Good buys in bond funds

Though bonds have taken a disheartening beating, some analysts point to a buying opportunity ahead. You just have to be patient.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Carolyn Bigda writer-reporter, Money Magazine

(Money Magazine) -- If you were counting on your fixed-income funds to prop you up in tough times, it's been a cruelly disappointing year. Although the news headlines focus on falling stocks, the fear of bad credit is at the heart of this financial crisis - and a bond, after all, is nothing but a loan.

Every category of bond fund is down in 2008, making this one of the worst years ever for bond investors. While disheartening, the beating that bonds have taken has some analysts pointing to a buying opportunity - if you're patient.

Here's the lowdown on bond funds by category, with a few picks from the Money 70, Money magazine's list of low-cost recommended funds.

Government bond funds

2008 Total return: -0.51%

What went wrong: Nothing. Investors did what you'd expect. They flocked to Treasuries during this panic, counting on Uncle Sam as the one debtor sure to pay back. The result: Government bond funds are holding their value, but 10-year Treasury yields have fallen below 4%.

What's ahead: Most Treasuries aren't bargains now, with one exception: Treasury Inflation-Protected Securities. They're priced to beat regular Treasuries if inflation tops a mere 0.8%. From an inflation standpoint, "TIPS have the most attractive valuations since they were first issued in the late '90s," says Brian Brennan of T. Rowe Price.

Money 70 pick: iShares Lehman TIPS Bond (TIP)

Corporate bond funds

2008 Total return: -7.47%

What went wrong: In a crisis, investors tend to embrace the bonds of high-quality firms. Today the strongest outfits aren't even trusted. "The markets have savaged anything with a whiff of credit risk," says Rob Arnott of Research Affiliates.

What's ahead: Be patient. Confidence will eventually return, especially after investors realize that investment-grade bonds are yielding 8.9% - five points more than 10-year Treasuries. Given the economy, Osterweis bond fund manager Carl Kaufman says stick with the highest-quality bonds and also intermediate-term bonds, in case inflation returns.

Money 70 pick: Harbor Bond (HABDX)

Municipal bond funds

2008 Total return: -5.51%

What went wrong: Investors are worried about tax shortfalls hitting cities and states, thanks to falling property values and a slowing economy. So they've lost their appetite for municipal debt - even triple-A-rated bonds.

What's ahead: Because of their tax-exempt status, munis typically yield about a fifth less than Treasuries. Today they're paying around one percentage point more - before taxes. But aren't default risks rising? Yes, but "even in the Depression, very, very few municipalities defaulted," says Christopher Vincent of the William Blair Funds. Just be diversified and stick with high-quality munis.

Low-cost pick: Vanguard Intermediate-Term Tax-Exempt (VWITX)

High-yield bond funds

2008 Total return: -23.18%

What went wrong: By definition, issuers of high-yield - or "junk" - bonds have poor credit. Not an attractive feature today. Prices have fallen so much that you can get yields of 19%, if you want to gamble. Junk bonds tend to pay five points over Treasuries. The spread is now triple that.

What's ahead: Even so, don't take the gamble on these bonds. Sometimes yields are ridiculously high for a reason. "We're still in the early innings of an economic slowdown," says Lawrence Jones, associate director of fund analysis at Morningstar. "So it's probably not the best time to be investing heavily in high yield."

NOTES: Figures shown represent average year-to-date total returns for mutual funds in each fixed-income category. Data through Nov. 7. SOURCE: Morningstar.  To top of page

Send feedback to Money Magazine
Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
50 years of the Ford Mustang Take a drive down memory lane with our favorite photos of the car through the years. More
Cool cars from the New York Auto Show These are some of the most interesting new models and concept vehicles from the Big Apple's car show. More
8 CEOs who took a pay cut in 2013 Median CEO pay inched up 9% in 2013 to $13.9 million. But not everyone got a bump last year. Here are eight CEOs who missed out. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.