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Long-Term Government Bonds Are on a Tear, Again!

Plus, Eaton Vance launches a new fund, Columbia bond manager departs, and more.

Morningstar Analysts, 07/12/2010

Deflationary concerns and a flight to quality have combined to produce terrific returns for long-term government bond funds. The 30-year U.S. Treasury bond's yield has fallen from 4.64% at the beginning of the year to 3.99% as of July 8, 2010. The long bond last traded under 4% in May 2009, when deflation was at the forefront of investor concerns. This quick, sharp drop in yield has upped the returns of bond prices and long-term government bond funds.

The category's 14.94% year-to-date gain through July 7 is the best of all fund groups at mid-year. That's not close to the long-term government funds' 52.3% average 2008 gain, but it is far better than the 44.1% the typical fund in the category lost last year.

The best-performing fund is PIMCO Extended Duration PEDIX. It's up 22.75% in the year to date and 16.9% annualized over the last three years. It has done well in part because the fund takes on a significant amount of interest-rate risk. Its average effective duration (a measure of interest-rate sensitivity) was 26.5 years as of March 31. This means another 1% drop in interest rates would lead to a roughly 26.5% gain for the fund.

But long-term, buy-and-hold investors should beware. The only way for these funds to keep up this year's pace is for long-term bond yields to fall even further. While yields may continue to fall over the short term, with a current yield under 4%, it is unlikely these funds will make the 6% annualized nominal return the average fund in the category has posted over the last 10 and 15 years.

New Eaton Vance Fund
Eaton Vance launched a new fund last week: Eaton Vance Option Absolute Return Strategy. Four managers will lead the fund: Thomas Luster, Maria Cappellano, Kenneth Everding, and Jonathan Orseck. Per the fund's prospectus, the fund seeks to supplement income from short-term, high-quality bonds with a mix of stock options. The option strategy will consist of calls and puts on the S&P 500 Index in an effort to provide returns uncorrelated to the returns of the index. As for the fixed-income portion of the fund, the managers aim to maintain an average maturity of one year or less. The Class A shares of the fund will charge a 1.75% total fee after an expense reimbursement.PAGEBREAK

Manager Shuffle at Columbia Strategic Income
On the heels of Ameriprise's acquisition of Columbia, Laura Ostrander has left Columbia and will no longer manage Columbia Strategic Income COSIX and Columbia International Bond CNBAX. Ostrander had managed Strategic Income since September 2000 and International Bond since its inception in December 2008.

Replacing her on Strategic Income are Colin Lundgren and Gene Tannuzzo (the comanagers of RiverSource Strategic Income Allocation RSGAX) as well as Brian Lavin, a high-yield-credit analyst and portfolio manager at RiverSource. At International Bond, Nicholas Pifer from RiverSource will take over as sole manager. Pifer also manages RiverSource Emerging Markets Bond REBAX, RiverSource Global Bond IGBFX, and RiverSource Absolute Return Currency and Income RARAX.

Invesco Announces Manager Changes
Invesco recently announced numerous portfolio-management changes in relation to its recent acquisition of Morgan Stanley's retail asset-management business. Most of the manager changes involve U.S. equity value funds.

One big new hire related to the transaction is Erik Voss, who was previously the portfolio manager of Seligman Growth SGRFX. Voss was named to run multiple Invesco U.S. growth funds, including the $3.4 billion Invesco Van Kampen Capital Growth ACPAX. That fund enjoyed a strong performance under Dennis Lynch, who is remaining at Morgan Stanley.

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