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Safety-Minded Investors Are Turning to Quality Bonds

Mutuals: Buyers chase Treasury funds and shun 'junk' funds.


Safety--not yield--appears to be foremost on the minds of mutual fund investors fleeing the volatile stock market for the relative calm of bonds. And that prudence appears to be paying off.

Investors plowed an estimated net $1.8 billion into U.S. government and mortgage-backed bond funds in July, according to, a Santa Rosa-based research firm. That's the highest monthly total in five years. And estimates for August are even higher.

High-quality corporate bond funds also are seeing major inflows of new money. AMG Data Services reports that "investment-grade" corporate bond funds are currently seeing net inflows of about $500 million a week, up 30% from June levels.

By contrast, in the seven days ended Aug. 12, risk-averse investors pulled a net $611 million out of high-yield "junk" bond funds.

"This is a classic flight to quality," says Bob Kern, manager of the Safeco High-Yield fund. "We've seen it all year long. When Asia began to crack, we saw the rally in Treasury bonds begin."

It's also a case of dollars chasing returns: Thus far this year, the typical mutual fund that invests in U.S. Treasuries has delivered a total return of 5.24% (total return equals share price appreciation plus interest income), according to fund tracker Lipper Analytical Services.

The average high-quality, long-term corporate bond fund is up 4.24% year-to-date. Both of those bond fund categories now are beating the average U.S. stock fund, which was up 3.35% year-to-date, through last Thursday.

Government and high-quality corporate bond funds have fared even better during the last four weeks, as some investors have fled stocks for bonds.

The average stock fund plunged 10.49% in the four weeks ended last Thursday, while the typical U.S. Treasury bond fund gained 1.08%.

Money pouring into high-quality bonds has pushed market interest rates lower, thus boosting the value of older bonds. Annualized yields on longer-term Treasuries have fallen to the 5.55% range.

But interest rates on dicier bonds--such as U.S. corporate junk issues--are rising as investors shun high-risk securities. The average junk fund has lost 1.69% of its value since July 16, though year-to-date the return is a positive 3.45%.

Worse, the average emerging-market bond fund lost a stunning 11.7% from July 16 to Thursday, Lipper says, as many foreign bond and stock markets tumbled in value.

Some emerging-market bond fund yields now exceed 11%, double U.S. Treasury yields.

But "if people are looking to preserve capital, they won't be stepping out of stocks into high-yield funds," said Lyle Fitterer, co-manager of the Strong Short-Term Bond and Strong Advantage funds.


Bond Funds Pour It On

As investors have shoveled money into bonds over the last four weeks--seeking a safe haven amid a tumbling stock market--interest rates on high-quality bonds have been pushed lower. That has boosted older bonds' values, lifting their "total return" (principal change plus interest income). But higher-risk bonds, including junk issues and emerging-markets debt, have fallen in value. Average returns for key bond mutual fund categories:


July 16 Year-to-date Bond fund category to Aug. 13* (to Aug. 13)* General U.S. Treasury +1.08% +5.24% General U.S. government +0.75 +4.28 General tax-free municipal +0.66 +2.81 Intermediate-term U.S. government +0.66 +4.13 Intermediate-term corporate +0.59 +4.30 Long-term corporate, high-quality +0.56 +4.24 Short-term U.S. government +0.47 +3.34 Short-term corporate +0.47 +3.55 Long-term corporate, lower-quality +0.07 +3.75 Flexible income --0.76 +2.20 High-yield corporate (junk) --1.69 +3.45 Multi-sector --1.81 +1.44 Emerging markets --11.70 --11.69 Avg. U.S. stock fund --10.49% +3.35%


*Total investment return

Source: Lipper Analytical Services

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