Interest rates are down and may go down more. That’s great if you want to borrow money, but it’s not so hot if you want to buy bonds or put money in the bank.

So where's the best place to put your fixed-income holdings?

It depends, of course, on your time horizon, tax situation and stomach for risk. Generally, though, under today’s conditions it doesn’t pay very well to tie your money up for the long term.

And it may pay to look beyond the ordinary holdings like bank savings and money market funds. Top-rated five-year municipal bonds, for example, pay the equivalent of nearly 4.7 percent for investors in the 28-percent tax bracket. At the same time, a five-year Treasury note yields just 3.4 percent.

To stimulate a growing economy, the Federal Reserve has cut short-term interest rates — the Fed funds rate — to 4.25 percent, down from 5.25 percent just a few months ago. While there is lots of speculation about whether the Fed will hold rates steady or cut further, not many analysts expect it to raise rates, which it does to head off inflation.

Fact file: Fixed income Here are some fixed-income options to compare in a falling-rate environment. Page down for more information. — Certificates of deposit: Federally insured up to $100,000 per account. Long-term CDs currently pay about the same rate as short-term ones. — Municipal bonds: With tax advantage, these may be a good value, especially in a high-tax state. — Bond funds: You can choose from a wide variety of mutual funds, but it is possible to lose money. — Money markets: Safe, but yields fluctuate depending on market conditions. — Savings bonds: Beginning next year, purchases will be limited to $5,000 per person annually. Interest is not paid until bonds are redeemed. — TIPS: Treasury securities are guaranteed to beat infflation. Complicated, but worth a look.

Long-term rates are not set by the Fed but by supply and demand as traders buy and sell bonds among themselves. Investors worried about high risks in the stock market and the ripple effects of the subprime mortgage crisis are eagerly buying up safe securities like U.S. Treasuries. That demand drives bond prices up, and that forces yields down.

If that’s confusing, imagine a $1,000 bond that paid its owner $50 a year, or 5 percent. If demand drove that bond’s price to $1,250, the $50 payment would be just 4 percent of the bond’s value. (It works the other way, too. If prevailing interest rates rise, prices of older bonds fall, since no one will pay full price for a bond with a below-market yield.)

The bond’s owner would be pretty happy about a price gain. But it takes an expert to make money speculating on changes in bond prices. Most ordinary investors focus on the yield – the steady interest earnings.

And for them, the picture is not pretty. Yield on the 10-year U.S. Treasury note, a benchmark for long-term rates, has fallen to about 4 percent, compared to 5.25 percent last summer.

While international traders with billions to invest may have no choice but to buy Treasuries, small investors have other options.

Certificates of deposit
The average 12-month certificate of deposit sold at a bank pays 4.4 percent, according to Bankrate.com. And your principal would be insured by the federal government, making it just as safe as a savings account. Invest in a Treasury instead and you would earn less and risk losing principal if interest rates were to go up.

Usually, you get a higher yield if you agree to tie your money up longer. But these are unusual times: Yields are virtually the same for five-year CDs as for one-year ones.

The only reason to tie your money up for five years or longer would be to lock in today’s rates in case yields fall further. No one knows for sure what will happen, but yields are already pretty low by historical standards.

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