Gold In The Bond Minefield

Amid the danger, intriguing chances to buy bonds cheaply

Bondholders are suffering through the worst year for fixed-income investments since the bleak days of 1994. With the red-hot economy now fanning inflation fears, bondholders are on the wrong side of the Federal Reserve, which has hiked interest rates twice this year. Making matters worse, the carnage from last fall's market meltdown has prompted many Wall Street firms to cut their exposure--creating wider spreads and illiquid trading in many bonds. And junk-bond defaults have climbed to near-record levels. Not surprisingly, a recent Market Vane poll of some 70 investment advisers found only 19% bullish on U.S. Treasuries. "This market feels awful, trades horribly, and could still go lower," says Richard Stevens, portfolio manager at Colonial Management Associates in Boston.

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