If the U.S. economy is really headed for a recession, you'll want to take shelter in investments that are relatively safe and offer steady yields.

I've been predicting a rate cut since late last year. While those calls may have been premature, the bond market is clearly signaling that interest rates will fall going forward. Meanwhile, equities are getting clobbered amid a selloff in overseas markets and concerns about the subprime contagion here at home.

Federal Reserve

Chairman Ben Bernanke himself was quoted earlier this year as saying something to the effect that "the markets have had a pretty good run." Translation: asset prices need to correct.

What is an investor to do in this climate, particularly if the market turmoil has only just begun? The following general types of investments provide yield and are more likely to weather the recession/slowdown that former Fed chief Alan Greenspan has mentioned:

  • U.S. government bonds are the ultimate safe haven, since everyone expects Uncle Sam will still make good on his debts if the economy heads south.
  • Investment-grade corporate bonds can be considered nearly as safe as Treasuries, since well-established companies with large market shares are likely to hold up relatively well in an economic downturn. These bonds also pay more interest than Treasuries.
  • Utility and infrastructure stocks have earnings that are relatively steady because demand for their services is relatively inelastic.
  • Municipal bonds are somewhat vulnerable to a weakening economy since the local entities that issue them are dependent on tax revenues. Investors who want to be more conservative may want to consider insured munis, while those who are willing to bet on the continued strength of the jobs market could venture further afield.

The point is that investors should avoid risk. Some would argue that this should be the natural state for all investors at all times, but in recent years more and more investors have become increasingly comfortable with risk taking and price discovery because the economy seemed so resilient. That's fine as long as you don't discover that the price you paid was too high.

Below are a few of the top-rated funds in each of the areas I've highlighted.

Sam Patel, CFA, is the manager of mutual fund research for the TheStreet.com Ratings.

In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

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