Where to put your money if the bond bull stumbles. Search for yield in less-popular areas of the fixed-income market.

Where to put your money if the bond bull stumbles. Search for yield in less-popular areas of the fixed-income market. By Wallace Witkowski, MarketWatch

SAN FRANCISCO (MarketWatch) — Bond buyers enjoyed another banner year in 2011, with total returns in all classes outperforming the broad U.S. stock market, and investors continuing to pile into bonds and shun stocks.

As Dow climbs, worries persist. The strong pace set by the market since Jan. 3 hasn't persuaded skeptics that the rally has legs, Brendan Conway reports on Markets Hub. (Photo: Reuters)

The celebrity status for bonds troubles some investors and investment strategists. They sense that this great bond bull market will slow in 2012. Not that sticking with bonds at this juncture is a recipe for disaster, but with more of their nest-egg tied to fixed-income securities, investors need to ask some hard questions.

Start with the worst case — what would an investor do in the admittedly unlikely event where a “perfect storm” collapses the bond market and spikes yields. (Bond prices and yields move inversely.)

For that to happen, several developments would need to converge, said Mark Luschini, chief investment strategist at Janney Montgomery Scott.

In this scenario, bond investors would be surprised as U.S. job growth accelerated dramatically, the sovereign debt crisis in Europe found a clear solution, China’s economy demonstrated a so-called soft landing and a pickup in growth, and the Fed ended Operation Twist and implemented a third-round of quantitative easing, Luschini noted.

“It would have to be a confluence of those things that could put pressure on bond prices,” Luschini said. “One ... alone would not be enough of a shock.”

A more realistic possibility is that stronger than expected economic growth spurs U.S. interest rates, raising yields and making existing bonds less attractive...

... Wallace goes on to describe various bond market segments that one can consider for investing. I don't understand Wallace's point here. He seems to be saying, if the bond market collapses, buy more bonds, just different ones, as if diversification into various bond markets will protect you if the bond markets collapse. It doesn't make any sense the way it is written.

Read his full article at http://www.marketwatch.com/story/where-to-put-your-money-if-the-bond-bull-stumbles-2012-01-20