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.

Going forward, the question on investors’ minds is how long will bond funds continue to eke out gains? One thing is sure: With lingering uncertainty over the war in Iraq and what happens afterwards, as well as the fear of terrorist attacks, tame inflation, and no sign of rising interest rates, corporate bonds should continue to enjoy a positive return environment, even if gains are much slimmer. Standard & Poor’s believes that the economy won’t start to accelerate until the second half of 2003, at which time bond fund supremacy could start to be challenged.

High-Quality Bond Funds

Best PerformersFirst Quarter 2003 Returns (%)Worst PerformersFirst Quarter 2003 Returns (%)

  • Loomis Sayles Bond/Instl (LSBDX) +6.8Federated Limited Term Fund/A (LTDFX) -0.4
  • Loomis Sayles Inv Tr Fxd Inc (LSFIX) +6.5Vintage Bond Fund (VBDFX) -0.3
  • Loomis Sayles Inv Tr Investment Grade Fxd Inc (LSIGX) +5.0Vintage Limited Term Bond Fund (AFTRX) -0.1
  • Alliance Corporate Bond Portfolio/A (CBFAX) +4.8Federated Short-Term Income Fd/Instl Serv (FSISX) -0.1
  • Loomis Sayles Investment Grade Bond/Instl (LSIIX) +4.5Turner Funds Core Fixed Income (TCFIX) +0.1

Source: Standard & Poor’s. Total returns are in U.S. dollars. Data through 03/31/03