In September 2010, the National Bureau of Economic Research said
the U.S. economy had exited a painful recessionary period in June
2009. This was the official confirmation that the worst was over,
following the sharpest downturn in more than fifty years.
The number of jobs lost in this period was in excess of eight
million. The major factor responsible for this decline was a series
of questionable investments related to mortgages. The subprime
mortgage crisis led to a financial crisis of enormous proportions,
typified by the fall one of Wall Street's biggest names, Lehman
Federal Reserve Action
The Federal Reserve responded to the situation by implementing
monetary easing measures of unprecedented proportions. Initially it
lowered the Federal funds target rate from 5.25% to 2%. The
discount rate was lowered to 2.25% from 5.75%. Ultimately, in
December 2008, the Fed pushed down the rate within a range of 0 to
0.25% or 25 basis points.
The Fed also decided to significantly expand the size of its
balance sheet around the same time. In November 2008, the central
bank launched a $600 billion program to purchase mortgage backed
securities of housing-related government-sponsored enterprises. In
March 2009, it said it would purchase an additional $750 billion of
mortgage backed securities. It also made large purchases of long
term Treasury securities and agency debt that year.
A Change in Direction
With the economic recovery remaining slow until recently, the Fed
has continued with its policy of keeping interest rates at
historically low levels through open market operations. As of now,
the Fed purchases Treasury and mortgage backed securities worth $85
billion every month. It intends to keep short term interest rates
at historically low levels until unemployment declines below 6.5%
and inflation rises to 2.5%.
However, in May Fed Chairman Ben Bernanke said the central bank
would begin to reduce the quantum of its purchases gradually. He
added that quantitative easing would end altogether by 2014. This
resulted in interest rates moving upwards. Last week, the figure
touched the 3% mark, the first time such a level was achieved since
The Fed is widely expected to reduce the level of Treasury
purchases from $45 billion a month to $35 billion a month. The rise
in interest rates has already impacted bonds. However, some bond
funds have managed to ride the storm, even gaining over the last
month. We are providing you with three such choices which have
bucked the trend.
Mutual Fund Picks
Putnam Short Duration Income A
Launched in October 2011, this is a large fund with net assets of
$1.25 billion. The fund purchases a wide range of fixed income
instruments. These include money market securities and other fixed
income investments, rated investment grade. The fund is up 3.21%
over the last month.
The mutual fund holds 589 securities in all. Its top 10 holdings
make up 6.74% of its assets. Its top 3 holdings are Svenska
Handelsbanken Ab FRN, Wachovia Corp New FRN and Bk New York Mtn Bk
Ent FRN. The fund returned 3.77% over the last one year period and
has a Zacks Rank #1(Strong Buy).
American Funds Tax-Exempt Maryland A
The oldest of our choices, the fund was launched in August 1986.
The net assets of the fund are in excess of $348 million. The fund
focusses on investing in securities, returns from which are not
subject to regular federal as well as Maryland income taxes. They
must also be exempt from federal alternative minimum tax. The fund
is up 3.36% over the last month.
The fund has a total number of 216 assets. The asset it is most
invested in is Maryland St Health & Higher Ed Var Rev B, which
makes up 3.48% of its assets. The next two, Montgomery Cnty Md Hsg
Oppntys Rev Bd 4% and Maryland St Health & Higher Ed Rev Bd 5%,
together make up 2.34% of its assets. The fund has a Zacks Rank
Delaware High-Yield Opportunities A
This is a fund with a minimum initial investment requirement of
$1,000 and was launched in December 1996. This fund focusses on
investing in high yield bonds, which are rated BBB- or lower. A
maximum of 25 of its assets are invested in foreign securities. The
fund is up 3.20% over the last month.
This fund holds a total of 269 securities. Its top 10 holdings
account for 8.632% of its assets. Its top three assets are Hbos Cap
Fdg No 2 L P 144A FRN, Univision Comms 144A 8.5% and Ing Groep N V
FRN. The fund returned 12.06% over the last one year period and has
a Zacks Rank #1(Strong Buy).
With interest rates slated to rise further, bond investors may have
tough times ahead. But even in such an environment, these mutual
funds have continued to register gains, making them good additions
for your portfolio.
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