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Flight to Safety a Boost to Bond Funds

Sam Patel

Despite the recent turmoil in the U.S. economy, investors both globally and domestically still have a soft spot for the U.S. dollar and U.S. government debt. Despite bad lending practices and disgraceful conduct of some Wall Street bankers as well as incompetent government officials and politicians, the U.S. still manages to inspire confidence in its future.

U.S. government debt can still attract investors looking for safety during these volatile times, a trend evidenced by the best-performing bond funds in the third quarter, many of which invest predominantly in government securities. Their performance shows a basic confidence that our tax dollars will pay for it all, balancing any risk.

The top-performing fund during the quarter was the ProFunds Rising U.S. Dollar Fund (RDPIX), which has profited from the recent rally in the U.S. dollar. With European and Asian economies now experiencing their own banking crises and slowing economies, the risk playing field has changed in favor of the U.S., and one way to play the greenback is to hold U.S. government debt.

The prices on these government securities are high by any measure, but the current environment is so extreme and uncertainty so pronounced that safety is overruling any valuation criteria. This paradigm may continue for some time. Now, factor in the rate cut from the Federal Reserve and these prices may go higher (and as a result, yields fall), but there is the counter argument that the Treasury Department's $700 billion bailout plan could cause prices to drop -- so investors interested in Treasuries should be willing and able to take on price volatility in the near and intermediate term.