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By Jason Stipp | 04-16-2010 06:00 AM

Bond Fund Picks to Keep It Simple

Given fixed-income uncertainty, investors may want to consider actively managed bond funds that can jockey among different market segments, says Morningstar's Christine Benz.

Jason Stipp: If you've been on recently, you've probably read a little bit about the difficult or cloudy environment that might be facing bond investors. Morningstar's Christine Benz, director of personal finance, says there is a way that you can account for some of these things and keep it simple with your bond portfolio. She's here to tell us how. Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: So the first question for you. It seems like there are a lot of concerns out there about the bond environment. Can you highlight a few of those and why people are worried about their bond investments?

Benz: Well, the big one is that there's concern that future interest rates really have only one direction to go, and that's up. So, while there's some difference of opinion on that subject, some people actually think that rates will hold steady or maybe even go down, generally, the consensus is that rates will go up, and that will hurt bond prices.

So that's the big concern. Particularly when you've seen the kind of stampede that we have into bond investing, you have to wonder whether there aren't some areas of the bond market that are overheated right now.

And then there's also the headwind of inflation. So, when you're earning a fixed rate on your investment, any sort of inflation is going to cut into your take-home return, so that's another concern there, too.

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