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Bonds may be winning surprise of ’98

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With inflation running just above 2 percent and with the currency devaluations in Southeast Asia likely to keep a lid on prices for goods imported from that region (as well as rival products produced elsewhere), this could be the year when yields of long-term Treasury bonds move decisively below 6 percent - and stay there for a lengthy period.

If so, holders of bonds and bond funds could earn respectable capital gains in the year ahead, on top of the income holdings generate.Yields may seem to be in the gutter, but these really are good times for bond investors. Bonds offer generous yields after taking into account the impact of inflation.

"For investors in CDs and cash, it's perfectly appropriate to extend maturities," says Kevin McClintock of Dreyfus.

William Gross, who oversees management of $110 billion at Pacific Investment Management Co., says the "globalization of capital and production" will continue to keep a lid on inflation. He expects prices to climb only about 2 percent in 1998.

As a result, he thinks there's little chance that yields on long-term Treasury bonds will climb back to 7 percent.