Bond Funds Take Hit by Rise in Yields

Treasury yields are on the rise. Short-term yields that slipped into negative territory in December and hovered near zero for most of January have begun to inch up.

The move higher is more pronounced farther out on the yield curve. On Jan. 30, 12-month T-bill yields were up 13 basis points to 0.47% from year-end. Over the same period, the 10-year generic U.S. government yield rose nearly 63 basis points to 2.84%, while the 30-year yield gained almost 93 basis points to 3.60%.

The Federal Reserve would like to keep interest rates low to encourage borrowing by consumers and businesses to resuscitate economic growth. However, unprecedented government deficits as far as the eye can see, coupled with the expectation of record borrowing levels to pay for the upcoming stimulus package, can't be ignored. To fund this borrowing, higher rates are starting to be demanded.

Bond prices move in the opposite direction to their yields. The recent pull-back from the massive flight to quality of U.S. government debt has sent prices lower and yields up. Two of the best-performing fixed-income mutual funds in January bet on higher interest rates.

The top-performing open-end, fixed-income fund in January is the ProFunds Rising Rates Opportunity ProFund ( RRPIX), which gained 20.13% during the month. The fund is 125% leveraged to the inverse price movements of recently issued long bonds.

Similarly, the Rydex Series -- Inverse Government Long Bond Strategy Fund ( RYJUX) is designed to increase in value as bond prices fall. This resulted in a January advance of 14.31%.

The other eight funds listed below focus on various geographic segments of the municipal bond market. Unfortunately, every single one of the muni funds charges investors either a front or back load, tagging investors either coming or going.

The top-performing Eaton Vance National Municipals Fund ( EANAX) returned 12.59% for the period under review. The fund holds nationwide municipal securities to gather income exempt from U.S. federal taxes. It charges a 4.75% front load.

The next best performer of the single-state muni funds is the Eaton Vance Virginia Municipals Fund ( EVVAX), which rose 11.44%. By investing municipal securities only from Virginia, income from the fund is exempt from Virginia state personal income taxes. Exiting this fund triggers a 5% back load.

Best-Performing Fixed-Income Mutual Funds in January
Fund (Ticker) Rating
Objective
Total Return -
1 Month
Total Return -
1 Year
Total Annualized Return - 3 Years
Profunds Rising Rates Opportunity ProFund (RRPIX US) U
Government/Agency
20.13%
-24.00%
-8.55%
Rydex Inverse Government Long Bond Strategy (RYJUX US) E-
Index Fund-Debt
14.31%
-17.80%
-6.49%
Eaton Vance National Municipals Fund (EANAX US) E
Municipal
12.59%
-21.18%
-6.15%
Eaton Vance Virginia Municipals Fund (EVVAX US) E+
Muni-Virginia
11.44%
-15.67%
-4.62%
Eaton Vance Pennsylvania Municipals Fund (EVPAX US) D-
Muni-Pennsylvania
11.13%
-12.50%
-2.93%
Eaton Vance High Yield Municipals Fund (ETHYX US) E-
Municipal
11.03%
-30.05%
-9.93%
Oppenheimer New Jersey Municipal Fund (ONJAX US) E
Muni-New Jersey
9.93%
-27.23%
-9.52%
Eaton Vance New York Municipals Fund (EVNYX US) E+
Muni-New York
9.92%
-16.03%
-4.36%
Eaton Vance Georgia Municipals Fund (EVGAX US) D-
Muni-Georgia
9.86%
-10.73%
-2.18%
Eaton Vance Kansas Municipals Fund (ETKSX US) D
Muni-Kansas
9.85%
-8.43%
-0.95%
Source: TheStreet.com Ratings & Bloomberg

For more information, check out an explanation of our ratings.

Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.

More from Mutual Funds

High-Flying Mutual Funds Begin to Favor Energy but Tech Still Reigns Supreme

High-Flying Mutual Funds Begin to Favor Energy but Tech Still Reigns Supreme

60 Seconds: What's the Difference Between an ETF and a Mutual Fund?

60 Seconds: What's the Difference Between an ETF and a Mutual Fund?

Mutual Funds on Track for Record Year

Mutual Funds on Track for Record Year

Bitcoin Today: Prices Come Off Highs as Rally to $10,000 Pauses

Bitcoin Today: Prices Come Off Highs as Rally to $10,000 Pauses

Video: How to Select Mutual Funds in Your 401(k)

Video: How to Select Mutual Funds in Your 401(k)