Bond Funds Likely to Gain From Fear

The release of a less-than-encouraging durable goods report earlier this week prompted Treasuries to rally and their yields to fall to levels not seen since the 1980s.

The yield on the 10-year note fell to 2.91%. The durable goods report was accompanied by bad economic news across the board and the deepening concern that deflation is going to be a feature of this economic downturn -- the fear of inflation sparking anytime soon is unlikely.

The two-year note yield fell to around 1%, giving a yield spread with the 10-year of just 1.9%. The move indicates the market's belief that the slowing global economy will more than control inflation; and bond investors therefore are expecting a flattening of the yield curve going forward.

The net result of all this is that we can expect more price gains (lower yields) for Treasuries in the coming months although these gains will not be as high as previously seen.

After having been punished in September and October, U.S. corporate bonds also looked to rebound, offering positive returns but still lagging Treasuries. The various government strategies to intervene in the bond markets and get credit flowing again, including guaranteeing bank debt sales, have restored some confidence in the markets and hence the rallies in corporate and other investment-grade securities. However, there is still a long way to go before we have a fully functioning credit markets again.

This all leads to this month's newest rated bond funds, most of which are focused on U.S. government or investment grade bonds. These funds may be set to gain in the near term as volatility in all markets continues.

The investment grade funds combine government, corporate and mortgage bonds with cash holdings. Weak economic data mean that non-investment grade defaults are going to rise and hence investment-grade and U.S. government securities will continue to attract investment dollars as they provide a safe haven at a time when fear abounds.

Fund Name Ticker TSC Rating One-Month Return Three-Month Return Category Fidelity CA Sh Intrm T/F Bd Fd FCSTX B+ -0.04 -0.53 Municipal - Single State FCI Bond Fund FCIZX C+ -0.52 -3.09 General Bd - Investment Grade J Hancock II Core Bond Fd JHCDX C+ -3.99 -4.53 General Bd - Investment Grade J Hancock II US Gov Sec Fd JHUSX C+ -1.67 -0.19 US Government - Short & Interm J Hancock II Inv Quality Bond Fd JHQBX C -4.64 -7.35 General Bd - Investment Grade J Hancock II Active Bond Fd JHADX C- -5.69 -7.69 General Bd - Investment Grade Source: TheStreet.com Ratings

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