Government bonds, which were a safe haven in the worst of the financial meltdown, took a beating over the past month The average long-term government bond fund is down 15 percent so far this year. The average diversified bond fund is up 12 percent while junk bonds are up 23 percent as of Wednesday.
That's mainly because investors are starting to look forward to an economic recovery.
Investors piled into government bonds last year because the government can't go broke. Investors were terrified that the sinking economy could produce a spate of corporate failures, which could sink their bond holders. Now, investors are gaining confidence and they're being tempted by the higher returns on corporate and other private bonds.
Lurking in the background is a gnawing worry about inflation, which is poison for bonds. For the moment, the inflation monster is sleeping. Consumer prices in May were actually 1.3 percent below a year earlier. That's mainly because of lower energy prices, although weak consumer and business spending are also holding inflation down.
The Federal Reserve said last month that it expected inflation to remain subdued "for some time."
But some worry that the seeds of future inflation are now being planted.
The Fed began pouring new money into the economy last year, in a successful effort to head off a credit collapse. For the moment, most of that money is sitting in the banking system, rather than being lent and spent.
But when the economy picks up again, all that extra money and federal stimulus spending could start pushing prices up unless the Fed is fast on its feet in reversing course.
"I don't think there's an inflation problem brewing in the next year or two," says economist Thayer. It will take that long to work down debt and for consumers to work up an appetite for spending again.
Stay away from Treasury bonds for now, says DeRose, although corporate bonds still offer some attractive rates. Go for intermediate-term bonds, those in the five- to seven-year range.
Meanwhile, real estate funds have lost nearly half of their value in the past 12 months, which makes them "incredibly cheap" in Terril's opinion. He likes real estate investment trusts specializing in retail, office and warehouse properties. Several REITS have been busy lately selling new stock to the public, largely to pay down debt. More-cautious observers note that property values are still falling and some funds may have trouble making their debt payments. A cautious investor might wait and see.
Investors, meanwhile, are wondering how long it will take to recover from the past year's drubbing. Carl Enloe, one of the gray-beards of the investment business in St. Louis, has some comforting words for them: Your investments may return more quickly than you think.
"I remember back in 1974, there were articles saying it would take 30 years for the market to recover, and in about 20 months we made it all back. Twenty months is the average recovery from bears since 1900," says Enloe, who started in the business 47 years ago.
"In three to five years, a 401(k) in good stocks will be looking pretty good," he says.
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