Charles Self III, senior vice president of LaSalle Street Capital Management Ltd. (312-220-7598), says inflation-indexed bonds are worth a look if you’re in the market for steady returns on a fixed-income investment. Although the interest rate on the first 10-year notes to be auctioned in January was expected to be 3%-3.5%, the bonds make up for the lack of yield by slating their principal value to increase with the consumer price index. With an inflation-indexed bond investment of $1,000, a 2% consumer price-index increase would boost the maturity value of your holding to $1,020.
Self-recommends these bonds for investors with a long time horizon–say, 10 years or so to retirement–and no pressure to significantly beat inflation that might go along with investing for college tuition. “Since the bonds will have a higher inflation-adjusted return than regular bonds or money market funds have earned historically,” he notes, “they may be used as a substitute for stocks when the equity market looks expensive.”