Dear Mr. Berko:

I have two $60,000 certificates of deposit coming due. What do you think of the 6.625 percent Federal Home Loan Bank bonds due in 2026 that sell for a little bit less than $1,000? Are they government-insured? The yield is 6.7 percent. I would like to invest the entire $120,000 in the bonds. However, I’m willing to take some risk to increase my income if I can. And please tell me whether interest rates will continue rising, or are they ready to go down?

H.H., Fort Walton Beach, Fla.

Dear H.H.:

Federal Reserve Chairman Ben Bernanke’s comments in mid-July to the effect that the Fed may be finished raising rates brought a lot of joy to Wall Street and helped move the market up more than 200 points that day. “Gentle Ben” really believes this; however, I’m told he is having trouble leading a contentious board of governors, some of whom believe interest rates should continue higher. Apparently two of the Fed’s governors are making Bernanke’s life a bit more difficult than he bargained for. They didn’t approve of his appointment because they feel Bernanke lacks hands-on experience, maturity and the global reputation of former chief Alan Greenspan.

Though those observations are not inaccurate, I will tell you that being a Fed governor is common sense 70 percent of the time, rocket science 5 percent of the time and flipping a coin 25 percent of the time. And “the Mumbler’s” global reputation isn’t all it’s cracked up to be.

Bernanke is a little green between the toes and therefore reluctant to rebuke his private antagonists and bring them in line. But that may happen soon, and there could be a resignation from the Fed’s board of governors.

I don’t know if rates will continue higher, remain the same or work lower. It’s reasonable to assume that the end (within one-quarter to one-half point) is near. There’s a 70 percent probability that the federal funds rate will remain at 5.5 percent for the next three to five months. And predicting events in a time frame longer than that requires prescience possessed by only seven people in this hemisphere.

Yes, rates may be forced down again (nine to 12 months from now) if the country enters a recession. The Fed usually lowers rates five to eight months after it decides the economy has entered a recession.

I have a very high regard for the 6.7 percent Federal Home Loan Bank bonds due April 2026. They currently trade at $986.00 per $1,000 face value and provide a 6.78 percent current yield. These triple-A-rated bonds were created by the Federal Home Loan Bank Act of 1932 in response to the Depression, which impaired the U.S. banking system. The purpose of these bonds was to create additional funds for banks to make mortgages and loans to individuals.

Basically, the FHLB bond is a government-sponsored enterprise, or GSE, created by Congress but not “backed by the full faith and the credit” of the U.S. Treasury or federal government. Still, Wall Street treats these securities as if they had negligible risks. It believes the federal government would prevent any GSE from defaulting because of its importance in continuing public policy.

Because you’re comfortable taking a bit of a risk, consider using a few closed-end funds to increase your income. If rates are coming down in the next nine to 12 months, then fixed-income investments like bonds and bond funds should increase in market value.

So, I propose that you purchase $40,000 of the 6.625 percent FHLB bonds for $39,440 and then invest $5,000 of each of the following closed-end funds:

1. Diversified Income Strategies (DVF-$18.81) pays $1.80 for a 9.6 percent yield.

2. Zweig Total Return Fund Inc. (ZTR-$5.16) has a 50-cent dividend and a 9.7 percent current yield.

3. Evergreen Income Advantage Fund (EAD-$14) has a payout of $1.387 and a current return of 9.9 percent.

4. Credit Suisse High Yield Bond Fund (DHY-$4.46) pays 42 cents for a yield of 9.4 percent.

You would get $2,680 in interest income from the $40,000 FHLB bonds and $1,930 in dividend income from the four closed-end funds. The combined income of $4,510 would give you a current yield of 7.6 percent.

Meanwhile, keep the remaining $60,000 in a 5.0 percent money market fund for about six months and if rates remain the same or are higher, buy $40,000 more FHLB bonds and $20,000 of the same closed-end funds.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

© Copley News Service