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Outlook not bad for bonds

Even though the bond market has lurched like a drunken sailor in recent days, there's no reason for an investor to take a long walk off a short pier.

Anxiety about the potential for inflation and higher interest rates is understandable, based on a wakeup call from Federal Reserve Chairman Alan Greenspan and concerns about energy prices in the Persian Gulf.But in our current economic climate, rates most likely will either move up only a small degree or stay put. Meanwhile, it's a good time to obtain or refinance a mortgage, and some experts like bonds a tad better than stocks.

While recent mortgage rates just around 7.25 percent leave little reason to put off buying a home, there's no reason to make a panic purchase.

"Even if there were a little upward- rather than downward-movement in mortgage rates, we still expect them to average 7.5 percent the next couple of quarters," predicted David Seiders, chief economist with the National Association of Home Builders in Washington, D.C. "Then we see rates moving down later next year."

Mortgage rates haven't done all that much the past several years. They dropped to just under 7 percent at the end of 1993, moved as high as 9 percent at the beginning of 1995 and have generally been below 8 percent in the past year.

"We see inflation in check and moderate interest rates, with short-term rates close to where they are now and long-term rates at fairly low levels," agreed Lynn Reaser, chief economist with Barnett Banks Inc. in Jacksonville, Fla.

The bond market's looking good to many.

"We see bonds as a little bit better relative value than stocks right now, although longer term, it really depends on the risk tolerance and time horizon of the individual investor," said Douglas Cliggott, U.S. market strategist for J.P. Morgan & Co., who expects a robust economy well into 1998.

J.P. Morgan's current suggested portfolio is 50 percent stocks, 35 percent bonds and 15 percent cash. That's heavier in bonds than its normal formula of 60 percent stocks, 30 percent bonds and 10 percent cash.

Of course, good rates benefit companies and stocks, too.

"As long as the economy is strong and interest rates are stable, we believe investors should be in stocks," said Rosanne Cahn, chief economist with Credit Suisse First Boston, who expects long-bond yields between 6.25 and 6.5 percent through year's end, gradually rising to 6.75 percent by the end of 1998. "I don't think the Fed has enough evidence of inflation to tighten rates this year."

Since there are differences of opinion, some strategists prefer to play this bond market cautiously.

"I'd emphasize intermediate maturity bonds of three, five and seven years because they offer the best of all worlds, featuring decent income without the volatility of the longer-term maturities," counseled William Hornbarger, fixed-income strategist with A.G. Ed-wards & Sons Inc.

Hornbarger is bullish on domestic bonds, partly because yields are so low overseas, with the 10-year Japanese treasury yield at a meager 1.75 percent. He expects a choppy bond market through year's end because of Greenspan's comments, with next year in a trading range close to 6 percent and perhaps as high as 6.75 percent.

The fact our rates are higher than the rest of the world could result in downward pressure.

"While my fearless forecast is for some upward pressure on interest rates near-term, rates a year from now are going to be measurably lower than today," asserted Daniel J. Fuss, a director at Loomis, Sayles who manages a number of funds that include Managers Bond Fund. "A drop in rates would only put our rates more in line with those of Japan or Europe."

He'd keep a significant 60 percent of an individual portfolio in long bonds and just 40 percent in equities.

Top-performing investment-grade bond funds in total return over the past 12 months, according to the Morningstar Mutual Funds investment advisory, have been:

- Alliance Bond Fund: Corporate Bond Portfolio, New York; $1.2 billion in assets; "A" shares with 4.25 percent "load" (initial sales charge), "B" shares with back-end load and "C" shares with level load; $250 minimum; 30-day yield of 6.97 percent; up 18.20 percent.

- SunAmerica Diversified Income Fund, New York; $100 million; "A" shares with 4.75 percent load and "B" shares with back-end load; $500 minimum; 30-day yield of 7.76 percent; up 16.97 percent.

- Managers Bond Fund, Norwalk Conn., $39 million; no-load; $2,000 minimum; 30-day yield of 5.99 percent; up 16.16 percent.

- Dreyfus Intermediate-Term Income Fund, New York; $22 million; no-load; $2,500 minimum; 30-day yield of 6.15 percent; up 15.48 percent.

- Smith Barney Investment Grade Bond Fund, New York; $305 million; "A" shares with 4.5 percent load, "B" shares with back-end load, and "C" shares with level load; $1,000 minimum; 30-day yield of 6.67 percent; up 15.35 percent.