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The risk is indeed that interest rates may start rising one of these days. (Fools have been saying that for almost 3 years now.) I think probably not until after the election next Fall. So for the next year bond funds will probably be OK, but you will want to keep a close eye on them and sell if it sounds like the Fed is thinking about raising rates.

The Asset Backed Securities are backed by long bonds and traded on the NYSE. Low commissions at a discount broker make it easier for individuals to trade in and out of these than traditional bonds. (See message 7693 on the Bond board.) The ability to trade cheaply and easily makes them potentially a better vehicle in uncertain times, but thin trading volumes can be a problem. It remains to be seen if they are liquid enough to get your money out when rates start to rise.

Owning the bonds themselves is the safest protection from big losses. Unfortunately short bonds are low yield and expensive. Intermediate bonds are a better deal, but you can be holding those paper losses if interest rates rise for quite a while.

Personally, I would do an estimate of how much interest rates have to rise before a prospective investment loses money compared to say a 3 to 5 yr CD. This keeps your choices in perspective.

Lastly, keep in mind that for the last year or so, gold has been a top performer. That will likely continue as long as the dollar continues to weaken and until interest rates start to rise. If your timing is right, gold or precious metal funds can do better than bonds.

I do not agree with the comment that equity funds are a better investment than bonds. Equities tend to amplify any interest rate effect. So if you think bonds are risky due to rising rates, stocks are more so (unless you select very carefully). Both depend on economic recovery and the business cycle. As the recovery gains strength, it becomes more likely the Feds will raise interest rates (and defend the dollar).

At the moment, we are not talking about deflation. The concern is that inflation could become a problem. That would cause rates to rise.
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