During the credit crisis, Delaware had 20% of assets in Treasuries and government-backed agency securities, which helped cushion the portfolio. Today the figure has dropped to 3%. Manager Early says the outlook for government issues is deteriorating. "There will be a massive new supply of Treasuries this year in order to fund the deficit," he says. "Yields will need to rise in order to attract investors."

Another deft fund is Janus Flexible Bond ( JAFIX), which has returned 6.8% annually during the past 10 years, outdoing 83% of intermediate funds. During 2008, the fund had 70% of assets in government-backed issues, including Treasuries and mortgages. That enabled Janus to return 5.6% for the year, outperforming its average competitor by 10 percentage points. Since then the fund has shifted away from government securities, putting 70% of assets in junk and investment-grade corporate bonds.

At the height of the crisis, Janus had 40% of assets in high-quality mortgages. The issues looked attractive because they yielded 175 basis points more than Treasuries, Janus manager Gibson Smith says. Since then, the spread has narrowed to 25 basis points. Because the yields have become so slim, Janus no longer holds any mortgages, Smith says.

The markets have changed because the Federal Reserve purchased $1.25 trillion of mortgages. That pushed up prices and lowered yields. The tiny yields don't compensate investors for the risks in the mortgage market, Smith says. "At some point, the Federal Reserve will have to exit the market and begin selling mortgages," he says. "When the Fed pulls away, prices could go down."

Smith favors investment-grade corporate bonds, which yield 150 basis points more than Treasuries. He also owns some junk, which yields 600 basis points more than Treasuries.

For a cautious flexible fund, consider Artio Total Return Bond ( BJBGX), which has returned 7% annually during the past 10 years, beating 87% of intermediate funds. While it holds a mix of government and investment-grade corporate bonds, the fund never owns junk. The high-quality holdings helped Artio stay in the black during 2008.

Manager Donald Quigley keeps a close eye on broad economic trends. When the economy seems headed for a recession, he emphasizes Treasuries, which can hold their value during hard times. As the economy rebounds, he owns more corporate issues. Those can rally as corporate earnings improve and the risk of defaults decreases.

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