"Even though the economy has been soft, corporate profitability has been quite good," he says. "The valuations of corporate bonds are compelling."

To obtain a bit more yield than ultra-short funds pay, consider short-term bond funds. These focus on securities with maturities of up to five years. A top choice is T. Rowe Price Short-Term Bond ( PRWBX), which yields 2.40%. During the past five years, the fund returned 4.3% annually and outdid 71% of competitors.

Convinced that corporate balance sheets remain sound, portfolio manager Ted Wiese has been increasing his allocation to corporate bonds. The fund now has 51% of issues in corporate issues. Wiese has been buying some bonds known as crossover issues. These have been rated BBB by one rating agency and BB -- or below investment grade -- by another agency. He aims to buy such bonds when their financial picture is improving and the securities seem likely to be upgraded.

A favorite crossover holding is an issue from Boston Scientific (BSX), a maker of medical devices. "It is an improving credit in a growth industry," Wiese says.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.

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