Bond Funds Post Quarterly Loss

The best thing you can say about bond mutual funds in the first quarter is that they performed about as expected--given lousy circumstances.

The average domestic bond fund posted a negative total return of 0.29% in the quarter, according to Lipper Analytical Services.

That means the average fund’s interest earnings were more than offset by a decline in principal value, as rising market interest rates devalued older, fixed-rate bonds in the funds.

Higher interest rates also hurt bond funds in 1996, limiting many fund categories to total returns of less than 5% for the year.

Among individual bond fund categories in the first quarter, “junk” corporate bond funds performed best, although they have faltered in recent days with concerns about the stock market, whose performance junk tends to track.

Short-term bond funds generally posted positive returns, as would be expected with a relatively modest interest-rate rise. Likewise, as expected, longer-term bond funds performed worst; and global bond funds were slammed by the dollar’s strength.

With the Federal Reserve Board having tightened credit March 25--and likely to tighten more to slow the economy--bond funds may face further trouble from rising market interest rates.

Still, the average bond fund’s loss of 0.29% in the first quarter was less than the average stock fund’s loss of 2%. Additional Fed rate hikes would hurt both stocks and bonds, of course. But at least many bond funds pay yields of 6% or better. That’s a buffer most stocks, and stock funds, don’t have.

How Bond Funds Fared

Here are average total returns for key categories of bond mutual funds in the first quarter ended March 31 and in 1996, as well as the funds current average annualized yields. Total return figures are interest earnings plus or minus any change in principal value.

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Avg. total return (%) Fund category 1st qtr. 1996 Avg. yield (%) Money market +1.15% +4.8% 4.7% Junk corporate bonds +0.77 +13.7 8.9 High-quality corporate +0.63 +4.6 5.9 bonds, 1- to 5-year U.S. govt. bonds, 1- to 5-year +0.59 +4.4 5.5 GNMA bonds -0.26 +3.8 6.4 Mixed bonds -0.35 +6.1 6.3 High-quality corporate -0.55 +3.1 6.0 bonds, 5- to 10-year U.S. govt. bonds, 5- to 10-year -0.58 +2.7 6.0 Calif. muni bonds, long-term -0.70 +3.7 5.1* Lower-quality corporate -0.82 +3.2 6.4 bonds, long-term General muni bonds, long-term -0.86 +2.8 4.8* High-quality corporate bonds, long-term -0.87 +2.5 6.2 U.S. govt. bonds, long-term -1.00 +1.7 6.1 Global bonds, long-term -2.17 +10.4 6.9

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*Yield is tax-exempt so true yield is higher

Source: Lipper Analytical Services Inc.