Investing - Bond fund investors have done well so far this year. Bonds are long term IOUs issued by corporations or the government. They pay regular interest until maturity.

When interest rates fall, bond prices rise. Let's say you owned a bond that paid 10% in interest each year. If rates fell to 5%, yield hungry investors would bid up your bond's price. You'd make money not only by collecting interest, but also from the price appreciation on the bond itself.

But when interest rates rise, bond prices drop. If your bond yielded 5% and rates soared to 10%, you'd have to reduce your bond's price to attract buyers. If you're investing in individual bonds and keep them to maturity, you have no problem. But if you sell your bond or if you own shares of a bond fund, you'll lose money when interest rates rise.

Bond yields have been generally falling since September 1981, when the 10-year Treasury note yielded 15.84%. Bond funds can, indeed, lose money. The average government securities fund, for example, has fallen 0.8% this year, which isn't much. The worst 12 month period for the Lehman Aggregate bond index the past 30 years has been a 9.2% loss, recorded in March 1980. Worst 12 months for the S&P A 26.6% loss in September 2001.

Nevertheless, bond bear markets make up in length what they lack in depth. Bonds earned the nickname "certificates of confiscation" in the 1960s and 1970s when rates rose steadily and prices moved downward.

The yield on the 10-year T-note has been climbing slowly since 2003.  The 10-year T-note yield on average has been 1.4 percentage points higher than the three-month T-bill yield the past 30 years.


The average Money market fund now yields 3.95%, according to iMoneyNet, which tracks the funds. Some funds, such as Fidelity Cash Reserves and Vanguard Prime Money Market fund, yield 4.2% or more. Those yields will rise as the Federal Reserve nudges short-term interest rates higher.

Guaranteed investment contracts are like Certificate of Deposit investments offered within 401(k) savings plans, sometimes called stable value funds. GICs now yield 5% to 5.25%, according to T. Rowe Price.

The average one year Bank CD yields 3.48%, according to Bankrate.com.

The current iBond which is an inflation-adjusted Savings Bond, yields 6.73%.

High quality, dividend-paying stocks such as Bank of America (BAC), has a dividend yield of 4.4%.

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