Mortgage securities a higher-yielding option

You can't say we don't have choices. We can lose our money in a quick, disastrous way by investing in common stocks. Or we can lose our money in a slow, methodical way by investing in short-term fixed-income securities.

While the agony of the stock market is thoroughly understood, the tiresome misery of fixed-income investing is less clear.

So let's do a quick scan of the fixed-income universe relative to inflation. According to the Department of Labor, the Consumer Price Index, excluding food and energy, was rising at a 2.3 percent annual rate at the end of June. That means a taxpayer in the 27 percent tax bracket would need to earn 3.15 percent before taxes to "stay even" with inflation.

Unfortunately, 3.15 percent is difficult to find.

You won't find it in money-market mutual funds. They earn an average of 1.3 percent.

You won't find it in short-term certificates of deposit, either. You have to commit to a two-year CD, according to www.banxquote.com, to get a 2.62 percent yield. Ditto U.S. Treasury obligations. The yield on a two-year Treasury is only 2.28 percent.

Long term? The yield on a 10-year Treasury is a measly 4.39 percent. And falling.

So where do we invest for yield?

I have two suggestions: GNMA funds (aka Ginnie Mae) and adjustable-rate-mortgage funds.

Ginnie Mae funds

Government-backed mortgage securities have the same credit quality as Treasury obligations.

They yield more than Treasuries of the same maturity because of uncertainties about when mortgages will be refinanced. If interest rates rise, people will hold on to their mortgages. If interest rates fall, people will refinance.

GNMA (Government National Mortgage Association) securities have been yielding 100 to 240 basis points (that's 1 to 2.4 percentage points) more than Treasuries of the same estimated maturity.