Government announced this week that for the first time in more than 14 years, the inflation index had passed the four percent mark. For just about every resident consumer, this news was no surprise. What is becoming an increasing challenge for Mr. and Mrs. Average Citizen, whose salaries and benefits are creeping up slower than inflation, is to find ways to keep ahead of this steady loss of purchasing power.

In response to inflationary pressures in other jurisdictions, interest rates will rise to attempt to curtail increased costs of everything, a much awaited event for those who rely upon meagre returns from term deposits and savings accounts. Unfortunately, that may still be a slow way off, at least according to US Federal Reserve chairman Alan Greenspan?s ?measured? commentary.

While the more reluctant are hesitant to think about investment markets, some consideration should be given to investing in fixed income securities. It is true that whenever interest rates rise, the prevailing theory and market commentary stress the idea that investing in bonds is not such a good idea. Typically, though such generic statements fail to encompass the entire financial viewpoint for a client. There are good reasons to think about investing in fixed income securities held in an investment account: Safety, full access to liquidity, currency diversification, legally separate entities, estate planning, no taxation on US security portfolio interest. Here?s why:

A broad basket of bond positions, both in yield and maturities may return rates greater than inflation, over a longer time frame.

Investments held in another currency besides Bermuda dollars provide diversification, liquidity, and minimisation of estate stamp duties.

Investing in shareholder pooled structures, such as mutual funds and money market funds that are separate legal entities, not attached to, or included in a financial institution?s balance sheet, provide an additional layer of protection. A mutual (money market) fund is a completely independent organisation with its own board of directors, investment policy statements, portfolio managers and administrative team. Funds are required to be legally registered and operate in full compliance with the jurisdiction?s securities laws.

Do not confuse mutual funds and money market funds with US dollar savings or term accounts, federal fund rate accounts, and the like. These are deposits and are still part of a financial institution?s deposit base.

Here are some terms you need to be familiar with:is determined by market conditions. It may be more or less than par (100 percent of the face value of the bond). Bonds have been pricey even in this declining interest rate market because of safety stacking, and increased demand by large institutional pension funds and insurance companies.is calculated every day, every second bonds are outstanding in the capital markets, and is driven by price paid, the coupon interest on the bond, market value, credit worthiness, call time frame and maturity.areset by rating agencies whose reputations focus on independent research on the hopefully sound financials of corporations and economies of countries.Bonds are rated in safety, although the rating is really derived from the underlying issuer (the proverbial question, will I get my money back) in the following manner. Bonds can range in maturities from a few weeks to 30 years. Generally, the longer the maturity, the higher the coupon interest rate as investors expect to be better compensated for the holding period. For instance, today?s US Treasuries listed on Bloomberg:

Two-year US Treasury note interest is 3.375%

30-year US Treasury bond is 5.375%the absolutely highest grade possible, and sometimes the lowest yield. There is a price for safety. Triple A rated governments tend to be situated a way up above the equator in the North Atlantic, with the exception of Australia, New Zealand. Strong stable governments are those such as the United Kingdom, Denmark, Kingdom of Sweden, Finland, Canada, Republic of Germany, United States. Some corporations that are really countries unto themselves, such as AIG, GE, ExxonMobil, etc. carry AAA ratings.Next highest rating, often given to provinces, banks and government agencies backed by countries, municipalities, etc. Bermuda is rated AA.ratings given to strong corporations with consistent earnings and good liability management programmes.

The groups above are all considered investment grade and credit-worthy.and, are usually the debt instruments of emerging market nations, the so-called third world countries, Russia, Brazil, Malaysia, Thailand, and so on. Many of these rapid growth countries are stabilising their economies and are maintaining a debt repayment schedule. Consistent with this success has been the steady high-yield returns from some of these sector mutual funds. stands for default, when the bond issuer no longer pays the interest due, may settle with bondholders for a discounted value on the original face value, or decline to return any of the holders? investments. Such was the case of government of Argentina, which in late February persuaded millions of bondholders to take 30 cents on the dollar. More than 75 percent grudgingly accepted; some money is better than none!stands for The Donald Trump bonds (I made this one up) which also went into default when his corporation declared bankruptcy. Amazing, that he is a personal global success in ?The Apprentice?, but overextended in business. Somehow, though he always manages to trump the odds!

While deposit holders struggle with low interest rates and inflation, this is good news for mortgage holders whose rates are lower, and their principal is reducing every day with cheaper dollars.