High-yield
When the economy heads south, high-yield bonds -- sometimes referred to as junk bonds -- can be enticing. It's easy to see how an investor could gravitate toward a struggling Ford Motor Co. that's scrounging for money by issuing bonds paying nearly 10 percent.

Jayme Wiggins, a certified financial analyst at Intrepid Capital Funds, manages the high-yield Intrepid Income Fund. He says that a year ago he couldn't find much worth buying because the yield difference between Treasuries and non-investment grade corporate bonds was maybe 250 basis points. Thanks to tough times, Wiggins says he's now finding spreads in excess of 700 basis points.

"You're looking at double digit yields on high-yield bonds," says Wiggins, "but you have to be very careful about what you buy. We're emphasizing higher quality credits that have gotten brought down with everything else, but we know their balance sheets are good enough to weather a recession.

"In the last seven to 10 years, the return of the high-yield market has actually approximated equity-type returns but with about half the volatility of the average equity. Even if a bond's price declines by 10 percent, if it's paying an 8 percent coupon -- which is reasonable for a high-yield issuer -- over the course of a year it's only down 2 percent because you're accruing that coupon. Unless an equity is paying an 8 percent dividend, and most of them aren't, it's hard to outrun a high-yield coupon. I'm not saying high-yield is better than equities, but I think it's a valuable diversifier."

Bonds for $1,000
Individual bonds can be extremely expensive for individuals with moderate portfolios. Bond funds and bond exchange-traded funds are a way around that, although you'll probably get somewhat less return.

One way to buy individual corporate bonds cheaply is through a product called InterNotes. They're primary issue, investment-grade corporate and government agency bonds made available only to individual investors. Each bond sells at par, $1,000, the minimum investment, and they can be purchased in increments of $1,000. The bonds are issued weekly and are typically available for purchase for five business days. You can buy them through most brokerages. Tom Ricketts, chief executive officer at Incapital, the company that offers InterNotes, says he hasn't seen the spread between Treasuries and corporates this large in a decade.

"The reason corporate spreads are out is not because anyone thinks GE has any risk of default, it's just because fewer dollars are bidding for the same number of bonds. So spreads move out and that's when you should be buying. It's a temporary thing. The institutional markets control the pricing for bonds and when their liquidity dries up a bit, when they don't have as much cash, then corporate spreads balloon.

Definitions

• Coupon -- The interest rate on a bond. It's expressed as an annual percentage of the face value. A bond that pays 6 percent interest has a 6 percent coupon. See the Guide's Glossary for a further explanation of these terms.

"There's a great relative value in corporates that will last maybe for six months and as market conditions improve, and liquidity improves, those yields premiums come back in so you get less relative value to Treasuries."

Maintain an appropriate allocation of bonds and you won't have to worry about timing the market. But if you want to increase your bond allocation during certain economic cycles, do your homework and maybe you'll buy and sell ahead of the crowd.