The iShares Barclays Aggregate Bond Fund (AGG) has notched gains
of 2.4% so far this year. This index, which is a measure of the
investment-grade debt, reflects the positive that bond funds have
been enjoying so far this year.
The low-rate environment is most likely to continue for some more
time and perhaps the baby boomer generation is not yet ready to
give up on their bond funds. A low interest rate environment is
favorable for investments in bond funds. This stems from the fact
that the market value of a bond is inversely proportional to
Coupled with the low-rate environment, economic data has been mixed
of late and the geopolitical tensions have sparked volatility in
equity markets. Also, the benchmark 10-year Treasury yield is down
to about 2.5% level from 3%, reflecting inflating Treasury prices.
Investing in investment grade bond funds is a prudent step in the
current scenario. However, before we cherry pick the top 5
performing investment grade bond funds of this year so far, let's
look into what investment grade bonds are.
Definition of 'Investment Grade'
Bonds are assigned ratings based on credit quality. Bond rating
firms, like Standard & Poor's, assign the ratings using upper-
and lower-case letters. Usually, 'AAA' and 'AA' (high credit
quality) and 'A' and 'BBB' (medium credit quality) are the
investment grade bonds.
Government bonds, or Treasuries, are not assigned any rating. They
generally qualify as the highest credit quality bonds.
Federal Reserve Trims Bond Buyback, Rates Remain
The Federal Open Market Committee (FOMC) in its latest two-day
policy meeting gave no hints about the timing of an increase in the
federal funds rate. The Federal Reserve said the rate hike may take
"considerable time" after the end of its bond buying program.
Meanwhile, the FOMC stuck to its plan of steadily wrapping up the
quantitative easing program by announcing another $10 billion cut
to the bond-buying program. The monthly purchases of Treasury and
mortgage-related assets now stand at $25 billion.
The U.S. economy rebounded in the second quarter with GDP growth
coming in stronger than expected. According to the "advance"
estimate by the Bureau of Economic Analysis, the second quarter
output of goods and services produced by labor and property located
in the United States increased at an annual rate of 4.0%, more than
the consensus estimate of an increase by 3.2%.
This rise in second quarter GDP was in sharp contrast to first
quarters' decline in real GDP by 2.1%. First quarter GDP was
revised from an earlier estimate of a decline by 2.9%. The US
economy had contracted in the first quarter for the first time in
three years. Harsh winter weather was cited for hampering business
operations and slowing down construction.
Subpar economic growth may have played a role in yield decline this
year. However now, the recent GDP numbers are encouraging enough.
Growth will need to pick up the pace before yields jump. Inflation
too should exceed the central bank's target of 2%.
Agency Downgrade to Junk
Interestingly, Investopedia notes: "Investors should be aware that
an agency downgrade of a company's bonds from 'BBB' to 'BB'
reclassifies its debt from investment grade to "junk" status with
just a one-step drop in quality. The repercussions of such an event
can be highly problematic for the issuer and can also adversely
affect bond prices for investors. Safety-conscious fund investors
should pay attention to a bond fund's portfolio credit quality
5 Best Performing Investment Grade Bonds YTD
Here we will share the 5 best-performing year-to-date investment
grade bonds that also sport a
Zacks Mutual Fund Rank #1 (Strong Buy)
. Remember, the goal of the Zacks Mutual Fund Rank is to guide
investors to identify potential winners and losers. Unlike most of
the fund-rating systems, the Zacks Mutual Fund Rank is not just
focused on past performance, but the likely future success of the
Delaware Extended Duration Bond Fund Class A
(DEEAX) invests mostly in corporate bonds that carry investment
grade credit ratings. These ratings are assigned by a nationally
recognized statistical rating organization (NRSRO). However, the
fund may also invest a maximum of 20% in high yield corporate
bonds. Though the fund may invest a maximum of 35% in foreign
securities, the non-U.S.-dollar currency exposure is limited up to
The fund has returned 13.3% year to date.
The top holdings include Ultra Treasury Bond Future Sept14, Verizon
Comms 6.4% and South Carolina Elec & Gas 4.5%.
GuideStone Funds Extended-Duration Bond Investor
(GEDZX) seeks maximum return along with capital preservation. The
fund parks most of its assets in fixed-income securities. The fund
may invest a maximum of 30% in non-US dollar denominated
obligations. It may invest more than 30% when buying U.S.
dollar-denominated securities of foreign issuers.
The fund has returned 13.5% year to date.
The top holdings include U S Treas Bd Stripped Prin Pmt, US
Treasury Bond 3.625% and Grand Parkway Transn Corp Tex Toll 5.25%.
Vanguard Long-Term Investment-Grade Admiral
(VWETX) invests mostly in intermediate- and long-term
investment-grade securities. The securities must be of high-quality
(those with A3 or equivalent or better rating) or of medium-quality
(equivalent of Baa1, Baa2, or Baa3).
The fund has returned 13.1% year to date.
The top holdings include US Treasury Bond 4.5%, Wells Fargo &
Co New 5.606% and Illinois St Go Bds 5.1%.
SEI Institutional Investments Trust Long Duration
(LDRAX) seeks to replicate returns of high quality corporate bonds
carrying duration of 9-14 years. The fund invests majority of
assets in long duration fixed income securities. A majority can
also be invested in synthetic instruments or derivatives with
similar economic characteristics of fixed income securities. The
fund invests in investment grade fixed income instruments that have
been either issued or guaranteed by the government.
The fund has returned 11.9% year to date.
The top holdings include NYSE/Liffe 2 Year US Treasury Note Future
Sept14, US Treasury Bond 3.625% and
US Treasury Bond 2.875%.
Principal Preferred Securities A
(PPSAX) seeks current income. It invests most of its assets in
preferred securities. Over 25% of assets may be invested in
domestic and foreign financial services industry that includes
banking, insurance and commercial finance. The fund also parks
money in real estate investment trusts (i.e. REIT) and utility
The fund has returned 9.9% year to date.
The top holdings include Jpmorgan Chase FRN, Qbe Cap Fdg Iii 144A
FRN and Prudential Finl FRN.
To view the Zacks Rank and past performance of all investment
grade bond mutual funds, investors can
click here to see the complete list of funds
About Zacks Mutual Fund Rank
By applying the Zacks Rank to mutual funds, investors can find
funds that not only outpaced the market in the past but are also
expected to outperform going forward. Learn more about the Zacks
Mutual Fund Rank in our
Mutual Fund Center
View All Zacks #1 Ranked Mutual Funds
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