Treasury funds got clobbered in May as stocks and stock funds
continued to pull in investors.
Treasuries also took a hit when Federal Reserve Chairman Ben
Bernanke told a congressional committee on May 22 that the
central bank could begin winding down bond purchases in its next
The damage was already done when Fed officials the next day
said no easing of stimulus will occur unless the economy
continues to mend and inflation picks up.
"It may not be this year," said Charles Burge, senior manager
of $603 million Invesco Core Plus Bond Fund . "But the Fed is
getting closer to having that discussion (about tapering its
Treasury funds tumbled 3.41% in May, according to preliminary
Lipper Inc. data.
Weak U.S. GDP growth data was released on May 30. That
undermined inflation fears. TIPS funds lost 3.90% in May.
Bond fund categories with little rate sensitivity got hurt the
least. Loan participation funds eked out a 0.07% May gain.
Flexible income funds lost 0.40%. High-yield funds lost
International income funds fared worse, losing 3.48% last
month. Emerging market debt funds slid 3.52%.
Bernanke's hints of a QE slowdown boosted the U.S. dollar and
hurt emerging market bonds. Emerging market local currency debt
funds plunged 5.78% in May.
Also, several indicators showed slowing GDP growth in
The yield curve steepened as the yield on 10-year Treasuries
rose 46 basis points in May, further than the 8 basis point rise
on two-year notes.
Burge owned a five-year Treasury, whose price slid to 98.33
from 99.75 in May. That pushed its yield to 0.98% from 0.68%.
Still, that fared better than 30-year Treasuries, whose prices
slumped to 96.83 from 104.77, pushing the yield to 3.30% from
Burge expects the Fed to throttle back its quantitative easing
program in an orderly fashion. That should enable the market to
avoid unexpected disruptions.
Still, he is trimming longer-maturity bonds and adding shorter
maturities to his portfolio. He has bought new issues of
investment-grade corporates, mainly financials such as Goldman
Sachs, plus some nonagency mortgages.
All tax-exempt bond fund categories lost ground in May. Some
investors pursued income from rate-insensitive taxable
categories, says Phil Condon, chief fixed income strategist for
DWS Investments. Others pursued total return from stocks and
Condon is guarding against Fed rate hikes by trimming exposure
to the longest bonds. He's buying 25-year munis with 10-year
calls for more yield.
In May he held an Atlanta airport revenue bond with a 5%
coupon, rated A+ by S&P.
It matures Jan. 1, 2037, and is callable Jan. 1, 2022.
With its price falling 403.5 basis points to 109.17 by
month-end, its total return was -3.28% vs. -4.41% for the 10-year