The safest bonds, the second-quarter's weakest performers, came out on top during the third, as investors fled corporate and emerging-market issues for U.S. government securities.

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The safest bonds, the second-quarter’s weakest performers, came out on top during the third, as investors fled corporate and emerging-market issues for U.S. government securities.

It was rough going in the quarter “unless you were in agencies [such as Freddie Mac, Fannie Mae and Ginnie Mae] or Treasurys. There’s no liquidity and nobody willing to jump in the market,” says Dave Albrycht, senior managing director at Goodwin Capital, which manages $13 billion in bonds.

The average bond mutual fund was down almost 4 percent during the quarter. But ones investing in 10- and 30-year Treasurys benefited as investors flocked to safety.

Long government bonds returned 1.37 percent in the quarter and nearly 9 percent for the year ended Sept. 30.

Such bonds gained earlier this year as the Federal Reserve cut interest rates. Falling rates lift the prices of existing bonds.

But Morningstar analyst Michael Herbst warns against “chasing the category’s gains.” While government bond funds are free of credit risk, their performance can suffer if rates rise.

With the individual bonds, you don’t lose money unless you sell before maturity. (Treasurys can be purchased free through treasurydirect.gov).

Bank loans and high-yield bonds were among the worst performers in the third quarter. But Albrycht says, “It’s times like these when things look the bleakest that you have the best chances of total return.”

He’s looking at the highest quality bank loans and commercial mortgage-backed securities that he says have been “unfairly punished.”

Many of these bonds, says Albrycht, are trading as if default rates were many multiples higher than they actually are. Some issues are yielding 5 percentage points above comparable maturity Treasurys, he says.

“It’s unheard of,” says Albrycht. “Two months ago I would have told you the same stuff is cheap, but now it’s even cheaper.”

Morningstar suggests treading carefully in bank loan funds. It recommends Eaton Vance Floating Rate (EVBLX), which “is more defensive than peers,” and Fidelity Floating Rate High Income (FFRHX) for its low 0.72 percent expense ratio.