February Is Worst Month for Bonds in 2 Years

Mutual funds that invest in U.S. bonds didn’t escape last month’s market slump.

February was the worst month for U.S. fixed-income securities since March 1994. The 30-year Treasury bond fell 6.05% on a total-return basis as its yield rose 0.43 percentage point to 6.47%, according to Ryan Labs Inc., a bond research firm.

The average fixed-income fund lost money for investors on a total-return basis, moving into negative territory for the first time this year.

The 1,523 fixed-income funds tracked by Lipper Analytical Services Inc. were down 0.41% on average for the year, as of Thursday. World income funds were down 0.12%.

Only funds that invest in Japanese stocks were doing worse, down 1.53% on average, Lipper reported.

Fixed-income funds have recouped some of the declines in the last two trading sessions. Still, it is unlikely that bond funds recovered all their losses, analysts said.

Though losses are a fraction of what they were in 1994 when the average taxable bond fund fell 3.3%, the returns are a reminder of how investors can lose money in the bond market.

“People sometimes lose sight of the risks associated with investing,” said Jim Midanek, chief investment officer of Solon Asset Management in Walnut Creek, Calif., which manages about $600 million in fixed-income investments.

Among bond funds, Benham Target Maturities 2020 Fund, which buys zero-coupon bonds that mature in 2020, was down 12.84% as of Thursday; Rushmore U.S. Government Bond Fund was down 5.49%; and Fidelity Spartan Long-Term Government Bond Fund was down 5.24%, according to Lipper.

The recent slide prompted investors to redeem shares from taxable bond funds, according to AMG Data Services, a research group in Arcata, Calif., that tracks mutual fund money flows.

The research group said a net $47.7 million, which excludes reinvested dividends, was redeemed from taxable bond funds in the week ended Wednesday.

It marked the second time in the last 10 weeks that more money was redeemed than invested in taxable bond funds. Investors have consistently removed money from the narrower category of government bond funds, according to AMG.

Investors have been hesitant to return to government bond funds since the beating they took in the 1994 bear market.

Money has been redeemed from these funds for eight of the last 10 weeks. More than $160 million was redeemed in the latest week, AMG reported.

Investors are being hasty to abandon the government bond market, said Christopher Conkey, senior vice president at Keystone Investments in Boston.

“I think economic fundamentals justify lower [interest] rates,” he said.