Jan. 6, 2004 — After three years of dominance, bonds appear to have run out of steam. With equity markets rising around the world, economic conditions improving, and interest rates likely to rise, investors have been shifting assets away from fixed-income securities into stocks.
Indeed, according to data from the Investment Company Institute, taxable bond funds have witnessed net new cash inflow of $40.2 billion through the first 11 months of the year, a far cry from the record $117.3 billion posted for the comparable period in 2002.
Despite this reversal of fortune, the average high-quality bond fund still gained 4.5% in 2003, and only a handful of such portfolios showed losses, and moderate ones at that. In comparison, the average high-quality bond fund rose 7.1% in 2002.
Within the realm of fixed-income funds, high-quality bonds under-performed such vehicles as high-yield and emerging market bonds, reflecting investors’ renewed appetite for higher-risk investments.
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“The best performance among high-quality bonds this year came from the lower-quality, investment-grade corporate bonds, particularly single-A and triple-B type issues,” noted Zane Brown, partner and Director of Fixed Income Investments at Lord Abbett. “This was because they provided higher income stream, and as investors found value in higher yield, they tended to bid up prices relative to Treasuries. Yield spreads started the year rather wide, they narrowed somewhat, particularly among the lower-quality corporate issues.”