Are bonds the safest bet?

DURING TIMES OF UNCERTAINTY INVESTORS TYPICALLY MOVE THEIR FUNDS INTO U-S GOVERNMENT BOND MUTUAL FUNDS AS A SAFE ALTERNATIVE TO THE RISKER STOCK MARKET. BUT DOING THAT MIGHT NOT BE AS SAFE AS IT SEEMS AND INVESTORS CAN ACTUALLY LOSE IF AND WHEN INTEREST RATES RISE. WITH AN EXPLAINATION, FIRST BUSEY TRUST`S SCOTT MACADAM: Q. FIRST OF ALL, ARE WE IN ONE OF THESE RISING INTEREST RATE ENVIRONMENTS? We think so. Over the recent past, we`ve seen interest rates at levels not seen in over 40 years. This has fueled all the record refinancing in home mortgages and brought bank money market rates to under 1%. Most economists now are predicting to rise during the course of this year due to higher inflation, a stronger economy and and Federal Reserve intervention. Q. HOW THEN DO RISING RATES HURT BOND INVESTORS? If you would buy today a $1000 US government bond due in 30 years (2035) that paid you 5% annually....you would expect to receive $50 per year for the next 30 years. (if interest rates always stayed the same, the value of your bond would always be $1000). Interest rates don`t stay the same however.....If rates went up soon thereafter to 6%, investors could go out and buy the similar US bond to yours that would pay them $60 per year for the next 30 years. At that point, you would have a hard time selling your original band to anyone @ $1000 if you had to. So the value of your bond automatically falls to make it mathmatically equivalent to the now current interest rates levels. So if you are stuck getting $50 per year for the next 30 years which has to now equal to 6%......the value of your original bond has to fall to $833 ($50 divided by $833 is equal to 6%) to make it equivalent to the now current rates. So if you had to sell your bond, $833 is all you would expect to get. Original Purchase $1000 US Gov Bond @ 5% ($50 per year) due in 2035 rates then go up to 6% original $1000 US Gov Bond paying $50 per year has to be devalued to $833 to make it equal to a 6% yield....$50 / $833 = 6% So, though your going to receive $50 in interest the first year after your purchase, your going to lose $167 on the value of your bond, bringing your net loss the first year to $117 or 11.7%. Bottom line.......values of bonds drop in direct correlation to upward interest movements Q. WHAT SHOULD INVESTORS DO THEN? Better Bond Buys Buy individual bonds-CDs Hold bonds to maturity Buy bonds with shorter maturities Buy Treasury Inflation Protected securities A. Investors can do a number of things to help mitigate these loses. buy individual bonds (or CDs) instead of bond mutual funds hold bonds to maturity buy bonds or funds with shorter maturities buy TIPs (Treasury inflation-protected securities)