Fed Signals Clobbered T-Bond, Muni Funds In May

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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 few meetings.

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 stimulus)."

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 0.56%.

Greenbacks Gained

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 China.

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 2.89%.

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.

Muni Moves

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 stock funds.

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 Treasury.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Mutual Funds

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