Bond funds are not as reliable as they have historically been, which his creating some headaches for investors, The Wall Street Journal reports.

When the markets cratered last year and investors flocked to Treasuries, that massive buying spree pushed down yields. And the government bail-outs are creating deficits of historic proportions.

As a result, said Robert Gahagan, team leader of U.S. taxable bonds at American Century Investment Management, “Treasuries, which are considered the risk-free asset class, probably are the riskiest asset class right now.”

And with tax rolls down in states and cities, the outlook for municipal bond funds isn’t bright, either. Even though downgrades and defaults on municipal bonds are rare, in this weak economic environment, that could change. Likewise, corporate bond defaults are troubling, and money market fund yields are virtually nil since the Fed funds rate is below 1%.

One alternative for fixed-income investors is intermediate bond funds that invest in a mix of government, mortgage and investment-grade corporate bonds. Another is funds that invest in Treasury inflation-protected securities.

“It’s a good idea for investors to have exposure to non-government sectors, like corporate bonds, that offer a bit more of a yield cushion and diversification,” said Miriam Sjoblom, an analyst with Morningstar. “No matter what move they make, investors should brace themselves for more volatility ahead as the market’s attitude toward risk continues to fluctuate.”

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.