The Best Ways to Invest in Bonds

What's a bond investor to do? The credit crunch that began in the subprime-mortgage niche has spread rapidly to investments that seemed undeniably safe just a year ago. The threat of rising defaults looms over everything from mortgage-backed securities to corporate debt. Even tax-free municipal debt looks like less of a sure thing as the financial well-being of bond insurers has come into doubt.

Meanwhile, yields on really safe investments are depressingly low. The average taxable money-market fund yielded a meager 2.3% in mid April, and ten-year Treasuries a criminally low 3.5%. These are not attractive choices.

Inflation is pinching from a third side. As measured by the consumer price index, inflation clocked in at an annual rate of 4.0% for the year through March. And it's only likely to accelerate given low interest rates and an impending injection of cash from the government's economic-stimulus package. If the economy responds strongly to the stimulus, investors and the Federal Reserve could turn their focus to inflation before the year is out. That could prompt a rise in both short- and long-term interest rates.