June 19th, 2012

Bond Mutual Funds had mixed performance over the last 30 days. About one third of the bonds among the major categories dropped in value. All the government focused funds, including Long-term Treasury Bonds, Inflation-protected Bonds, and Intermediate & Short-term government bond funds went up.

The two highest performing fund categories were Long Government and Inflation-Protected Bonds. According to Morningstar, these categories gained 3.91% and 1.00% respectively during the month. In general, when both corporate bonds and government bond funds rise in value, interest rates have gone down, which increases the value of their bond holdings.

However, the huge increases in value in Long-term Government Bonds and Inflation-protected Bonds cannot be attributed just to changes in interest rates. When these two categories lead the pack, it means the market is gravitating towards less risky assets. To understand changes in the market, it’s useful to compare the relative performance of a few related categories:

Intermediate Term Bonds:

Corporate vs. Government Winner: Government Bonds Biggest Monthly Gainer: Fidelity Spartan Intermediate Treasury Bond Index Advantage (FIBAX) Government Long Bond mutual funds outperformed corporate bonds by gaining 0.15% more in value on an average during the month. An increase in government bond values relative to corporate bond values can indicate a move from riskier to safer assets OR a belief that corporate bonds have become more risky.

Government Bonds: Short vs. Intermediate vs. Long Term Winner:

Long-Term Government Bonds Biggest Monthly Gainer: Vanguard Extended Duration Treasury Index Instl (VEDTX) Overall, government bond mutual funds did not have much movement except long term bonds category. The Long-Term Government Bond funds increased in value 3.91% on an average, outperforming both Intermediate and Short-Term Government Bonds which gained by 0.39% and 0.07%, respectively. The rise is long government bond funds is direct reflection of continue downward pressure on rates. The market believes that the probability …