Government bond mutual funds racked up solid returns in 2000, easily beating major U.S. stock indexes, as investors' search for safe havens fueled strong demand for U.S. Treasury bonds.
But higher-risk corporate "junk" bond funds were hammered as the slowing economy slashed corporate profits and sent default rates soaring.
In 2001, though, some analysts wonder whether bond-fund performance numbers may end up looking vastly different, now that the Federal Reserve is easing credit.
Long-term government bond funds fared best last year, returning 15% on average, according to Morningstar Inc. That figure represents "total return," meaning interest earned plus the gain in principal value as market yields on Treasury issues fell, boosting the value of older, higher-yielding bonds.
Other high-quality-bond funds also performed well, led by funds that own long-term California tax-free municipal issues. That category produced an average total return of 12.9% for the year. Because muni interest is tax-free, the true return to investors was higher, depending on their tax bracket.
Top performers included Seligman Muni California Quality, which gained 16.2% in total return; Liberty California Tax-Exempt, up 15.3%; Vanguard California Insured Long Tax-Exempt, up 15.2%; and Seligman Muni California High Yield, up 14.3%.
Junk bond funds, meanwhile, had by far the worst performance of any bond sector, losing 9.4% on average. Last year was junk funds' third straight weak year and their worst in more than a decade.
But the surge in yields on junk issues now has some bargain-hunters circling. They note that yield spreads--the amount of extra yield junk bonds provide over U.S. government debt of comparable maturities--soared in 2000 to the widest levels since the 1990-91 recession.
In December, junk funds had their best one-month gain in two years, as buyers including Warren Buffett's Berkshire Hathaway Inc. snapped up some issues.
The Janus Capital fund family is known for its success with growth stocks, but 2000 was something of a switch: While many of its equity funds tanked, the Janus High-Yield fund held up well. The fund gained 2.5%, beating its average high-yield peer by nearly 12 percentage points, as manager Sandy Rufenacht kept a healthy cash level and avoided the blowups among small telecom companies that rocked many of his peers.
Other junk funds that did well include Strong Short-Term High-Yield Bond, which rose 4.9%, and Columbia High-Yield, which gained 4.4%.
Janus may not be known for its bond funds, but Newport Beach-based Pacific Investment Management certainly is.
PIMCO Total Return, the world's biggest bond fund, returned 12% in 2000, as manager Bill Gross beat his peer group, as usual: The average intermediate-term investment-grade bond fund--those that buy high-quality bonds maturing in four to 10 years--returned 9.4% last year.
Making a smart call in early 2000, PIMCO bulked up on long-term Treasury bonds, anticipating that the government would begin buying back debt, noted Morningstar analyst Russel Kinnel. Even more impressive, according to Kinnel, was the decision to scale back on corporate bonds, which Gross and his team expected to lag with the weakening economy.
Other bond funds with strong relative returns in 2000 included ISI North American Government Bond, up 14.1%; Galaxy II U.S. Treasury Index, up 13.1%; Frontegra Total Return Bond, up 13.5%; Janus Aspen Flexible Income, up 9.4%; Vanguard Short-Term Federal, up 9.2%; PIMCO Real Return Bond, up 13.5%; and Advantus Mortgage Securities Income, up 12.1%.
While international bond funds had a lackluster year, emerging-market debt paid well, with those funds producing an average total return of 11.3%. Winners included Fidelity Advisor Emerging Markets, up 21.2%, and J.P. Morgan Emerging Markets Debt, up 17.5%.
Those funds got a boost as the financial picture of some emerging-market countries improved earlier in 2000, with the booming global economy. But a slowdown in 2001 could test investors' conviction toward those bonds.
Times wire services were used in compiling this report.