Bonds best trait? Stocks are worse

At a funeral one day, the minister stood up and said, “You know, I didn’t know Ralph terribly well. Could someone stand up and say something nice about him?” Silence.

Finally, a guy stands up in the back of the room to offer words of consolation. “Yes?” the minister says. “His brother was worse,” the mourner says.

It’s an old joke, but for bond investors, it rings true: The only thing good that can be said about bond funds lately is that stock funds have been worse. If you’re looking for someplace to put your money, a high-grade corporate bond fund might be the best place.

First, let’s take a brief survey of the carnage this year:

•Short-term bond funds: -3.5 percent.

•Intermediate-term bond funds: -6.4 percent.

•Long-term bond funds: -12.3 percent.

Those are Morningstar’s figures for average funds. Some funds fared far worse. The wretched Regions Morgan Keegan Select Intermediate Bond fund has plunged 83 percent this year. The larger yet still hapless Legg Mason Investment Grade Income Fund Prime is down 29 percent.

And high-yield, high-risk, junk-bond funds lived up to their reputations this year, falling an average 22.8 percent. One of the worst, Oppenheimer Champion Income B, has plunged 47 percent.

Why have bonds bombed? Bonds are high-quality, long-term loans. In a credit crisis, people don’t want to make loans, much less invest in them. Traders worry that the bond’s issuer will default, leaving investors with high-quality wallpaper. So they sell any bonds with default potential and seek safety in bonds with no default risk – in other words, in Treasury bonds.

Default risk increases with time. You might be confident that a company will be around in three years, but you’re probably not as certain about the company’s future in 30 years. That’s why long-term bonds got hit worse than short-term bonds.

When bond prices fall, their yields – the interest payment divided by their current prices – rise. For example, suppose you own a 10-year bond issued with a face value of $1,000 that pays $50 in interest every year. If traders push the bond’s price to $700, its yield soars to 7.1 percent.

Don’t expect to make a fortune on bonds. But if you can’t think of anything good to say about stocks, you’ll probably do better in bonds.