Loomis Sayles, FPA Prep for Rate Increase

NEW YORK (TheStreet) -- The managers of FPA New Income(FPNIX Quote) and Loomis Sayles Bond(LSBRX Quote) follow different strategies.

FPA has been one of the most conservative bond funds lately, while Loomis Sayles takes on substantial risk. But the veteran managers agree about one thing: At a time when most money-market funds yield around 0.1%, interest rates are bound to rise in the next several years. To prepare for the inevitable, both funds are adjusting their portfolios.

The caution of these experienced professionals should serve as a warning for investors. To avoid trouble, bond holders should carefully diversify their portfolios or buy conservative funds that have delivered decent results in periods of rising rates.

When rates rise, most bond funds sink. The impact of rising rates became clear during the first six months of this year when yields on 10-year Treasuries rose from 2.46% to 3.24%. That caused prices of bonds to drop, and long government funds lost 13.8% of their value.

Despite such warning signs, investors have been seeking safety by pouring into bond funds. So far this year, inflows to bond funds have totaled $219 billion, according to the Investment Company Institute. That is about equal to the inflows for the previous four years combined.

The rush to bonds could be peaking just before the funds move into a period of little or no gains, says FPA portfolio manager Tom Atteberry. "People are fearful of stocks so they are going into bonds and driving the prices up to unsustainable levels," he says.