What the bond exodus means for you

Everyone's ditching bonds and their pitiful yields. So what should you do with your portfolio?

By Kim Peterson Dec 16, 2010 2:52PM
Smart ways to start investing © Creatas / PictureQuest For two years now, investors couldn't get enough of bonds, seeking them out as a haven from the ups and downs of stocks.

But that's all changed. Now investors are fleeing bonds, shaking their heads at 2% returns. It's time to go for the big bucks, apparently. About $400 million flowed out of taxable bond funds (on a net basis) during the first week of December, MarketWatch reports.

Some of that might be year-end profit taking, but bonds are clearly falling out of favor. OK, so what does that mean for your portfolios? Don't follow the trend and ditch bonds -- they should still be a big part of your investing strategy.Fortune has some tips for how to manage the bond exodus.

The key now is to be really careful about which bonds you step into. Rates are so low now that you should avoid long-term Treasurys, writes Shawn Tully. Rates are sure to rise, and that will annihilate the prices of long-term bonds. Post continues after video:
Tully suggests investors look at bonds with short maturities. New areas of fixed-income investing are also good to check out. He offers four categories for investors:

High-yield bonds that are intermediate-term. A good bond in this category has a yield of about 6 percentage points over Treasurys. He suggests BlackRock's iShares iBoxx High Yield Corporate Bond Fund (HYG), which has an 8% yield and a five-year average maturity.

Emerging-market bonds. Buy the debt of Brazil and Indonesia. Those countries aren't up to their eyeballs in debt yet, unlike some other governments we know. Some of them are already ahead on the recovery, so there's less chance that their rates will rise dramatically, Tully writes. He likes Pimco's Emerging Local Bond Fund (PELAX).

Floating-rate bank loans. Again, another way to avoid the damage from interest rates going up. Banks lend money to companies, and the funds buy up those loans. The loans are generally priced relative to some benchmark rate that changes over time, which means they reset regularly. Tully suggests BlackRock's Floating Rate Income Trust (BGT), which has a 5.6% yield.

Go-anywhere funds. These are the ultimate in freestyling funds, with managers who are allowed to search the world for opportunities. BlackRock has the Strategic Income Opportunities Fund (BASIX), and Pimco has the Unconstrained Bond Fund (PUBAX), Tully writes.
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