This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Bond Mutual Funds That Escape Bear Markets

NEW YORK ( TheStreet) -- The rally in bonds, like the bull market in stocks, may be slowing.

High-yield bond funds returned 32% in the past year, and intermediate-term bond funds gained 14%, according to Morningstar. Many bonds now have high prices and low yields, which could be reversed if interest rates rise in the next year, as many economists predict.

Should you avoid bond funds altogether? Probably not. Most portfolios should have fixed income for diversification. Consider putting part of your fixed-income holdings into flexible funds. These have the ability to emphasize Treasuries one year and corporate bonds the next. By trading deftly, top flexible funds limit losses in hard times. In contrast, typical bond funds hold relatively static portfolios that can be hurt when interest rates rise.

A compelling flexible choice is Delaware Diversified Income (DPDFX), which returned 9.2% annually during the past 10 years. Of the 495 intermediate-term bond funds tracked by Morningstar, Delaware ranked as the top performer for the decade. The fund achieved its stellar record by holding a mix that included Treasuries, foreign debt, corporate issues and mortgages.

By avoiding richly priced bonds, Delaware navigated through the rollercoaster markets of recent years. Before the credit crisis began in 2006, the fund had 25% of its assets in high-yield bonds, which are rated below-investment grade. But as conditions deteriorated, the fund began unloading its riskier bonds. By the end of 2007, Delaware had only 10% of assets in high yield.

The fund managers steered away from junk because they worried that the market was becoming too complacent about risk. Investors were snapping up shaky issues, and junk only yielded a bit more than high-grade bonds. "A lot of the new high-yield issuance was coming from companies that had unattractive balance sheets," Delaware manager Roger Early says.

The move away from junk proved well-timed, since many lower-rated issues collapsed during the downturn of 2008. Then by early 2009, Delaware began reversing course, loading up on junk bonds. At the time, many junk bonds yielded 1,500 basis points (15 percentage points) more than investment-grade debt. By the end of last year, the fund had more than 30% of its assets in high-yield bonds. The big junk position helped the fund climb as bonds rallied.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
AAPL $127.60 0.00%
FB $83.09 0.00%
GOOG $535.38 0.00%
TSLA $205.27 0.00%
YHOO $44.66 0.00%


DOW 18,034.93 +208.63 1.17%
S&P 500 2,100.40 +19.22 0.92%
NASDAQ 4,994.6020 +62.7870 1.27%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs