Newspaper article The Christian Science Monitor

Fixed-Income Investors Find a Happy Medium ; A Weakening Economy Could Make Intermediate Bond Funds More Attractive

Newspaper article The Christian Science Monitor

Fixed-Income Investors Find a Happy Medium ; A Weakening Economy Could Make Intermediate Bond Funds More Attractive

Article excerpt

With inflationary forces waning and interest rates starting to ease, risk-averse investors face a quandary.

Do they keep most of their cash parked in money-market funds, or do they latch onto the resurgent bond market in hopes of gaining modestly higher returns? With many money- market funds yielding close to 5 percent, it's tempting to stand pat, says Eric Jacobson a bond analyst for Morningstar in Chicago. "Yields on high-grade bonds with longer maturities don't look all that rewarding by comparison," he says.

Since the yield on 10-year Treasury bonds reached a four-year high of 5.25 percent in late June, it has slipped to about 4.7 percent. By contrast, short-term interest rates, including money- market yields, have remained relatively firm over the summer.

A decline in short-term interest rates looms if forecasts of a weakening economy over the next six to 12 months hold true, some bond-market analysts say. And that would call for a change in strategy. "It's a good time for small investors to consider lengthening the maturity structure of their fixed-income portfolios," says Ken Volpert, a bond manager with Vanguard Group in Valley Forge, Pa. In other words: Consider longer-term investments.

The Federal Reserve has probably finished raising short-term interest rates, Mr. Volpert says, and while it is too early to forecast when the Fed will begin to lower them, mid-2007 is a good bet. In that case, it makes sense for investors to give up some immediate benefits in money-market funds and lock in the better durability of yield and income that bonds provide.

"The reinvestment risk on money-fund yields is currently huge," says Steve Bohlin, a bond-fund manager with Thornburg Investment Management in Santa Fe, N.M., so don't be complacent. He points to the year 2000, before the last recession, when money-market funds paid about 6 percent. …

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