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Earlier today, stocks were higher on the news that June home sales were higher than expected. Indeed, the news provided a bit of a jolt for Wall Street, since the indication was that the housing market might have bottomed. There are hopes that perhaps rising home prices and rising sales could be a sign that things are on the verge of turning around. That good news, however, was drowned out by earnings news from various companies.

Earnings is still a focus for investors on Wall Street. And earnings are still rather lackluster. Even though there has been some positive earnings news, those surprises have not been as prolific as one might hope. There is some hope that stocks might turn around as Euoprean stocks did. After falling close to the end of the day, European markets managed to pull out of it and end higher. However, it would take some effort on the part of bulls to make it happen.

Treasury auctions in focus for Wall Street

In a break from recent history, it appears as though Wall Street will be taking interest in this weeks Treasury auctions. Investors will be looking for signs of inflation and also for signs that economic recovery is underway. Here is what MarketWatch says about Wall Street’s interest in this week’s Treasury Auctions:

“The one thing that makes this all plausible is that last week, the Fed Chairman [Ben Bernanke] in his testimony to Congress stated that while the recovery may be underway, it will not likely include inflation,” said Kevin Giddis, head of fixed income trading and research, Morgan Keegan.

“This was the best news the markets could hope for and it is likely the reason for the rally in stocks,” said Giddis of last week’s trade, which on Friday had the Dow industrials closing at their highest level since early November.

All in all, it should be an eventful and interesting week.

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Bond investors can be a nervous bunch. Many of them like the safety that bonds offer. However, one of the issues that has been nagging many bond investors has to do with yield. Yield isn’t that high right now. Bond yields may be higher than cash right now, but they are still fairly low. But, as many equity investors are quick to point out, when you take the relative safety of bonds, you are not going to see very high yields. Higher returns require higher risk. BusinessWeek makes this argument very well:

After all, reward is proportionate to the risk you take, making it infeasible for two different portfolios to carry the same amount of risk yet deliver substantially different levels of return. “It’s almost like gravity, you can’t get off it,” says Frank Armstrong, president of Investor Solutions in Coconut Grove, Fla. “Investors need to accept that we’re in a low-interest-rate environment. Anything beyond money-market funds is going to have some kind of risk they may or may not understand.”

However, there are ways to get higher yields on your bond portfolio. It does require adding a little risk, but many bond investors can handle the increase in risk — as long as it results in higher yields that are still reasonably safe.

Different types of bonds to add risk (and return) to your bond investments

Many bond investors go with short-term Treasuries. These are notes that range from a few months to 5 years. However, it is possible to increase your return by buying bonds for a longer term. Longer-term Treasuries, such as 8 year and 10 year notes, may provide better yield. But you still have to worry about the risk of rising rates at the tail end of the bond maturity.

Another option is to invest in municipal bonds. These are local government bonds that usually offer a higher return. However, these municipal bonds carry more risk, and can be volatile. But there are some that have tax advantages, and they can be helpful as part of a mutual fund.

Finally, consider corporate bonds. These are picking up, and you can get good yields as businesses try to find funding. But these are among the riskiest of bond choices right now, with so much in the business sector in turmoil.

You can also invest in bond indexes to get access to a wider variety of bonds.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions. 

One of the ways to protect yourself from inflation is to invest in Treasury Inflation Protected Securities. These are government bonds that adjust their returns to the rate of inflation. This is one way to preserve your capital and protect against inflation. Interestingly, there are plenty of experts who believe that including TIPS (perhaps in the form of an ETF) in your retirement portfolio is a good idea. This way, at least part of your retirement earnings are protected from inflation and in reasonably safe investments. Here is what ETF Database points out about mitigating inflation risk in the long term:

I have no idea whether inflation or deflation is the larger risk in the short term. I am however fairly sure that over a 20- or 40-year time horizon (the horizon most of us are dealing with in our IRA’s and 401(k)s), inflation is the much higher risk. Inflation is the norm. If you’re holding a bond that pays 3% per annum, you’re basically accepting that if inflation returns to a more normal state, you will accept a 0% or lower real return. I’d rather accept a slightly lower real return now, and take the chance that the economy will return to a more normal state in the next 20 years!

TIPS allow you to avoid that problem of regular bonds. If inflation continues on a historically average track, you are protected. On the other hand, however, there are concerns from some that Treasury backed securities aren’t going to be very safe down the road. These folks generally think that the U.S. government is going to succumb to increasing loads of debt. There is a chance of this happening; all investment carries risk, including these “safe” investments.

Additionally, if deflation turns out to be the long-term problem, TIPS are basically worthless. It all depends on what you think will happen in the long term. However, including TIPS in your retirement portfolio can be a good way to protect some of your nest egg from dips in the stock market and the eroding effects of inflation.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.