Safe Bond Funds Come Under Fire
Bond funds, once a pillar of strength and stability in times of market upheaval, appear to be showing signs of trouble.
Even though the Lehman Brothers U.S. Aggregate bond index, which tracks taxable bonds, Treasury notes, corporate and some mortgage securities, is up 2.3 percent as of April 4, 20 percent of all investment-grade U.S. taxable bond funds are in the red.
As reported April 8, 2008, by Shefali Anand in the Wall Street Journal, bond funds that had substantial investments in mortgage securities are the funds most likely to be in hot water. The Regions Morgan Keegan Select Intermediate Bond Fund was down 44 percent since the beginning of the year; the State Street Global Advisors Yield Plus and Schwab YieldPlus funds fell 18 percent and 23 percent, respectively, since the start of 2008.
Other bond funds are suffering from a massive sell-off of mortgage securities related to the subprime crisis. Among them: Metropolitan West Strategic Income Fund, down 8 percent this quarter; UBS Absolute Return Bond, down nearly 15 percent over the past year; and the Principal Investors’
Ultra Short Bond fund, down nearly 7 percent this quarter.
Metropolitan West alone had more than half of its investments in mortgage securities and other asset-backed products as of Dec. 31, 2007.
As the Wall Street Journal article points out, this has been an atypical time for bond markets. And, in some instances, investors may be well served to hold on to their bond investments for the long-term. On the other hand, investors may be in a Catch 22 situation in that it’s become increasingly difficult to determine if a bond fund is really safe and if its investments are in mortgage securities or other asset-backed products.
Moreover, the average credit quality of a bond fund may not correspond to its true risks. The State Street Global Advisors Yield Plus and the Schwab Yield Plus funds showed average credit ratings of double-A or higher on recent disclosures, yet both recorded significant losses in the past year.
In the end, investors who are looking for “safeâ€Â investments may find themselves turning to old faithful - the tried and trusted investments of bank savings accounts or money-market funds.
Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
