A reader left this question about buying bonds.

I have a question about bonds. Is now a good time? One would get the benefit of interest plus possible cap appreciation. If you sense that the year will be negative to flat, as you mentioned, why not hunker down in a high yield bond fund? Some bond funds I looked at are down 2-3 percent ytd and paying well over 6. With six months left, that's 3 percent plus possible appreciation. The possible part is the catch. If we go into recession, as you fear, then would these funds be in trouble?

Funny because I had a similar discussion with a client over the weekend.

Is now a good time? Bonds are an asset class and belong in diversified portfolios one way or another. An aggressive investor might use fixed income to manage volatility and enhance yield and a conservative investor might weight them more heavily to provide income. It is important to remember that bonds don't offer real growth but price movements occur and occasionally need to be taken advantage of.

From the this is just how it works standpoint, the yield curve in now flat and will take on a normal slope at some point. The long end will go up in yield or the short end will come down or more likely both will occur. Regardless of anyone's ability to predict when, normalization will occur. Also, a ten year treasury yield at 5.13% is below the historical norm. I would not be shocked to see ten year yields in the mid sixes sometime during this decade, and that would not be historically high. If they ever go to 10% again (not impossible), that might be a time to back up the truck.

So if higher long term rates with lower short term rates seems plausible to you for later in the decade, short term debt would be the better buy. That is not to say that in structuring your fixed income portfolio you should only own two-year treasuries. Remember just because the yield curve should normalize does not mean it will normalize. This, like equities, is about not betting on only one outcome.

A bond portfolio can have many holdings of different types of fixed income products with different maturities but still tilt to whatever maturity and quality and so on that you think is right.

The reader asks about funds. The drawback of bond funds is that, unlike a bond, there is not par value it will eventually come back to. A bond fund can drop and stay down. This does not have to be a reason to stay away but all products have drawbacks and this is a big one for bond funds.

If we go into a recession, the Fed should ease rates, causing yields on the rest of the curve to come down causing prices to rise. So you get price appreciation but depending on what goes on in the fund the dividend paid could go down. The reader says he has found funds paying 6%, this at a time when treasuries are in the low fives. If treasuries were to yield only 3% (intentional hyperbole), the 6% yield is not like to stay around. The managers would likely sell some holdings to take gains. They don't have to of course but it is possible.

For fixed income I utilize treasuries (more so now than a few years ago), preferred stocks (individual issues IMO are less volatile than funds of preferred stocks), closed end funds, foreign bond funds, convertible bond funds and TIPs.