Bonds and Bond funds - Financial Education Center

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Fund Category/
First Quarter 2003 Trailing 13 weeks One Year

Taxable Bond 1.98% 8.22%

Emerging Markets 7.53% 11.50%

High Yield 5.38% 2.42%

Intermediate Gov't 0.59% 9.55%

Intermediate-Term 1.27% 9.78%

International 2.36% 16.37%

Long Gov't 0.28% 15.02%

Long Term 1.72% 10.39%

Multisector 3.15% 9.09%

Short Gov't 0.52% 6.99%

Short Term 0.75% 5.99%

UltraShort 0.73% 2.84%

Lehman Bros.
Mortgage Backed 1.96% 7.50%

Lehman Bros.
Government 3.81% 11.26%

Lehman Bros.
Aggregate 3.57% 9.93%

Municipal 0.86% 7.78%

Lehman Bros.
Municipal 3.28% 7.67%

The Best of the Best
A Look at Bond Funds
While bond funds are a safer bet than the current equity market, there is no guarantee that your money is risk free. In many cases, the risk is diminished in some funds and more volatile in others. In this special midweek look at bond funds, we will list bonds that have achieved kudos as some of the best rated funds in their respective categories.

Please be aware that all the standard disclaimers apply such as none of these funds are owned by the BlueCollarDollar or its employees unless stated and we don't recommend their purchase.

Ultra Short Term Bond Funds
These funds are designed to provide a better than money market return without any real added risk. Morningstar has reported on these funds saying "the average ultrashort bond fund has not lost money over any trailing 12-month period" since the company initiated tracking twenty years ago.
How did they achieve this feat out gaining taxable money markets fund over the last ten years? While not all of these funds are created equally and the risk between them can differ greatly, the best invest in the highest grade bonds, usually rated AAA which keeps it a very conservative investment. In this arena, conservative means missing upturns and on the other hand, dodging downturns.
Our favorite: SSGA Yield Plus SSYPX, 3 year return: 3.98%

Long Government Bond Funds
This is the category that investors run to when things look the way they have for the last three years. Corporate scandals, poor overall economic performance, and the uncertainty of the world investing theater in general made this group an outstanding performer. But that, in the opinion of many, including us, points to an end to these gains. By investing in Treasuries, the markets most interest rate sensitive securities allowed this group to post annualized gains of 11% over the last three calendar years.
Our favorite: T. Rowe Price U.S. Treasury Long-Term PRULX, 3 yr. return 12.06%

Long Term Corporate Bond Funds
This group took the brunt of those corporate scandals not so long ago. And then they staged something of a rally that has proved to be somewhat sustainable. Those high yield (read: increased risk) bonds held in many of these funds in conjunction with investment grade bonds caused problems that low interest rates couldn't always correct. This risky exposure to interest rates, the perils of holding corporate bonds for the long term, and the temptation to increase returns by adding even riskier, lower grade bonds, make these funds a tough place to drop your money.
Our favorite: Vanguard Long-Term Corporate Bond VWESX, 3 yr. return 11.82%

Intermediate Term Corporate Bond Funds
This is a very diverse group with funds looking at mortgage income, corporate bonds, and inflation indexed Treasuries. Low interest rates keep this category doing better than average balancing the loses in the corporate holdings. Should interest rates rise, these funds will be helped by those corporate holdings. The key to success in this group is how well they held up last year. If a fund can keep their expenses low, they can rise to the top without much problem.
Our favorite: Dodge & Cox Income DODIX, 3 year return 10.60%

Short Term Corporate Bond Funds
Don't kid yourself, this is not free of risk. These funds have the same corporate exposure as the long and intermediate return funds, but might, and emphasis on might, just be a good choice if the economy's rebound pushes interest rates up. But picking the right fund in this group is incredibly difficult. So many scenarios can influence the return you might receive along with duration that chance plays a big role here. The longer the duration, the better the return; the shorter the duration, the smaller the return. This seems, on the surface, to make the choice easier. It doesn't. The best funds find just the perfect mix of interest sensitivity, corporate exposure and a knack for active and nimble management.
Our favorite: Vanguard Short-Term Bond Index VBISX, 3 year return 8.1%

Multi-Sector Bond Funds
If you desire exposure to all of the risk, all of the time, this fund group found trouble in high yield bonds, low quality debt, the weaker dollar and international exposure. The average return for this group in 2002 was 6%, which of course is not to bad unless you compare it to intermediate bond funds. The strategy of combining all of these investment strategies makes little sense in most environments but should the offer of quality high yield debt and a weaker dollar, this odd group will benefit.
Our favorite: T. Rowe Price Spectrum Income RPSIX, 3 year return 7.19%

High Yield Bond Funds
What's good for stocks is good for this group. If companies show improved profits, better revenues, a lower costs, this category tends to do better when the economy does better. This is done with increased risk and a good deal of the turn around in this group is the willingness of investors to take on that very risk for better yield. This group likes news from companies that are peppered with promises to do better at cost cutting and debt reduction. That said, you can expect this to result in better returns if the equities market changes significantly.
Our favorite: Janus High-Yield JAHYX, 3 year return 3.07%