The improving economy also was an elixir for bank-loan funds, which buy pieces of floating-rate corporate loans from banks and which fell sharply last year. They surged 16.3% in the second quarter and are up 26% this year to date, though they remain down more than 10% over the last 12 months.
At the other end of the spectrum, long-term government funds lost 8.3% and are down 15% this year, according to Morningstar.
As prices of long-term Treasuries tumbled, their yields surged, with the 30-year benchmark Treasury jumping from 3.53% at the end of March to 4.33% at the end of June, though down from a nearly one-year high of 4.76% on June 10. (On Friday, the 30-year yielded 4.19%.)
Although long-term Treasuries have gotten a boost in the last month from the latest wave of economic worries, their outlook is cloudy at best. Continuing economic improvement could spur a further exodus from the sector. And investors worry that heavy issuance of Treasuries to fund the federal government's stimulus program could push up yields on newly issued securities, thus depressing prices for existing fund holders.
Meanwhile, after an explosive rally in municipal bonds earlier in the year, the tax-exempt securities cooled off but still turned in a solid performance in the second quarter.
Long-term California muni funds gained 3.4% in the quarter, according to Morningstar.
Although most analysts say California is unlikely to default on any of its debt despite the state's economic woes and budgetary gridlock, investors in the second quarter began demanding higher yields on new issues, pushing down values of portfolios holding the older, lower-yielding securities.
Many bond-market players say they like the outlook for investment-grade corporate bonds. Some also say the prospects for long-term high-yield debt remain favorable.
High-yield corporate bonds yielded about 20 percentage points more than comparable Treasuries in December.
That differential has since been cut in half, generating huge returns. But the so-called spread is still about where it peaked in the last two recessions, suggesting there are further declines in junk yields -- and price gains -- to come over time, Molumphy said.
For investment-grade corporate bonds, the spread reached 6 percentage points over Treasuries.
It's now down to about 3 points, double or more the long-term average of 1 to 1.5 points, he said.
"You're likely to see corporate debt -- investment grade and below-investment grade -- give stocks a run for their money," said Jim Sarni, managing principal at Los Angeles investment management firm Payden & Rygel.
--
walter.hamilton@latimes.com
