Many bond funds, which are supposed to be the pillars of stability during times of market upheaval, are suffering serious subprime mortgage investment losses. The Lehman Brothers U.S. Aggregate bond index, which tracks taxable bonds, Treasury notes, corporates, and some mortgage securities, is up 2.3% from January 1 through April 4 of this year. Yet, as reported by Shefali Anand of The Wall Street Journal on April 8, 2008, 20 percent of all investment-grade U.S. taxable bond funds are in the red for that same period.
The Regions Morgan Keegan Select Intermediate Bond fund is down 44% since the start of the year and 72% over the past year. Since the start of the year, State Street Global Advisors Yield Plus is down 18% and Schwab YieldPlus has fallen 23%.
Many bond funds have been dragged down by the massive sell off of mortgage securities because of the subprime crisis. Among the casualties are Metropolitan Strategic Fund (down 8% this quarter and 12% for one year), UBS Absolute Return Bond (down 8.5% year to date and nearly 15% over the past year), and Principal Investors Ultra Short Bond Fund (down nearly 7% this quarter and nearly 10% over the past year). Metropolitan West had more than half of its investments in mortgage and other asset-backed securities as of December 31, 2007.
Other bond funds in trouble include Morgan Stanley Inst Limited Duration (down 8% year to date), Fidelity Ultra-Short Bond (down 7.12% year to date) and Van Kampen Limited Duration (down 6.8% year to date).
All but one of these bond funds are in either the short-term or ultrashort categories.
It can be difficult for investor determine if a bond fund is safe. Some funds merely disclose that they own asset-backed securities and do not specify if they are backed by mortgages. Also, the average credit quality of a fund may not convey the fund’s true risks. The State Street and Schwab fund had average credit ratings of double-A or higher, according to their most recent disclosures. Those looking for very safe investments may find themselves attracted to bank savings accounts or money-market funds in spite of their low yields.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing investors regarding their subprime investment problems. For further information, please contact us.