April 4, 2003 –The average high-quality corporate bond fund tracked by Standard & Poor’s gained 1.5% in the first quarter on the heels of a three-year bull market for bonds. Uncertainty over the war with Iraq, as well as the timing of an economic recovery, prompted investors to seek safety and steady yields as cash continued to flood into all bond fund categories.
With interest rates at 40-year lows, it wasn’t surprising to find long-term bond funds at the top of our list. Although low rates characterized the first quarter, during which it was certain that war was imminent, an eight day stock-market rally starting March 12 caused bond yields to rise, hurting overall performance, and underscoring bond fund volatility. But as optimism for a rapid conclusion to the war started to dwindle, investors returned to bonds, and the stock market fell back to negative territory. Still, the bond market took a hit: The average high-quality corporate bond fund was up 1.8% for the year through March 11, but had only gained 0.3% for the year as of March 24.
Within the sector, long-term medium-quality bond funds, which invest mainly in corporate fixed-income securities rated ‘BBB’ or above with an average maturity over ten years, were the best performers, gaining 1.6% on average. They were followed by mid-term medium-quality bond funds, which invest in the same type of credit quality securities, but with an average portfolio maturity between five and ten years. These gained 1.1% on average. Funds that were invested mainly in corporate fixed-income securities rated ‘A’ or above, with either a long-term, mid-term, or short-term average maturity, brought back just 0.6% on average, while short-term medium-quality funds finished last, with a 0.2% average return for the quarter.