April 4, 2005 — After three years of enjoying sustained gains, high-quality corporate bond and government bond funds posted a weak first quarter, suffering under the weight of rising interest rates, a surge in long-term Treasury yields, and growing fears over inflation.
The average high-quality corporate bond fund declined 0.63% in the first quarter of 2005, while the average government bond fund dropped 0.40%. However, these performance figures outpaced broad domestic equity indices.
Corporate bonds funds with shorter durations tended to outperform their longer-duration counterparts, since shorter-duration funds are less sensitive to higher interest rates.
The top-performing high-quality corporate bond fund for the quarter, the Dreyfus Institutional Yield Advantage Fund/Inv (DYAIX), seeks to maintain a minimum average credit quality of “A” and an average effective duration of one year or less.
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“In the higher-quality corporate bond space, the high-beta sectors — like autos, telecoms and cable — were particularly weak during the first quarter, and faced selling pressure from investment-grade managers,” said Kathleen Gaffney, co-manager of the Loomis Sayles Bond Fund/Retail (LSBRX).