Bonds continue bumpy ride.

Investors contend with another seesaw market

Events--from the Fed chairman's comments to the air strikes in Yugoslavia--have rocked the bond market. The most noticeable spike in the first quarter occurred on February 14 when Alan Greenspan testified before Congress that the economy was starting to overheat and raised concerns about rising inflation and interest rates. The news roiled the bond market, pushing the price of the bell-wether 30-year Treasury bond down more than 1 point, or over $10 per $1,000 bond, and boosting the yield--which moves inversely to the bond's price--above 5.5% for the first time since August 20.

That's not all. The bond market dragged down the stock market, since higher bond rates are anathema for stocks. The Dow Jones slid 144.75, or 1.52%, to 9,399.67, while the S&P fell 17.80, or 1.4%, to 1,253.41. The tech-driven Nasdaq Composite Index dropped 36.97, or 1.56%, to 2,339.38.

The chairman's comments--coupled with the rise of the National Association of Purchasing Managers' Manufacturing Index to its highest level in more than 10 months--raised the specter that the days of a low-inflation economy were marked. As a result, bond prices continued to drop as their yields rose as high as 5.70%.

The bond market held its collective breath while it awaited the March 5 employment report from the Labor Department. The news that average hourly earnings--a measure of labor costs--and the jobless rate had risen a mere 0.1% were just the right tonic. Optimistic that inflation was in check, U.S. bonds produced their biggest gain in five months. The 30-year Treasury rose 1 3/8 points, or $13.75 per $1,000 bond, and pushed the yield down 10 basis points to 5.60%. The Dow reacted just as dramatically, advancing 286.68 points to a record-smashing 9,736.08, its highest point since January 8. By mid April--after spending weeks worrying about inflation--the long bond traded at a yield in the 5.43% range.

Investors can expect to see more tumult in the coming months. What does this mean for you?

"Now is a prime buying opportunity for investors," says Craig Simmons, chief investment strategist and head of fixed income for Ashland Global Securities, a New York institutional investment firm. "The spreads between Treasuries and corporate bonds have narrowed, and the yields are much better than stocks, which average 2.6%."

"We breathed a sigh of relief when the market rallied," he maintains. "But we can expect continued volatility in the bond market for months to come." Mark D. Lay, a head of MDL Capital Management, an institutional money manager in Pittsburgh, says you should scoop up T-bonds now. To keep inflation at bay, he expects the Fed to cut rates before the end of the year, bringing the long-term bond yield in the 4.75% range. He believes that moderate investors should shift the allocation of assets from 40% in bonds to 45%. "If I were an investor," says Lay, "I would buy bonds and just hold them."

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