(Fortune) -- The bond rally of 2008 to 2010 has been epic, but alas, all signs are that it has peaked. Investors plowed $303 billion into U.S. bond mutual funds over the 12 months ending March 31 (compared to a $9.6 billion outflow for U.S. stock funds). Normally stodgy U.S. corporate investment-grade bond prices have jumped 19%, extending their longest rally since 2003. "From a longer-term investor's viewpoint, that is not good news," says Dan Fuss, who manages the $19 billion Loomis Sayles Bond Fund (LSBRX) and has been investing in fixed income for 52 years. Prices are up and yields have fallen. That leaves fixed-income investors in a quandary: Suffer with a puny 3.4% yield on 10-year U.S. Treasuries or buy pricey corporate bonds that are susceptible to inflation and rising U.S. interest rates. Even fixed-income guru Bill Gross of Pimco cautions that bonds have seen their best days.
It's simply not a good time to make a one-time bet on most bonds. Instead, Fuss says, investors should embrace the virtues of dollar-cost averaging -- contributing steadily over good markets and bad -- in a broad pool of bonds, such as Pimco Total Return Fund (PTTAX) (or even Fuss's own Loomis Sayles fund, which has returned 9.3% annually in the past 10 years to beat 91% of its competitors). Fuss's best guess is that U.S. interest rates will rise for 20 years, crimping returns. He trusts managers like Gross to navigate higher rates and inflation, which drive down bond prices.
Some managers are finding creative ways to juice returns. Many of these strategies are impossible -- and unwise -- for amateur investors to implement on their own. But getting a diversified taste of such approaches can be a useful part of a broader bond portfolio. For example, consider the $34 billion Templeton Global Bond Fund (TPINX), which has beaten 97% of competitors in the past decade with 11.5% annualized returns. Manager Michael Hasenstab doesn't hold any U.S., Japanese, or U.K. government debt. Instead, he's targeting growth in Asia and Brazil. Hasenstab is using local currencies to buy short-term debt with a 4% yield in countries like South Korea and waiting for interest rates to rise, which in turn strengthens their currencies. "You're getting a high yield with a currency that is undervalued," he says. He also holds Brazilian seven- to 10-year government bonds yielding 12%. He thinks Brazil's conservative fiscal policy will protect against a destructive spike in inflation there.
Jason Brady, co-manager of the $5 billion Thornburg Investment Income Builder Fund (TIBAX), which has returned 27% in the past year (beating 93% of competitors), is girding for inflation. But instead of piling into gold or TIPS, he's buying five-year Australian government bonds, yielding 5.4%, in local currency. With well-capitalized banking, low consumer debt, and a commodity-based economy, Australia is a safe harbor from inflation. "The underlying fundamentals of Australia are very, very good," he says.