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Should bond funds replace low-yielding CDs in your portfolio?

By Sheyna Steiner · Bankrate.com
Thursday, May 13, 2010
Posted: 2 pm ET

Savers searching for yield and soured on low CD rates sometimes choose to park their money in a bond fund. More risky than CDs, bond funds can offer improved yields but without the safety of the FDIC guarantee to principal.

"There is always a downside -- Coca-Cola or McDonald's is not as safe as the government. The CD is guaranteed by the government, a bond fund isn't," says Donald Cummings, Jr., managing partner at Blue Haven Capital, in Geneva, Ill.

"If someone wants to take a little bit of principal risk and needs more yield and income, a bond fund, or bond ETF is more appropriate," he says.

But not just any bond fund: Do your homework if you're considering bond funds over CDs. It's important to remember that if rates go up, you can lose principal whereas a CD is as close to a sure-thing as you can get.

"The current assessment is that late third quarter or early fourth, the Fed may move interest rates up. So you would have to stay with a short-term bond fund and maybe even balance that out with a Treasury inflation protected securities bond fund," says Robert Laura, partner at Synergos Financial, in Howell, Mich.

"That would react positively to interest rate changes. There are also some bond funds called floating rate that will adjust with interest rates going up, and you want to make sure you're in a senior floating rate bond fund because it will hold more senior or higher-quality debt securities that will change as interest rates change," says Laura.

Do you think it's a risk worth taking or are you sticking with CDs?

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3 Comments
Sheyna Steiner
May 28, 2010 at 10:11 am

Very interesting point. Sorry about the delay in getting your comment up on the site, the learning curve in using our new blogging software is not very steep but apparently hard enough for me.

Barak Volner
May 16, 2010 at 10:48 pm

Looks like popularity states " no interest rate hike," as the "Bears" put it. Seems as if we will stick to near zero point interst rates as the $1 trillion loan to Europe keeps the Euro breathing.