Bond-Fund Managers Take on More Risk

Besides staying away from junk bonds, Taubes also avoided non-agency mortgages, which he had often held in the past. He correctly decided that mortgage markets would struggle because consumers had taken on too much debt.

Taubes became interested in junk bonds after they crashed last year. He says the market was pricing junk bonds as if there would be a 20% annual default rate. So far, the default rate has reached about 7%, and Pioneer has profited from the recent rebound in junk prices.

Another flexible choice is Artio Total Return Bond, which returned 0.5% in 2008, outdoing the average intermediate-term fund by 5.2 percentage points. Unlike many competitors that focus exclusively on U.S. markets, Artio is free to range around the globe, typically putting 20% of assets abroad. Last year a stake in Japan helped results. As investors sought safety, they looked to Tokyo. The yen rose, raising the value of Japanese bonds for U.S. investors.

Artio also avoided some damage last year by emphasizing high-quality issues, which weathered the storm. The fund held big stakes in Treasuries and had 71% of assets in securities that carried Standard & Poor's highest rating of AAA.

Lately, Artio portfolio managers Richard Pell and Donald Quigley have begun changing gears. Figuring that the economy is stabilizing, they have shifted away from the safety of low-yielding Treasuries and moved to corporate bonds. The fund now has no Treasuries and 45% of assets in corporate bonds. While 10-year Treasuries yield a skimpy 3.5%, it's possible to obtain yields of more than 6% from investment-grade corporate issues.