The current financial turmoil has lead to a series of unfortunate events for investors looking for safe yield. To bail out a sliding economy and housing market, the Federal Reserve is lowering interest rates to rock bottom levels, which shrinks yields paid by money market funds, CDs, and short-term bond funds. Panicked investors have bought government bonds down to pathetically low yields - 3.5% on the ten year, far less on shorter maturities. To make matters worse, these yields, after tax, are below the rate of inflation. This leaves the yield hungry between a rock and a hard place (and rock prices are rising).

A BusinessWeek article notes some options:

1. Stay Away from Treasuries
2. Look at Muni Bonds, Despite the Bond Insurer Crisis
3. Inflation Is Hard to Beat [TIPS are overpriced]
4. "Mortgage" Isn't Always a Dirty Word
5. Corporate Debt Can Offer Good Returns—But Beware

We'd add that investors might have to take on even more risk. Funds that write covered calls can generate attractive yields, albeit with far more risk than most bond funds but less than ordinary stock funds. High yield (junk) bond funds like Vanguard High-Yield Corporate (VWEHX) yield about 8.6%, now rewarding investors quite a bit more than safe debt yields for the heightened risk (even though such funds have 20% downside risk in a bad market for low-grade debt). Even stock index funds are looking attractive (thought with much higher risks than most bond funds) given the 2.37% yield on the S&P 500, which actually beats some bonds adjusting for the tax break on dividend yield. One strategy could be to start buying these higher risk / higher yield funds now with a relatively small portion of your portfolio, and if the credit markets and economy worsen, increase your stake further.

Be warned that reaching for extra yield can be dangerous (as all the hedge funds and other investment partnerships buying mortgage debt with leverage are finding out). Of course long haul, earning less than inflation is dangerous as well.

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