Bond Funds Continue to Draw Investors

Investors, buoyed by falling interest rates and skittish over volatile stock prices, are continuing to flee to the relative safety of bonds.

More than $2.5 billion poured into taxable bond mutual funds this week. It is the biggest inflow in more than three years and continues a trend that began last month, AMG Data Services said Friday.

The inflows in the week ended Wednesday cut across all bond sectors and overall were the largest since the first week of January 1998, according to AMG, which tracks fund flows.

Meanwhile, mutual funds investing in junk bonds, which have been the belles of the ball in U.S. bond markets this year, enjoyed their fifth straight week of big cash inflows. They took in $694 million, AMG said, and for the year have taken in more than $3.28 billion.

Taxable bond funds, especially those investing in corporate bonds, got successive shots in the arm from the Federal Reserve twice cutting interest rates by half a point in January to keep the U.S. economy out of recession.

“There is the message that [Fed Chairman] Alan Greenspan will take care of everyone,” said Carl Wittnebert, director of research at Santa Rosa, Calif.-based TrimTabs.com, which also tracks fund flows.

Falling interest rates boost bond prices, which helps investors in bond mutual funds. Unlike bondholders who buy individual bonds and hold them to maturity, fund investors can benefit from, or be hurt by, price fluctuations because their funds never “mature.” That has been reflected in fund performance. Junk bond funds are up 7.1% year-to-date, according to fund tracker Morningstar Inc., and long-term government bond funds are up 1.9%.

Stock prices, meanwhile, have failed to recover from last year’s broad-based declines. Technology funds are down 2.3% so far this year, while funds that invest in large growth stocks are down 2.4%. (All fund performance figures are through Thursday.)

Investors pulled millions of dollars out of bond funds last year, when fixed-income funds were among the best-performing investments.

“When [people] see the destruction in some of their stock portfolios, they sometimes say perhaps they should look at another asset class that did really well,” said Eric Jacobson, senior fixed-income analyst at Morningstar.

Last year, intermediate-term bond mutual funds returned 9.4%, including interest, according to Morningstar.