The Federal Reserve has supported the bond market by keeping its target rate for overnight loans among banks between zero and 0.25 percent since December 2008 and embarking on three rounds of unprecedented asset purchases. The Fed said on Sept. 13 it will probably keep the federal funds target rate near zero until at least mid-2015.

That helped bonds outperform stocks last year even with borrowing costs near record lows. Bond funds returned an average 6.1 percent in 2011, and stock funds lost an average 5.7 percent, data compiled by Morningstar show. This year the average stock fund has returned 13 percent as of Sept. 30 compared with 6.7 percent for the average bond fund, Morningstar data show.

Bond 'Crisp'

Managers of some of the largest bond funds have warned rates can't stay low forever, and investors in bonds may be poised for losses. Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., said the U.S. must begin to close the gap between spending and debt or inflation will result.

"Bonds would be burned to a crisp," Gross, whose Pimco Total Return Fund has $278 billion in assets, wrote in his Oct. 2 investment outlook.

Jeffrey Gundlach, chief executive officer of DoubleLine Capital LP, said on Sept. 13 that U.S. Treasury 30-year bonds have "incredible downside." BlackRock's Fink, CEO of the world's biggest money manager, has been urging investors to get back into equities.

Old Adage

Gross has been buying Treasury Inflation Protected Securities, or TIPS, as a way to profit from a likely inflationary situation in the next few years. To account for interest rate risk, Gundlach maintains an allocation to both agency mortgage-backed securities and non-agency mortgage securities, which don't have an explicit or implicit guarantee from the U.S. government.

Many investors don't understand what could happen to their bond fund investments in a rising interest-rate environment, which is an issue today because rates are at "rock-bottom," said Bullard.

Martin Sokol, 75, said he didn't know until earlier this year that his investments in bond funds may be vulnerable to losses if interest rates rise.

"I only realized that within the last six months," after reading more about interest rates, said Sokol, who has a family-owned leather company in Queens, New York. "I go by the old adage: whatever your age is, that's what you should have in fixed income."