Buy bonds now?

WITH interest rates on the rise, now is a dicey time to be putting your money in bond mutual funds. Sound familiar? It's based on a view you can hear repeated almost anywhere you ask in the financial world.

"Right now, all of the fixed-income portfolio managers that we know of are

"Anything but Treasuries," says Bill Gross, manager of the biggest of all bond funds, the Pimco Total Return Fund. Those U.S. government securities are notoriously sensitive to the ups and downs of interest rates.

On the evidence, the public is similarly leery. In the first quarter of this year, according to Investment Company Institute data, bond funds attracted just $8.9 billion of net new money from investors while $100 billion cascaded into stock and balanced funds.

So timing your purchases of bond funds must be a pretty simple matter: You buy when rates are holding steady or headed lower, and hold off when rates are due to rise.

Sorry, it isn't that easy. Those who can reliably predict interest-rate movements should forget all about bond funds and bone up on the futures markets, where their gift of divination can be turned into big payoffs quickly. Bond funds are way too slow-moving for them.

For the rest of us, timing the bond market is a tough job. Fortunately, even people with poor timing skills may get along reasonably well using bond funds as one element in a diversified long-term portfolio.

How would bond-fund investors fare if they bought just before past periods of rising rates and falling prices?

I picked out the bad bond years of 1984, 1990 and 1994, and checked Bloomberg data for a representative bond fund, the $8.1 billion Lord Abbett Bond-Debenture Fund, looking for five-year results.

The results: Bond-Debenture, down 8 percent in 1984, finished the five years from the end of 1983 through the end of 1988 with a gain of 5.3 percent per year. After losing 7 percent in 1990, it emerged from the five years through the end of 1994 up 10.1 percent annualized. And after dropping 3.9 percent in 1994, it wound up the five years ended in 1998 with a gain of 7.8 percent a year.

Granted, all these time frames fell within a sustained bull market for bond prices over most of the past two decades. Go back to the 1970s, when interest rates rose to scary two-digit levels, and you'll find five-year periods when you were lucky to break even in bonds or bond funds.

So there's no assurance that longer-term bond investments always work out beautifully. Nevertheless, perfect timing is by no means necessary for bond-fund investing.

Low interest rates are themselves a big problem in today's world for income-conscious investors, who have been enduring what has amounted to a yield famine, If you're in that situation, you might be glad to see rates go higher.