ISM Services Index decreased from 55.5% in July to 51.4% in August. Even job data last month was quite disappointing.

Retail sales fell in August, raising caution over consumers’ ability to drive economic growth this year. Further, decline in production of nondurable goods weighed on industrial output, which fell 0.4% in August following an increase of 0.6% in July. 

Buy 4 Mutual Funds with High Yields

This backdrop calls for investors’ attention to four mutual funds that have yields above 6% and also boast a Zacks Mutual Fund Rank #1 (Strong Buy). Moreover, these funds have impressive year-to-date (YTD), one-year and three-year annualized returns. They also have minimum initial investment within $5000 and possess low expense ratios.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

Westcore Flexible Income Retail (WTLTX - Free Report) seeks return for the long run by investing mainly in bonds. WTLTX invests the bulk of its assets in income-generating securities. The fund also invests nearly one-fifth of its assets in dividend paying equity securities and also owns junk bonds.

WTLTX has an annual expense ratio of 0.85%, lower than the category average of 1.06%. The fund has YTD, one-year and three-year annualized returns of 11.6%, 10% and 5.7%, respectively. Annual dividend yield of the fund is 8.2%.

AB High Income Advisor (AGDYX - Free Report) invests primarily in fixed income securities in not only developed countries but also in emerging markets. AGDYX invests both in corporate and sovereign bonds. The fund seeks high level of return through income growth and price appreciation.

AGDYX has an annual expense ratio of 0.58%, lower than the category average of 0.98%. The fund has YTD, one-year and three-year annualized returns of 12.9%, 10.2% and 5%, respectively. Annual dividend yield of the fund is 6.1%.

Oppenheimer Rochester High Yield Muni Y (ORNYX - Free Report) seeks current income exempted from federal tax. ACTDX invests the bulk portion of its assets in municipal securities which offer income exempted from federal and state income tax.

ORNYX has an annual expense ratio of 0.59%, lower than the category average of 0.94%. The fund has YTD, one-year and three-year annualized returns of 10.3%, 13.4% and 10.4%, respectively. Annual dividend yield of the fund is 6.1%.

Consulting Group International Fixed Income (TIFUX - Free Report) invests the lion’s share of its assets in fixed-income securities of companies located in foreign countries. TIFUX invests in more than three different nations along with the U.S. The fund may also invest in emerging markets. It is a non-diversified mutual fund.

TIFUX has an annual expense ratio of 0.87%, lower than the category average of 0.94%. The fund has YTD, one-year and three-year annualized returns of 8.2%, 9.1% and 5.4%, respectively. Annual dividend yield of the fund is 6.4%.

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