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Not all mortgage-backed bonds are poisonous. In fact, some are quite profitable.

More than a quarter of the

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Julius Baer Total Return Bond's assets are pass-through mortgage-backed securities. Unlike the so-called "subprime slime" roiling the market, these bonds are comprised of conventional mortgages and guaranteed by agencies like

Fannie Mae



Freddie Mac



The yield is generally lower on pass-throughs, because the quality of the asset is higher, but the mammoth market offers the advantage of liquidity. And the freedom to buy and sell bonds quickly is something that the highly flexible fund's co-manager Don Quigley relishes, especially now as Wall Street's largest investment banks are trapped holding subprime paper without a place to sell it.

"There is no price discovery right now. Nobody can find a price for these bonds and maybe nobody wants to," Quigley says in a recent TV interview. "Eventually, it will have to happen, but banks are reluctant to take that hit, which is why the news is coming out in dribs and drabs like we've been seeing at

Merrill Lynch


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Quigley believes that "eventually the problem will work itself out." He and co-manager Richard Pell are even looking at lower quality Alt.-A mortgage bonds, just in case the market "over-corrected."

In the meantime, the fund continues to outperform its benchmark, even as the bond market churns. Julius Baer Total Return Bond, which earned a five-star rating from


, is up 5.8% year to date, slightly over 2 percentage points better than the Lehman Aggregate Bond Index. The fund has returned an average of 5.2% annually over the past three years, 1.9% better than its benchmark.

Away from mortgages, on the corporate debt part of their portfolio, the fund managers have been nibbling away at -- believe it or not -- banks.

"We started buying money-center banks like


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Bank of America

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during the meltdown," says Quigley. "The banking system in its entirety is sound. Banks are regulated and the government won't let them get into too much trouble, but we are avoiding brokers."

Corporate debt makes up 13% of the fund's assets, while 7% of its assets is in Treasuries. Quigley expects Treasury yields to continue to decline even from their current low levels, and then move higher as foreign buyers demand higher compensation to offset the declining dollar. The benchmark 10-year Treasury is trading at 4.37%, flirting with its two year low of 4.27%.

"Eventually the foreign buyers will go on strike and demand higher yields," says Quigley. "That will happen, but not for a while."

Before joining, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.