Though General U.S. Treasury Funds lost 4.77 percent for December to finish the year down 6.47 percent, notes Jeff Tjornehoj, research manager for the U.S. and Canada at Lipper, some fund groups faired much better for the full year.

Meanwhile, taxable money market funds earned 17 basis points on average for 2009, he says, though big money could have earned 32 basis points in institutional money market funds.

High current yield funds rose 2.87 percent in December and had annual returns of 46.41 percent, according to Lipper. But muni debt funds had a disappointing fourth quarter, falling 1.01 percent, still managing a gain of 15.52 percent for the full year.

Treasury funds lost ground in the fourth quarter, and general U.S. Treasury funds (-6.47 percent) produced the sole negative return for the full year in the bond funds universe. “Long-duration Treasuries were the hardest hit, with benchmarks such as the Barclays Capital U.S. 20+ Year Treasury Bond Index falling over 20 percent for 2009,” he notes.

Treasury debt was rolled into the market in unprecedented amounts in 2009, explains the Lipper analyst, yet investors had the appetite to down it all without too many complications. Near the end of the year, a few auctions started to get messy, but observers noted that valuations were pretty rich by then.

Shorter-dated Treasuries held up much better and left short U.S. Treasury funds with a skimpy — but still positive — annual return of 65 basis points. Meanwhile, TIPS Funds took advantage of the inflation fears stoked by huge issuance and finished the year up 10.75 percent, despite giving back 1.94 percent in the volatile December market.

“The nation’s corporate debt market sprang to life in 2009 after credit markets were left for dead the year before,” Tjornehoj explains. Investment-grade corporate debt bonds gained more than 21 percent for 2009, according to Bank of America data, their best performance since a 21.6 percent return in 1995.

Corporate debt BBB-rated funds gained 21.13 percent for the year, owing to a bit more junk in their portfolios than the benchmark. The classification’s higher-quality peer — corporate debt A-rated funds — ticked up 15.18 percent. Both groups benefited from the narrowest spreads versus Treasuries in two years.

Still, neither group could compare to high current yield funds, which hit the ball out of the park for 2009 with an incredible 46.41 percent return, Lipper reports. Issuance also reached a record level; Thomson Reuters data tracked nearly $146 billion going to market. This is three times the amount issued through November 2008 but slightly less than what JP Morgan estimates will be issued in 2010.

The average high current yield fund couldn’t top the benchmark ML High Yield Master II Index, which returned nearly 52 percent in 2009. Nonetheless, investors added nearly $30 billion to junk bond funds for the year.

World income funds also posted a great number (up 18.84 percent), led by emerging markets debt funds, which returned 32.49 percent for the year. International income funds gained 10.84 percent for the year, after giving up over 3.6 percentage points of return in December.

Long-term single-state municipal debt funds rose an average 15.52 percent for the year, led by Maryland Muni Debt Fund’s 20.10 plus return.

“The news this year was Build America Bonds (BABs), which did more to invigorate the $2.7-trillion muni debt market than many expected at their genesis,” says Thornehoj. “BABs accounted for about 21 percent of all muni debt sold through November, and their issuance is expected to spike from $55 billion in 2009 to something north of $100 billion in 2010.”