As Dow soars, don't give up on bonds just yet
Long term, bonds still make sense in any portfolio. Here's what to consider now.
from the May 21, 2007 edition
Page 2 of 4
These are steps that may benefit you, even if you're having difficulty knowing where interest rates are headed next.
In recent months, economists and market strategists have struggled to read the tea leaves on that very point.
Some worry about recession. They point to a weak housing market and the burden of rising food and gasoline prices on consumers. These have been the bond bulls.
Others say the economy's solid fundamentals – everything from rising exports to low unemployment – make a recession unlikely. Also at the opposite extreme from the bond bulls are those who worry that inflation won't soon be tamed. Inflation is the worst enemy for traditional bonds, because it eats away at the value of a bond's promised stream of income.
"That seems to be the big question: Where does inflation go, where does the economy go, where does the Fed go?" says Scott Berry, a senior bond-fund analyst at Morningstar, a Chicago rating firm. "There's not a lot of agreement."
As of last week, with concern about recession fading, investors mostly gave up hope that the Federal Reserve would cut interest rates to stimulate the economy. Rate cuts tend to buoy bond prices. Yet the Fed also may not need to raise rates, either. The latest gauge of consumer prices suggests that inflation may be cooling a bit.
This market consensus could change, pushing bonds in either direction. In a survey this month, the median forecast among economists is that the 10-year Treasury note will yield 4.9 percent by December, up a bit from 4.8 percent today. The highest five forecasts in the survey averaged 5.24 percent, while the lowest five averaged 4.28.
Against this backdrop, what can fixed-income investors do to position themselves? Here's what some bond analysts and financial advisers recommend:
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