FORECAST: BETTER TIMES ARE AHEAD FOR BONDS

► After a chilly January in which yields on 30-year Treasuries jumped half a point and prices tumbled 5%, the bond market has turned balmy. “At current yields of 8.5%, bonds are the place to be,” says A. Gary Shilling, a New York City economist. One reason for his optimism: in early February, Japanese investors bid heavily in the Treasury’s quarterly auction of $30 billion of bills and bonds, calming fears that rates would jump up even higher to levels that could stall the economy. Shilling and other economists think rates could start drifting down this month and reach late-1989 levels by summer; such a decline would sweeten bondholders’ returns with a 5% capital gain.

January’s bond market slump resulted largely from foreign competition. Japan hiked its interest rates steadily late last year to quell inflation and combat the roughly 25% decline of the yen against the Deutsche mark. West Germany boosted rates as well. The fat after-inflation returns available in both countries — up to a full percentage point above real returns in the U.S. — proved irresistible to foreign buyers, especially the gnomes of Tokyo, who in recent years have soaked up 15% to 45% of new U.S, debt. For now, however, Japanese and German rates are not expected to climb further.

The unexpected interest rate spike spooked stock as well as bond investors in January; the Dow Jones industrial average tumbled 6%. Shilling worries that stocks may not recover as quickly as bonds, in part because investors are still fretting over weak corporate profits. An alarming 53% of large publicly held companies reported feebler fourth-quarter earnings than analysts had expected. Shilling, who expects another round of weak earnings reports next quarter, is looking for the Dow to dip below 2500 in the coming months.

SAVINGS: HIGH-RATE MEDICINE FOR SICK THRIFTS

► The savings and loan bailout bill was supposed to end interest-rate competition in the industry by putting the weakest S&Ls — the ones that had to bid highest for deposits — under government supervision. But the rate wars haven’t stopped. Short of cash, some thrifts managed by the government’s Resolution Trust Corporation (RTC) are jacking up their CD rates as much as 0.6 points above the national averages. That, in turn, could force thriving thrifts to follow suit. Among the government-controlled S&Ls re-entering the high-rate sweepstakes is Gill Savings in Texas, the notorious high roller that has been run by regulators since February 1989. Gill’s 8.61% yield on a one-year CD is the seventh highest in the country.

Don’t automatically chase after such lofty yields. The RTC is striving mightily to sell the invalid thrifts or merge them with healthy savings institutions. Your principal up to SI00,000 is safe. But when the government disposes of a thrift, it allows the bank or S&L that inherits your deposit to reduce your rate after two weeks. In that case, you’ll either have to accept the lower rate or scramble to find a better one.

You can increase your chances of getting the promised interest rate for the full term of your CD if you stick with the soundest institutions — those listed on page 14 with at least two stars.

BORROWING: REDUCING THE RISKS OF VARIABLE RATES

► Variable-rate credit cards are becoming more popular — they now account for 30% of all bank cards, up from 25% last year. But don’t expect card rates to fall much anytime soon. Most are pegged to a common index, usually the prime rate. As long as the economy continues to skirt a recession, further cuts in the prime rate are unlikely. The reason: most banks lowered their prime before January’s interest-rate leap. So even if other rates drift downward in the near term, the prime will probably stay right where it is.

If you carry a large balance on a variable-rate card, credit experts suggest two ways to protect yourself against a sudden surge:

► Look for deals where the rate is at least one full point lower than that of a fixed-rate card and a ceiling is specified. With the national card average at 18.66%. that means 17.66% or less.

► Obtain a standby fixed-rate card with no annual fee. That way, if your variable rate soars, you can pay your balance with a cash advance from your fixed-rate card.

MORTGAGES: ARMS POISED FOR A COMEBACK

► This may turn out to be the year of the ARM. For much of 1989, fixed-rate mortgages were available for less than 10%: as a result. ARMs shrank from 58% of new mortgages at the beginning of 1989 to a mere 21% at year-end. But by February, fixed-rate loans had risen by 0.4 percentage points on average, and initial rates on ARMs were nearly two points cheaper. The widened spread resulted from January’s bond market turmoil, which mostly affected long-term rates. Mortgage rates responded quickly. The average 30-year fixed-rate mortgage jumped to 10.25% on Feb. 1 from 9.85% in mid-December, while the average one-year adjustable rate remained flat, at 8.43%. James Christian, chief economist at the U.S. League of Savings Institutions. expects fixed-rate mortgages to drift back down to about 9.9% by spring. But for the next two months, he believes that initial rates on ARMs will remain more than a point below fixed rates.