In search of bond opportunities.

Investors should consider high-grade fixed-income securities 

Watching the performance of the bond market in 1999 was like bearing witness to a three-car collision. Your best hope, of course, was that you weren't one of the investors who got to view the wreckage from the passenger's seat.

U.S. Treasuries were battered worse, with the 30-year bond down 14% for the year. And most fixed-income players are not overly enthusiastic about the prospects for 2000. Says Vicki Fuller, senior vice president, Alliance Capital, Secaucus, New Jersey, in her outlook of the bond market for the coming year: "I'm not bullish on the Treasury market; I'm concerned about increases in interest rates."

Interest rate concerns and inflation fears continue to drive all markets, giving investors the jitters. However, as the year began, T-bonds rallied as the stock market continued its trademark volatility. For instance, in late January, many investors fled to safety by buying five-year and 10-year Treasuries as the stock market declined. On January 24, the tech-driven Nasdaq composite index slid 139.32 points, the fourth-worst point decline ever, to 4096.08, while the Dow Jones industrial average fell 243.54 points. Due to the bond shift, the bellwether 30-year Treasury rose 20/32, or $6.25 for a bond with a $1,000 face value, and its yield, which moves inversely to price, dropped to 6.64%. (Before the rebound, the yield had been as high as 6.75%.) By week's end, the yield of the 30-year bond stayed below that of the 10-year bond and five-year note--a development known as a yield inversion--and came close to falling below the two-year note.

The bond market hadn't seen such activity in a decade. The 30-year-bond should produce a stronger performance as the government repurchases Treasuries to reduce outstanding debt.

But fixed-income money managers think the best opportunities for bonds will come from the corporate sector. For example, two members of this year's BLACK ENTERPRISE Investment Roundtable, fixed-income strategists Frankie Hughes of Hughes Capital Management and Valerie Mosley Diamond of Wellington Management Co., have overweighted their portfolios with such "spread products" as corporate bonds and mortgage-backed securities. (See "This Bull Has Legs," this issue.)

So how can you capitalize on the bond market over the next few months? Alliance's Fuller believes that investors should look at international bonds, which were the best-performing category in 1999, and high-grade corporates. She urges investors to tread cautiously with high yield or "junk" bonds. She says: "Last year, we saw a number of defaults creep in."

She offers that investors will gain the greatest downside protection with bond funds "because they offer investors greater diversification and sector rotation" and convertibles, securities in which the issuing company gives you the right to swap bonds for common stock.

Consider such moves collision insurance.

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