Buy Bonds, Boost Your Return
With rates stalled and maybe falling, short-term bond funds look like a good bet
By Carolyn Bigda

(MONEY Magazine) – Over the past year, with interest rates rising and top money funds offering a no-risk 5%, there's been no good reason to stash cash in a short-term bond fund. But now that the Fed has paused and may even cut rates later this year, the advantage seems to be shifting. Reason: If rates fall, bond prices (which move in the opposite direction) will rise, boosting your total return. A half-point drop in rates, for example, would cause short-term bond prices to rise 1%, which could push total returns on top-yielding funds above 6%. Also, bond funds hold fixed-income securities with longer maturities, so if the Fed cuts rates, they'll retain higher yields longer than money funds, which closely track rate changes. Best bet: Shift your investment cash to bonds, reserving money funds for cash you'll spend soon.

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SAVINGS NOTES AND SOURCES: CD and money-market account data as of Dec. 12 from 100 Highest Yields, a publication of Bankrate.com ($124 for 52 issues; 800-327-7717, ext. 11410); all have a minimum investment of $10,000 or less. Average tax-exempt and taxable money-market fund yields for the week ended Dec. 12 from Money Fund Report (imoneynet.com); all have a minimum investment of $10,000 or less and assets of $25 million or more. Average bond fund yields for the month ended Nov. 30 from Lipper; all are medium- and high-quality funds without sales loads and with average maturities of three years or less. ¹Manager absorbed all or some operating expenses. CREDIT NOTES AND SOURCES: All rates subject to change. Credit-card rates are for standard cards as of Dec. 12 from Bankrate.com and are variable unless otherwise indicated. Survey does not include Internet-only cards or AmEx Blue. ¹Fixed rate. ²Visa only. ³Platinum and gold cards.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.