Markets May Change, But Need for Holding Bonds Doe

Fixed-Income Sector Checkup

Each fixed-income sector has its pluses and minus, given the current market environment. U.S. Treasury bonds offer high credit quality, but their near-term outlook is uncertain, due to the likelihood of higher interest rates and rising federal budget deficits, said Migliozzi.

Agency mortgage-backed securities, such as Ginnie Maes, also offer high credit quality, but they are subject to prepayment risk, notes Phoneix's Albrycht.

Investment-grade corporate bonds can provide diversification, but they face event risk and default risk, said Albrycht. Because of these risks, Phoenix bond funds generally take smaller positions in investment grade corporate bonds, Albrycht said.

Municipal bonds should be evaluated based on an individual's tax status. While high-income investors an benefit considerable from muni bonds' tax exemptions, all investors should consider their overall after-tax returns, Migliozzi recommends.

High-yield bonds should be approached with care because they offer potentially higher payments than other fixed-income sectors, but also greater risk and volatility, notes Scudder's Rooney. The high-yield sector's weak performance in recent years highlights this drawback, Rooney said.

Emerging market bonds are also volatile, but they are less correlated with other fixed-income sectors, so they offer further diversification, Rooney notes. In recent years, individual country and issue considerations have become more important in emerging market bonds, increasing the importance of independent fundamentals, said Albrycht.