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Strategies to Avoid Bond-Market 'Bubble'

Playing your preferences

Bond funds can help simplify the process of deciding exposure to various bond classes, as many of them are built with a specific purpose in mind.

For those chasing higher returns, there are various bond types to consider and funds built around them. Those in the high-yield category often target the bonds of below-investment-grade companies. These bonds can, in a best-case scenario, offer good returns. The downside is that they have the greatest likelihood of default.

Notable high-yield bond funds include John Hancock High-Yield (JHHBX), which rose 55% last year, and BlackRock High Income (MAHIX), which climbed 34%.

Concerned about rising interest rates or convinced the U.S. economy is moving in the wrong direction?

Funds that pick their bonds from global offerings, such as GMO's family of emerging country funds, can reduce exposure to domestic interest rates and currency concerns.

Concerns about rising taxes often lead investors to municipal bonds. Several funds target this market, including Barclays Capital Municipal Bond (TFI), iShares S&P National AMT-Free Municipal Bond Fund (MUB) and the Pimco Unconstrained Bond Fund (PFIUX).

Those worried about the impact state and local economic woes may have on munis will want to seek out broad-based funds that spread investments across multiple states and have a mix of short-, intermediate- and long-duration maturities.

Given the needed commitment in money and time, though, Philips would caution against investors going it alone. Bond funds have researchers on staff and buy cheaper through economies of scale.

"Unless you have an extraordinarily large pool of money that you are putting to work in a laddered portfolio, it can be very difficult to get a properly diversified portfolio," Philips says.

-- Reported by Joe Mont in Boston.

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