CHARLESTON, W.Va. -- As many people know, interest rates are at historic lows, and have been for several years.
That's great news if you want to borrow money to buy a car, or take out a home mortgage.
But for retirees who count on bond income to cover the their daily living expenses, it's a whole different story.
And yet, folks who own a piece of the Pimco Total Return bond fund, an anchor of many 401-k plans, earned more than 10 percent on that investment last year.
How is that possible?
As Ed Stike, senior vice president at RBC Wealth Management, says, it's all about relative movement of interest rates.
"I think what happened in 2012 is exactly what happened in 2011 and 2010 -- interest rates finished the year below what they were they were the year before," said Stike.
"When yields [interest rates] go down, the value of the bond goes up. So if you bought a bond in January and held it in December, not only did you get the interest on the bond but the $100 bond is probably worth $102."
Bond funds work the same way. Prices go up when interest rates fall, and they drop when interest rates rise.
The general barometer for tracking bond yield is the 10-year U.S. Treasury note rate, Stike said. Last year it fell from an already anemic 1.97 percent in January to 1.78 percent in December.
"But the bonds that did well last year were corporate bonds, not only high grade but what we call lesser quality or high yield," better known as junk bonds.
"For example, a [junk bond] mutual fund was up 14 percent," he said. "Investors who had high-yield or junk bunds last year did even better than stocks. You had mid-teen returns."
Ironically, consumer demand for higher-yielding bonds has helped drive those interest rates down, Stike said. It's simply a matter of supply and demand.
"What you see is investors have a truly insatiable demand for yield now. There's so much demand for yield that it drives rates down. When companies issue debt they don't have to issue it at 10 percent. They can issue it at 7 percent and people will buy it.
"Everyone with money in the bank -- retirees -- they're dying for yield and they have bee for the last several years. So if they see 7 percent, they go out and get it.
"What does that mean? Nothing if everything goes smoothly. The default rate for high-yield bonds has fallen below 2 percent, which is historically low."