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Where To Get Higher Yields

- Alan Lavine and Gail Liberman

Look for higher yields? Who isnšt now that money market fund rates are near zero.

Be careful about investing in long term bonds. Bond prices move in opposite directions to interest rates. So if interest rates rise when the economy gets stronger, bond prices will fall.

Chirs Bebberet, chief of fixed income investing with Madison Investment Advisors, Madison, WI is concerned about the deepening risks in the bond market.

"We believe that the best opportunity for outperformance over the next year will be in protecting the downside,"he says. "Risk is our main concern with interest rates at historic lows."

Bebberet says that the bond investment climate is perplexing. There are conflicting signals about the economy. There is evidence of an economic recovery, with improved corporate spending and a recent stock market rally. On the negative side, unemployment is still high and there are still fears about deflation, which are falling prices.

Although the recent cut in interest rates by the Federal Reserve was good for bond prices, he says it could signal the end of the bull market in bonds. The potential for loss has become so great that Bebberet is taking a defensive position in the $6 billion his firm has invested in bonds. He is sticking with shorter term bonds.

The reasons: There is a massive amount of monetary and fiscal stimulus in the economy. In the past when the economy has recovered long -term interest rates increase 2 percentage points to 5 percentage points in yield.

The bond manager sees 10-year Treasury notes rising to the 5 percent yield level. So keep some money in cash to invest later on. But if you buy today and bonds go to 5 percent, the total return on your investment will be ­9 percent.

George Strickland, manager of the Thornberg Investment Management, Santa Fe, NM, says the best way to play the bond market is to cover all the bases. It is best to ladder a bond portfolio. A laddered bond portfolio is typically built from the bottom up, beginning with short term bonds that mature in 1,2,3 and 4 years at the lower level and 8 to 10 years at the upper level. Bonds mature each year, and as this occurs, the resulting cash is reinvested in new higher yield bonds. For more information on how to ladder a bond portfolio go to www. Thornberg.com.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).

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