Calm Center In A Bouncy Market - money market funds continue to yield dividends - Brief Article

Kiplinger's Personal Finance Magazine, Feb, 2001 by Joan Goldwasser

SAVINGS | Enticed by GENEROUS YIELDS, investors are drawn to money funds and bonds.

DESPITE December's welcome rally, it's still nail-biting time as stocks bounce like gymnasts on a trampoline. If this uncertainty has you looking for a more peaceful place for some of your money--at least temporarily--yields on cash and bonds are generous, considering the inflation rate is returning to below 3%. Chances are slim that interest rates will soon rise and harm bond prices or make certificates of deposit look anemic.

Money-market funds are the best option for parking money profitably, says Peter Crane, managing editor of Money Fund Report, in Westborough, Mass. Yields are higher than you might imagine: The money funds with the best 30-day yields through December 7 are Strong (6.5%), Aon (6.5%) and Transamerica (6.4%). The average yield on a taxable money-market fund is a hefty 6%. That will dip if the Federal Reserve Board cuts short-term interest rates later this winter or in early spring, but the Fed's plans are uncertain.

Some federally insured CDs have excellent rates. For example, if you are willing to lock up money for five years, Capital One pays 7.7%. Six-month CDs at banks offer about 5.3%, varying by region. But here's a warning about CDs: Don't let a tantalizing above-market yield lure you into a callable CD from a brokerage firm. The catch is that the issuer can redeem your money at will after one year (see "Don't Take This Rate Bait," on page 102), forcing you to shop for whatever rate is then in effect. Savers have sunk almost $2 billion into such investments.

Bullish on bonds. Unlikely as it seems, bond traders factored in the chance of a recession some months ago, and their caution pushed the yield spread between Treasuries and corporates wider than usual. Therefore, strategists now see good buying opportunities with plenty of safety. "High-quality corporations have experience with business cycles," says Mario de Rose, fixed-income analyst with Edward D. Jones. "They have been through them before." Buyers of five- to seven-year corporate bonds with solid credit ratings should receive at least one and one-fourth percentage points more in yield than they would earn in a Treasury of similar maturity.

For example, bonds of large companies whose debt is easy to trade, such as Disney, General Electric and Wal-Mart, are priced to yield about 7.3%, with the bonds maturing in ten years. De Rose also recommends triple-A-rated utility bonds. For example, Wisconsin Electric Power's 16-year bond yields 7.3%, and its 23-year bond, 7.7%. Interest payments are insured against default. Junk bonds, despite yields over 10%, are still too risky for most people.

Treasury strategy. If you are comfortable only with the full faith and credit of the government, Peter Kretzmer, an economist with Bank of America, suggests medium-term Treasury securities. His preferences are the two-year note, which yields 5.5%, and the five-year note, which yields 5.3%. The Treasury isn't selling as much new debt as it used to, which is another reason its interest rates are so much lower than those of corporate bonds and short-term CDs. For information on buying Treasury securities directly, visit the Treasury's Web site, www.ustreas.gov, or call the Bureau of the Public Debt at 800-722-2678. --Reporter: ERIN BURT