Walter Hamilton Reporting From New York — As long as you stayed away from long-term Treasury bonds, chances are you made good money in bond mutual funds in the second quarter.
Many bond-fund categories -- including high-yield, emerging-market and even investment-grade corporate debt -- produced scorching returns as suddenly nervy investors ventured back into those sectors.
Bonds were helped by the same force driving up the stock market: optimism that the worldwide recession is abating.
Investors bet that a reinvigorated global economy would help even the most troubled borrowers repay their debts. And after the big sell-off in riskier bond sectors late last year, they couldn't resist the attractive yields.
The big losers during the quarter were U.S. government bond funds, as investors abandoned low-yielding Treasuries.
That marked a sharp reversal of last year's "flight to safety" trade, in which investors huddled into Treasuries at the expense of many other sectors.
"In the second quarter, we saw almost a mirror image of the end of 2008," said Mary Miller, head of fund giant T. Rowe Price's fixed-income group.
Not that investors should expect the eye-popping returns to continue, many experts say.
As with the recent stock-market exuberance, many experts fear that the bond rally may be overdone.
At a minimum, they say, bond prices have snapped back so sharply from last year's plunge that little opportunity remains for outsize capital gains.
"Arguably, the easy money has been made," said Chris Molumphy, head of fixed income at the Franklin Templeton fund group.
Beyond that, some analysts say, riskier segments of the market could get clipped if the recession doesn't lift as rapidly as bullish investors expect. They point out that some areas, such as high-yield bonds, lagged toward the end of the quarter on renewed fears that steep job losses would weigh on consumer spending and the overall economy for a protracted period.
"This market's gotten well ahead of itself," said Dave MacEwen, head of fixed income at American Century Investments.
Even so, the second quarter was a welcome relief to bond-fund investors who endured big hits late last year.
High-yield, or junk, funds soared 18.1% in the second quarter, according to fund tracker Morningstar Inc. Emerging-market bonds rocketed 14.6%. And long-term bond funds, which hold mainly investment-grade corporate issues, jumped 10.9%.
