Bond Funds to Own Today - TheStreet

U.S. Treasury bills and money-market funds that hold them provide a nearly bomb-proof shelter from today's investment maelstrom. With the threat of inflation receding because of the softening economy and the pullback in the price of petroleum, fixed-income fund investors are likely to seek heftier returns than the anemic yields that T-bills have provided.

Taxable and tax-exempt bond fund objectives that performed well in the latest month --along with category-leading funds -- appear at the end of this story. Because the investment banking, brokerage and commercial banking tumult was already unfolding at the time, these fund categories would be a logical place to hide from the current investment mess.

As the U.S. Treasury has the authority to print money, its obligations are considered certain to be honored. So while Treasury notes and bonds are moderately more risky than T-bills because of their more distant redemption dates, they have a similar safety profile. This was reflected in the 1.20% advance in the average U.S. Treasury fund in the latest month. A leading fund in that group is Wasatch Hoisington U.S. Treasury (WHOSX) - Get Report , which returned 3.9% for the month and 10.5% over 12 months.

U.S. government and agency notes and bonds are a hair riskier than Treasury securities. Consequently, the average return of that category of bond funds, at 1.08% for the month, was fractionally less than that of Treasury funds.

Long government bond funds, because of the more distant maturity dates of their holdings, are more susceptible to nervousness about price erosion due to inflation. But with economic activity muted and crude oil prices falling, long government bond funds are likely to gain potential as relatively safe fixed-income refuges for assets.

The risk inherent in any long-maturity bond is that higher interest rates result in lower bond prices. This inverse relationship between bond prices and interest rates applies to all bonds, including corporate bonds, munis, government issues and Treasuries.

The municipal bond market was rattled in recent months by threats to exemption of income from state tax collectors -- an issue that has been resolved in favor of the bond issuers. Credit-rating-downgrade threats to insurers of muni bonds and problems in the auction-rate securities markets also impacted tax-exempt bond funds. But both national and insured muni funds advanced close to a full percentage point in the most recent month.

Yields on many muni bond funds, when adjusted for their favorable tax treatments, now stand competitive with the best taxable fixed-income funds.