Mapping Out a Course for Bonds

November was a crazy month for bond prices. They soared on the Treasury's Oct. 31 announcement that it would stop issuing the 30-year bond, and they then endured a sharp selloff that pushed yields well above the levels from which they started their journey.

Where do yields go from here, and what kind of returns can investors expect from bonds now? Let's look at two major factors that pushed yields up: indications that the economy is better than most had expected, and bond investors' mind-set.

Consumer spending isn't shaping up to be the disaster that many investors had feared after Sept. 11. Auto companies began by offering 0% financing, which spurred a jump in sales. Although these sales aren't particularly profitable for Ford (F Quote), General Motors (GM Quote) and DaimlerChrysler (DCX Quote), they indicated that consumers were willing to spend at certain price levels.

Questions about declining air travel's impact on the economy are also being partly answered. While some people are taking alternative means of transportation, others who aren't traveling for pleasure seem to be spending some of that savings. This bears out the motto of one of my mentors: If American consumers have it, they'll spend it. So the impact of reduced air travel on gross domestic product looks like it'll be less than the negative 0.5% to 1% that I'd expected. ...