Bond Mutual Funds: Winners and Losers Report

(February 13th 2012)  Fixed Income Mutual Funds have performed well over the last 30 days. All the major categories of bond funds rose in value, with the exception of Long-Term Government Bonds, which moved slightly down.

The two highest performing fund categories were Emerging Market Bonds and High Yield Bonds. According to Morningstar, these categories gained 5.65% and 3.05% respectively during the month.

In general, when both corporate bonds and government bond mutual funds rose in value, interest rates have gone down, which increases the value of their bond holdings.

However, the huge increases in value in Emerging Market Bonds and High Yield Bonds cannot be attributed just to changes in interest rates. When these two categories lead the pack, it means the market is gravitating to more risky assets.

To understand changes in the market, its useful to compare the relative performance of a few related categories:

Intermediate Term Bonds: Corporate vs Government

Winner: Corporate Bonds

Biggest Monthly Gainer: Angel Oak Intermediate Income (ANGLX)

Corporate Bond mutual funds outperformed government bonds by over a full percentage point gaining 1.46% in value during the month. An increase in corporate bond values relative to government bond values can indicate a move from safer to more risky assets OR a belief that corporate bonds have become less risky.

Government Bonds: Short vs. Intermediate vs Long Term

Winner: Intermediate Government Bonds

Biggest Monthly Gainer: Legg Mason WA Mortgage Backed Secs B (HGVSX)

Overall, government bond mutual funds did not have much movement. Intermediate funds increased in value 0.44%, just slightly outperforming short-term bonds which gained 0.27%. Small movements in returns may have more to due with short-term supply and demand rather than long-term trends. To put these moves in perspective, long-term bond mutual funds rose 36% over the last year.

Corporate Bonds: Investment Grade vs. Junk

Winner: Junk Bonds

Biggest Gainer: JHFunds II High Income NAV (JHAQX)

Junk Bonds with a 3.05% monthly return easily beat Investment grade bonds. This can occur when sentiment on the US economy is improving or investors start looking at more risky assets to increase returns.

International Bonds: World Bonds vs Emerging Market

Winner: Emerging Market bonds

Biggest Gainer: Goldman Sachs Local Emerg Mkts Debt IF (GLIRX)

Emerging Market Bonds can include countries like Brazil, India, Russia, and South Africa. World bonds generally refer to developed nations such as Germany, Japan, and The United Kingdom. While all international bonds did well, those of developed nations did better. This can be indicative of a two potential trends: 1) less risk of financial contagion from Europe, 2) emerging market economies are getting stronger.

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