A mixed record for bonds

Bond investors, like stock investors, regained some confidence in April and May -- only to start losing it again in June.

The result was a bifurcated quarter for bond mutual funds that made for a mixed performance among fund categories.

Portfolios of high-quality bonds generally racked up negative returns in the three months as some investors pared their holdings, while funds that own higher-risk bonds, such as junk issues, scored gains as buyers returned.

In June, however, those trends reversed as concerns about the economy and the financial system resurged.

There's another worry that may trump all others for buy-and-hold bond investors: the continuing climb in prices of commodities, including oil. That has stoked inflation, which is the biggest long-term threat to bonds because it erodes fixed-rate returns.

The trend in the market yield on the 10-year U.S. Treasury note, a benchmark for other long-term interest rates, shows the mood shifts that have rocked the bond market this year.

The T-note yield began the year at 4.03%, then sank as Wall Street's credit crunch worsened and investors looked for a haven.

By mid-March -- just after brokerage Bear Stearns Cos. collapsed -- the yield fell as low as 3.3% as investors, fearing that the financial system could unravel, rushed into the relative safety of Treasuries.

(If nothing else, investors know the Treasury can print money to pay its bond principal and interest.)

But confidence revived in April and May after the Federal Reserve began lending huge sums to struggling banks and brokerages. Some investors began to sell low-yielding Treasuries in favor of riskier bonds, including junk issues. By late May the T-note yield was at 4.08%.

It has since pulled back, ending last week at 3.98%, amid revived fears of a severe U.S. recession that would pose new threats to the financial system.

"The consumer is in real trouble in a lot of different ways," said Jim Kauffmann, a bond fund manager at ING Investments in Atlanta.

He notes that many Americans find their personal finances squeezed by falling home prices and banks' unwillingness to lend, at a time when the economy is shedding jobs.

The government last week said the economy lost a net 62,000 jobs in June -- the sixth straight monthly drop.

The risk of a serious recession is causing some investors to again shun high-yield, or junk, bonds -- debt of companies that are rated below investment grade.