Bond yields can entice during market volatility
By Laura Bruce • Bankrate.com

Yields on the five-year and 10-year Treasury bonds went on a tear in June and spiked to their highest levels since mid-2006. After languishing below the 5 percent mark for 11 months, the yields climbed to 5.18 percent and 5.26 percent, respectively.

Bond yields and bond prices move in opposite directions; as bond prices fall on economic or market news, the yields rise.

For fixed-income fans that situation can be rather enticing. Paying less for a bond and getting a higher yield makes it seem like the right time to jump in and buy. Sometimes it turns out to be a smart move and sometimes you find a better option was available. The bond market is huge and it can be confusing and risky. Stay within some boundaries and you can build an asset that will cushion your portfolio during times of stock market volatility.

"When we go out there we buy only really safe stuff -- U.S. Treasuries, CDs, and agencies," says Herb Hopwood, Certified Financial Planner and president of Hopwood Financial Services in Great Falls, Va.

"In the investment-grade corporate arena you don't get paid in most cases for the risk you're taking and the risk would be default," he says. "Even though it's investment-grade, if there's a private equity fund that comes along and takes them private, it goes from investment grade to junk overnight. Most of the time you're not getting even a quarter-percent more yield on a corporate investment grade than you are on a broker-sold CD."

5-year Treasury bond yield

Government-sponsored enterprises
The agencies Hopwood refers to are debt obligations of various U.S. government agencies or government-sponsored enterprises, or GSEs, such as Federal Home Loan Bank. He says buying them can make sense in today's environment.

"Callable agencies can be bought from a broker, and I strongly recommend new issues," Hopwood says. "That way you get the middleman out of it and you get a much better yield after expenses. Today there was a 10-year Federal Farm Credit that was at 6 percent and was noncallable for five years. That's huge. We haven't seen 6 percent paper until the last week and a half."

Unlike treasuries, which have an explicit government guarantee, GSEs and agencies have an implicit guarantee; their safety and soundness is highly regulated. They usually pay a slightly higher yield than treasuries because of the additional risk. Fidelity's Web site says it sells GSEs in minimum denominations of $5,000, with subsequent investments in increments of $1,000. Other brokers may have different minimums.

Just as with treasuries, the income from some GSEs is exempt from state or local taxes. Federal Farm Credit, Federal Home Loan Bank, Student Loan Marketing Association (Sallie Mae) and Tennessee Valley Authority are the major governmental agencies that are in the tax-exempt category. Federal Home Loan Mortgage (Freddie Mac), Federal National Mortgage Association (Fannie Mae) and Government National Mortgage Association (Ginnie Mae) are not.