2008 was a devastating and demoralizing year for just about all securities and exchange traded funds (ETFs) except for the U.S. Treasury Bond market.The reason behind this surge in bonds was that investors responded to turbulent times in a fight-or-flight manner, and fled to the traditional safety of U.S. bonds. Retirees in particular have been hunting for areas that provide real safetly along with reasonable rates of return.

Conventional wisdom would suggest that investors should continue to focus on the U.S. Treasury market. However, it is much believed that this market is in a bubble and will be the next to burst. Instead, Chance Carson for Index Universe suggests taking a look at the following asset classes:

  • Mortgage-Backed Securities: With the Fed’s intervention and purchase of up to $500 million of troubled mortgage-related bonds, this asset class offers the same security as U.S. Treasuries while shooting off significantly higher yields. Take a look at the iShares Barclays MBS Bond Fund (MBB), offering a yield of 4.36% and only down 1% over the last month.
  • Treasury Inflation Protected Securities (TIPS): The theme of many recent discussions has been the growing risks of worldwide deflation, which has sent TIPS prices plummeting and yields out the roof; however, a combination of the gargantuan Federal stimulus plan, the slowdown of the deleveraging cycle and the reliquification of asset managers, should cause inflation to skyrocket, which is good news for TIPS. Take a look at SPDR Barclays Capital TIPS (IPE), up 2.1% over the last month and generating a yield of 5.88%.
  • Municipal Bonds: The beauty with this class is that defaults are generally rare for investment-grade municipals, prices are relatively cheap, yields are high and Uncle Sam doesn’t get his piece of the pie. Take a look at the PowerShares Insured National Municipal Bond Portfolio (PZA), up 1.5% over the last month with a 5% tax-free yield. If you really want to play it safe, take a look at Market Vectors Pre-Refunded Municipal Index ETF (PRB), it is 100% fully guaranteed by the U.S. government. It just launched last week.
  • High-Grade Corporate Bonds: These bonds are dirt-cheap and are offering yields that are 5%-6% higher than a comparable maturity Treasury. Additionally, the federal government has mitigated a bit of the risk by bailing out some troubled institutions. If you decide to add these assets to your portfolio, take a look at iShares iBoxx $ Investment-Grade Corporate Bond Fund (LQD), which is made up of 100% investment grade corporate bonds, offers a 5.61% yield and is down 3.1% over the last month.

No matter how turbulent times are, there is always a winner somewhere; even 2008 was glamorous for some. Remember, in order to maximize your portfolio and not take a hit as big as the one that many of us took in 2008, diversify, watch the trends and keep yourself up to par on financial news.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.