Bond Funds: Best Returns In Five Years

January 13, 2003 ( - Bond mutual funds posted their best returns in five years in 2002, as low interest rates and war worries made bonds particularly attractive, according to a Reuters report.

The average bond fund returned 4.80% in 2002, much better than the average US diversified equity fund, which plunged 22.36%, in the third straight year of stock fund losses, according to Reuters, citing Lipper data.

A relatively little-known group of funds called target maturity funds stole the show. The funds, which hold longer-dated securities and move in step with long-term Treasuries, rose an average 16.67%, Lipper said.

Coming in second were Intermediate US Treasury Funds, gaining 14.83% and turning in their best returns since 1995. The third place trophy went to general US Treasury Funds, rising 12.47%.

Sour Note

However, shorter-dated bond funds turned in notably weaker performances.   Bond fund managers attributed this slower return to the decline in interest rates curbing their income payouts. For example money market funds returned only 1.22%, their worst showing in 30 years.

Lipper analysts say that high yield funds were 2002’s “rotten egg” in the bond market, slipping 1.74%.   Even a strong 5.91% gain in the fourth quarter was not enough to erase junk bond fund losses for the year.

However, the overall mood may sour some in the bond market in 2003. According to fund manager Bill Gross, currently in charge of the $66.5 billion Pimco Total Return fund, the three-year US bond bull market may be coming to a halt, predicting bond investors should expect annual gains of between 4% and 5% over the next several years.