Bond Funds Outperformed in First Quarter
The first quarter of 2008 has been defined by subprime issues, as well as what has been dubbed a credit crisis.
This instinctively conjures the idea that debt investments are a dangerous place to invest in such times and they may well be. However, when we look at the average returns by category of bond funds, our data show that they have, on average, held up very well given the market turmoil. In fact, they've held up much better than funds invested in stocks.
At a time when capital preservation is more important than return on capital, the bond market has served this function, on average, much better than the equity markets, which have experienced some dramatic negative returns over the first three months.
The only category of bond funds with notable negative returns are high yield and loan participation funds, and even these funds did not do that bad given the turmoil in the markets.
The table below effectively suggests that the bond market was a far better performer than the stock market despite credit concerns.
One of the key reasons for this apparent contradiction may lie with the recent actions of the
Federal Reserve
to shore up the financial system by providing liquidity and/or lowering interest rates, which caused investors to bid up the price of bonds that may not be directly exposed to the credit crisis.
If investors are of the opinion that the Fed will continue to intervene in the markets, bond funds may be the place to invest in the second quarter as well. However, investors should note that instruments such as Treasuries are very highly priced at present, as evidenced by their very low yields (prices and yields of bond instruments move in an inverse relationship).
Looking at individual funds within each category the table below has some suggestions for investors into the second quarter, if they are of the opinion that the worst of the credit woes are behind us.
However, investors should also consider the separate issue of recessionary forces that are likely to present themselves more fully in the second and third quarters of the year. Should this occur, the ability of bond funds to repeat their first-quarter performance is unlikely without further Fed intervention.
NAME | TICKER | TSCR Grade | 1 Month Return | 3 Month Return | Category |
Direxion 10 Year Note Bull 2.5X Fd | DXKLX | C | 2.84 | 14.84 | US Treasury |
Rydex Ser-Dyn Wekng Dlr 2x Stgry A | RYWDX | U | 5.52 | 14.02 | General Bd - Investment Grade |
Dreyfus Premier Intl Bond A | DIBAX | U | 3.62 | 11.71 | Global Income |
GMO International Bond III | GMIBX | C- | 3.47 | 9.2 | Corporate - Investment Grade |
ProFunds-Falling US Dollar Inv | FDPIX | C | 2.91 | 7.02 | General Mortgage |
Delaware Inflation Protected Bond A | DIPAX | C | 0.47 | 6.02 | US Government - Short & Interm |
BlackRock Inflation Prot Bond Inv A | BPRAX | C | 0.29 | 5.81 | General Bd - Short & Interm |
Vantagepoint Inflation Prot Sec | VPTSX | C+ | 1.14 | 5.51 | US Government - Long |
ProFunds-US Government Plus A | GVPQX | U | 2.83 | 4.25 | US Government/Agency |
Direxion HY Bear Fund Inv | PHBRX | U | -0.6 | 3.81 | Corporate - High Yield |
American Century NT Diver Bd Inst | ACLDX | U | 0.11 | 3.22 | Multi-Sector Bond |
Eaton Vance Emer Market Local Inc A | EEIAX | U | -0.93 | 2.86 | Emerging Market Income |
Country VP Bond Fund | CVPLX | B+ | -0.04 | 2.51 | General Bd - Long |
Fidelity Sh-Interm Muni Inc | FSTFX | A- | 1.24 | 1.76 | Municipal - National |
T. Rowe Price MD Sh-Term T/F | PRMDX | A- | 1.01 | 1.73 | Municipal - Single State |
SEI Tax-Exempt Tr-NY Muni Bond A | SENYX | C | 2.05 | 1.31 | Municipal - Insured |
RMK Sel Interm T/E Bond A | RTEAX | C- | 1.76 | 1.12 | Municipal - High Yield |
Calvert Ultra-Short Floating Inc A | CULAX | U | -0.18 | 0.45 | Loan Participation |
Sam Patel, CFA, is the manager of mutual fund research for the TheStreet.com Ratings.
In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.
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