The global rush to safety during the first three months of 2008 painted a clear dividing line between bond-fund winners and losers in the...

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The global rush to safety during the first three months of 2008 painted a clear dividing line between bond-fund winners and losers in the United States.

“It was a quarter of extremes,” says Morningstar mutual-fund analyst Scott Berry. “If you took the first-quarter returns and annualized them, you could see just how dramatic it was: Some funds are returning 15 to 20 percent, and others are losing an equal amount.”

Contrast that to the past five years. Over that period, almost all bond-fund categories offered annualized returns of 3 percent to 7 percent, according to Morningstar.

World bond funds topped the winner’s list for the first quarter as the falling dollar meant more income for U.S. investors, when interest was converted from euros, British pounds and other stronger currencies.

Inflation-protected bond funds also fared well amid spiking food and oil prices. The Federal Reserve has been slashing interest rates in hopes of keeping the U.S. economy out of a recession, further fanning inflation worries.

Government bond funds gained as investors flocked to Treasurys as a safe haven amid the ongoing global-credit crunch and prospects of declining growth in the United States.

On the losing side for the quarter were riskier assets: funds investing in high-yield bonds, which are issued by corporations with weaker credit ratings, and funds investing in loans that banks make to corporations. Much of the decline for bank-loan funds was due to selling by cash-strapped hedge funds, not an increase in defaults.

Emerging-market bond funds, meanwhile, didn’t perform as well as world bond funds, which invest globally. Much of the developing world’s debt is denominated in dollars, so the funds didn’t benefit from the falling dollar.