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Bonds have shed their staid image

However they might fit into your money management plans, chances are you look at bond investments much differently today from the way your parents and grandparents learned to see them.

To previous generations, bonds were a conservative place to put your money for a stable stream of income with a minimum of worry or excitement.

Today, the bond market is a complicated, often stormy world of sharp swings in interest rates and bond prices, where risk can be measured a half-dozen ways.

A prime force behind this transformation was the wave of inflation that swept through the U.S. economy in the 1970s and early 1980s. Even though that fever has long since subsided, bonds have shown no signs of a return to their former form.

"Bonds are now about as volatile as stocks," says Bradlee Perry, a veteran observer at the investment management firm of David L. Babson & Co. in Cambridge, Mass.

Love it or hate it, the new bond market is much bigger and serves more purposes than the old one ever did.

Through mortgage-backed securities, for instance, it supplies enormous amounts of credit to home buyers, smoothing out what used to be a boom-bust cycle in the housing market. Through high-yield junk bonds, it provides a prime source of capital to smaller, newer companies.

At the same time, the bond market has developed into a powerful economic and political force responding to changing business conditions with instant adjustments in the level of interest rates.

To some observers, this puts an awful lot of power in the hands of bond investors, who are famous for an almost single-minded aversion to inflation.

Since economist Edward Yardeni coined the expression "bond market vigilantes" in the early 1980s to describe the new role bond investors were taking on, the economy has suffered just one relatively brief recession, in 1990-91.

For all its volatility, the modern bond market has rewarded long-term investors. According to Lipper Analytical Services Inc., long-term corporate bond funds returned an average of 7.77 percent annually through the five years ended June 30, even with setbacks they suffered in 1994 and again in the first half of 1996.

The bond market's recent behavior certainly suggests that it remains subject to sudden ups and downs. On July 5, for example, bond prices fell sharply, and interest rates climbed as much as a quarter of a percentage point after the release of a stronger-than-expected government report on employment conditions.

So it looks pretty unlikely that bonds will regain their former stability anytime soon.

"This doesn't mean that the bond market has become a financial counterpart of Harrah's Casino," Perry concludes. "But clearly, in its riskier areas, price fluctuations have been and probably will continue to be large."