"Walk! Don't run," was what our teachers used to say when we had Fire Drills in grammar school. Actually, I can almost hear them still yelling that as I raced to the door.

We had our Fixed Income Fire in the early part of this decade and a lot of people got badly burned by the ultra low interest rates. I am starting to smell smoke and perhaps it is time to use what we have learned from the past and have a Fire Drill of our own, just in case.

Recently, within the past 2 weeks, two of my bonds have been Called, a DaimlerChrysler 6% and a Fed Home Loan 6.25%. I expect as the Fed lowers short-term rates later this month, and beyond, we will see more, Higher Yielding Bonds called.

This is what lead to the CDO, CDS asset backed security, Hedge Fund, explosive growth. The search for YIELD lead many astute and foolish people, myself included, make very risky investments. Fortunately, for me, I got chicken in the early spring of last year and started to reduce my riskier investments but not without some losses.

So now to the Fire Drill:

1. Callable Bonds at a Premium can be sold if the Premium is Two Years interest.

a) Two years interest gives you a cushion should the cash have to sit in a Money Market account at low interest rates.

2. Callable Bonds at a Discount can be purchased if they become callable within Two Years.

a) If the bond is at a discount and does not get called within two years you still get a decent return on your investment should rates drop significantly.

3. High Yield Closed-end Bond Funds trading at a Discount can be purchased but do not have Dividend Reinvestment if you need the cash or just want to hold them short term for Cap Gains.

a) As rates drop, people will be scrambling for higher returns on their cash. Many Closed-end-bond-funds currently trading at a discount will be bid up for their dividends. There is a potential for Capital gains and a decent return on your cash. Lower short-term rates and the desire for yield may also give junk bond issuers some additional breathing room, fewer Junk Bond defaults.

4. Don't buy High Yielding stocks just for the Dividend. As we have seen with the various Financial Institutions, the Dividend is predicated on earnings and can be reduced or eliminated.

a) Many Financial Institutions are currently trading at deep discounts to their recent highs. If you have time then some of them may be good long-term holds.

5. Don't lock yourself into a long-term CD or Annuity that promises you a CURRENT high-yield that is actually historically low.

a) If this is a repeat of 2001 then we are in for another round of Japan style Deflation. If this is a repeat of the 60's – 70's Guns and Butter Philosophy then within a few short years we might very well be seeing run-away inflation.

6. If you have substantial capital gains on Bond Mutual Funds, you may want to cash them in, depending on your personal Tax Situation.

a) As higher yielding bonds are called and new lower yielding bonds are added, the monthly income generated by these Mutual Funds will decline.

Only time will tell whether or not the next few years will be a mirror image or a shadow of the past few years. In either even it does not hurt to be prepared. That is after all why we have Fire Drills.

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Myron Shlapak

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