(March 21st, 2012) Bond Mutual Funds have not performed well in the last 30 days. The majority of funds registered negative returns with a handful of exceptions, led by the High Yield Bond fund category.
The top performers in the last 30 days have been the High Yield and the Emerging Market Bond funds. According to Morningstar, these categories returned an average of 1.14 percent and 1.04 percent, respectively, during the month. The two fund categories also remained this year’s top performers, returning 5.51 percent and 7.32 percent, respectively, since December.
The outperformance of High Yield and Emerging Market Bond funds indicates an overall improvement in investor sentiment. Favorable economic conditions result in a higher investor risk appetite and greater demand for riskier assets like High Yield and Emerging Market bond Funds.
To understand changes in the market, it’s useful to compare the relative performance of a few related categories:
Visit our free Bond Investing Course.
Intermediate Term Bonds: Corporate vs Government
Winner: Corporate Bonds
Biggest Monthly Gainer: Principal Preferred Securities P (PPSPX)
Although both categories lost value, Corporate Bond funds outperformed government bond funds by 0.22 percent over the last 30 days. During that time the decline for Corporate Bond funds was 0.40 percent on average while the fall in Government Bond funds was 0.62 percent. An increase in corporate bond values relative to government bond values can indicate a move from safer to more risky assets OR a belief that corporate bonds have become less risky.
Government Bonds: Short vs. Intermediate vs Long Term
Winner: Short Government Bonds
Biggest Monthly Gainer: Franklin Adjustable US Govt Secs C (FCSCX)
Overall, short and intermediate government bond funds did not have much movement. Intermediate funds declined 0.62%, just slightly underperforming short-term bonds which lost 0.23% on average. Small movements in returns may have more to do with short-term supply and demand rather than long-term trends. To put these moves in perspective, long-term bond mutual funds gained 21.26% on an average over the last year.
Corporate Bonds: Investment Grade vs. Junk
Winner: Junk Bonds
Biggest Gainer: Aegis High Yield (AHYFX)
Junk Bonds with a 1.14% average return over the last 30 days easily beat Investment grade bonds. This can occur when sentiment on the US economy is improving and/or investors start looking at more risky assets to increase returns.
International Bonds: World Bonds vs Emerging Market
Winner: Emerging Market bonds
Biggest Gainer: GMO Emerging Country Debt IV (GMDFX)
Emerging Market Bonds can include countries like China, Brazil, India, Russia, and South Africa. World bonds generally refer to developed nations such as Germany, Japan, and The United Kingdom. While all international bonds did well, those of developed nations did better. This can be indicative of a two potential trends: 1) less risk of financial contagion from Europe, 2) emerging market economies are getting stronger.