Where can investors expect to make money in the bond market during 2006?
Mortgage-backed securities, such as GNMA (“Ginnie Mae”) mutual funds. These securities became cheaper during 2005 and now offer relatively high yields. Vanguard GNMA Fund, for example, recently was yielding 4.7 percent
Emerging markets bonds funds. Analysts are encouraged by positive trends in countries such as Brazil and Russia.
Municipal bonds These are attractive now for investors in high tax brackets because their yields compare well with yields on taxable bonds. What’s more, tax receipts are up for most state and local governments, which now have a sizable budget surplus, so these bonds are well-secured.
On the other hand, junk bonds, Treasury Inflation-Protected Securities (TIPS), and European bonds seem risky. They’ve all done well but they don’t look as appealing now as they did a year ago. Junk bonds might be hurt by corporate defaults in a slowing economy, TIPS would fall if inflation seems less threatening, and tightening by the European Central Bank could raise interest rates there, weakening European issues.
