Unfortunately, things do not look a whole lot brighter for investors yearning for bigger bond coupons in today’s yield-starved world of fixed income investing.This past week, in fact, the US Federal Open Market Committee (FOMC) met for its regular gathering and decided that the US economy is muddling along at best. In response to the forthcoming challenges in the new world of slower growth, the Fed stated that interest rates would stay “exceptionally low until at least late 2014”.As of this writing the ten-year US Treasury is yielding just about two percent and most high quality bonds maturing in less than three years are paying even less. Meanwhile, money market funds are essentially paying nothing.Yet despite the challenges of the current market there are a few tricks left which can be used to exploit those anomalies that add to bond portfolio performance and make a difference in achieving a higher total return from the fixed income sector. Extra return on bond portfolios can be had by extending maturities, buying carefully selected corporate bonds offering ‘yield spread’ and trading longer-term US government bonds for income and capital gains.What happened last yearAfter a pervasive ‘flight to quality’ trend during the Third Quarter of last year, investors began to reverse course over the fourth quarter, gradually moving to a ‘risk-off’ trade which favoured US corporate bonds, emerging market debt and commercial mortgage-backed securities (CMBS) over US Treasuries. However, US Treasury bonds were still positive for the period and ended up cementing their slot as one of the best performing asset classes over the 2011 calendar year as a whole.Over the fourth quarter, 10-year US Treasury yields fell approximately two basis points from 1.91 percent to 1.89 percent while the 30-year bond yield fell just one basis point from a 2.90 percent yield to 2.89 percent at year end. For the quarter, the Citigroup 1-3 year Corporate Bond Index improved by 0.0 percent and the Citigroup 1-3 year Treasury index advanced by 0.17 percent. Mortgage-backed Agency paper posted a total return of 0.89 percent return while CMBS returned 3.11 percent.During the back half of 2011, Europe remained at centre stage with its well-publicised andseemingly endless political disputes, plethora of euro leader meetings and occasional fiscal agreements swaying markets on both sides of the Atlantic.Meanwhile, nervous investors continued to flee the trouble euro zone area pushing the euro currency down over three percent against the greenback. The euro finished the year at a new low as pessimism about finding a comprehensive solution for the region reached consensus levels.Funds leaving Europe found a home in the US dollar and were ultimately invested in US Treasury securities and high-quality dollar-denominated corporate bonds.Adding to the viability of the United States as a safe port in the credit storm, America’s economic data series began to point more solidly towards an economic recovery. Indeed, fears of a US ‘double-dip’ recession subsided as US GDP posted gains of 0.4 percent, 1.3 percent, and 1.8 percent for the first three quarters of last year, respectively. At the time of this writing, Fourth Quarter real GDP is expected to be reported at three percent, making the Q4 one of the strongest quarters since the recovery began in 2009.Best bets for 2012Taking advantage of the trends unfolding in the New Year requires being nimble and staying in close touch with the markets. While interest rates remain low, additional yield can still be had by purchasing even modestly longer-term securities. Therefore, opportunistically increasing the average maturity of the bond portfolio is a smart bet particularly now that the US. Federal Reserve has showed its hand at keeping rates low for awhile. Furthermore, as rates bob around in response to headline geopolitical events, value can be had by buying longer-dated liquid bond issues and then selling for a profit when markets move back to the ‘flight to safety’ trade. Direct Federal Reserve buying programmes such as ‘Operation Twist’ are underpinning longer-term bond prices for now.Higher paying bond issuers which are not necessarily lower quality institutions are also a good bet for the year ahead. Overall, we expect a modest continuation of the “risk-off” trend which began in Q4 and has already started to move forward into the early part of this year. We therefore see select short-term, high grade euro credits backed by ‘too big to fail’ institutions as solid investments, albeit with limited market liquidity.We also expect higher rated, US financial credits to begin to rally again as America continues to exert its leadership position in the global economy by recovering from its recession at a faster pace than both Europe and the UK. And finally, better quality emerging market debt should outperform other sectors as China engineers a ‘soft landing’ and markets begin to focus on the higher growth prospects and better fiscal positions of many emerging countries in Asia and South America. The natural resource countries including Canada, Australia and select Middle Eastern credits will likely also do well as indirect beneficiaries of the faster-growing emerging nations.Bryan Dooley, CFA is a portfolio manager at LOM Asset Management in Bermuda specialising in the areas of asset allocation, portfolio management and quantitative process. He can be contacted at 441-505-5675