Bond Funds Sail In Quarter

U.S. bond mutual funds recorded higher gains in the third quarter than they have in more than a year.

The average taxable bond fund was up 2.08 percent in the three-month period ended Sept. 30, the biggest one quarter gain since the second quarter of 1995, according to the research group Lipper Analytical Services Inc.

“This is a sharp change from last quarter when virtually all bond fund objectives finished lower,” said A. Michael Lipper, president of Lipper Analytical.

Despite the strong third-quarter performance, many bond fund groups, such as U.S. Treasury funds and “target maturity” funds, are still recording negative returns for the year, Lipper said.

“The near-term outlook for bond funds is unclear,” Lipper said. “They could outperform equity funds at some point because stock funds are due to cool off.”

The average stock fund rose 2.61 percent in the third quarter and gained 13.73 percent in the first nine months of 1996, Lipper said.

In the third quarter, bond funds got a boost from the perception that the U.S. economy isn’t as strong as earlier thought, triggering a recent rise in the bond market, Lipper said.

Those expectations were reinforced last week when the Federal Reserve decided to leave interest rates unchanged at a meeting. The yield of the 10-year Treasury note has fallen to 6.59 percent from 6.98 percent since Sept. 5.

The market for developing country debt has been the best performing this year, led by an economic rebound in Mexico and a desire for higher yields among investors in the U.S., Lipper said.

The average emerging market bond fund rose 12.89 percent on a total-return basis in the third quarter and was up 29.84 percent in the first nine months of the year, Lipper said.

Junk bond and convertible securities funds also recorded above average gains in the third quarter, Lipper said. The average “high current yield” fund rose an average 4.66 percent on a total-return basis during the quarter and the average convertible securities fund was up 3.04 percent.

For the year, junk bond and convertible securities funds were up 9.77 percent and 10.25 percent, respectively, Lipper reported.