Easing Inflation Could Help Bonds; Declining Oil Prices Reduce the Risk of Diminished Returns
Investors who rushed to the relative safety of bond funds when the stock market began to stagger last year might have thought they had outrun the troubles in equities -- only to face the new threat of inflation when oil prices started soaring. But with the cost of crude now falling, some fixed-income investors could find themselves in an enviable position.</br></br>While economists and market watchers debate the reasons behind the drop that has left oil down more than $30 a barrel from its July 11 high of $147.27, most investors are probably simply relieved to see a pullback. In the case of bonds, lower prices for oil and other commodities can reduce the risks of inflation eating into returns. And if the decline in oil signals a slowing global economy rather than an overheated market taking a break, the sure-footedness of bonds could look even more attractive.</br></br>Most investors find it easier to rely on bond funds rather than trying to navigate the complexities of the bond markets. A fund also will probably mean holdings are more safely spread out over a range of investments.</br></br>Compared with the stock market, which has been pounded by the credit crisis, many types of bond funds have fared reasonably well over the past year. The credit problems have exacted a toll on riskier parts of the market, including the asset-backed debt that includes mortgages, car loans and credit cards. But government bond funds, for example, have held up.</br></br>However, despite bond funds' relative soundness, investors have been concerned about the problems that inflation poses for their holdings.