If gyrating stock mutual funds haven't been enough to make investors queasy, many bond funds have swooned, too. Bonds are supposed to be...
If gyrating stock mutual funds haven’t been enough to make investors queasy, many bond funds have swooned, too.
Bonds are supposed to be pillars of stability during times of tumult in the market. And indeed, the broad Lehman Brothers U.S. Aggregate bond index — which tracks taxable bonds, including Treasury notes, corporates and some mortgage securities — was up about 2.3 percent since the start of this year through April 4.
Yet a fifth of all investment-grade U.S. taxable bond funds tracked by Morningstar were in the red for that same period.
A few bond funds that placed big bets on mortgage securities have posted shockingly big drops. The Regions Morgan Keegan Select Intermediate Bond fund was down 44 percent since the start of the year and 72 percent over the past year, through April 4. State Street Global Advisors Yield Plus and Schwab YieldPlus fell 18 percent and 23 percent, respectively, from the start of the year through April 4.
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And even the relatively successful funds that invest in inflation-protected Treasury securities face new risks. If interest rates rise, the price of Treasury bonds will tumble — likely quite sharply in the short-term.
So what options remain for investors?
For those looking to put some cash in very safe investments and who are prepared to handle the low yields, a bank savings account or a money-market fund might be the way to go.
Those who already hold bond funds or are able to make long-term investments should do some research to determine if the bond fund is safe — something that is harder than it seems. Even though funds publish their holdings every quarter, it’s no simple chore figuring out which could be problematic.
Some bond funds disclose only that they own asset-backed securities, not specifying if they’re backed by mortgages. Also, the average credit quality of a fund may not convey risks. The State Street and Schwab funds that posted sizable losses in the past year both had average credit ratings of double-A or more, according to their most-recent disclosures.
To be sure, this is an unusual time for bond markets, and in some cases, it might serve investors well to hold for the long-term. If a fund has been hurt lately, investors shouldn’t necessarily dump it headlong. Try reading the manager’s recent commentary to figure out what is hurting the fund. Kurt Brouwer, a fee-only planner at Brouwer & Janachowski in Tiburon, Calif., suggests that investors might ask themselves if, based on the fund managers’ track record and holdings in the fund, they would buy the fund today. If not, it might be time to get out.