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By Christine Benz and Eric Jacobson | 07-02-2012 02:00 PM

Bond Investing in a Teeter-Totter Economy

Following a first quarter that saw riskier assets outperform, and a second quarter marked by a flight to Treasuries, investors would do well to review the suitability of their current portfolio allocations, says Morningstar's director of fixed-income research.

Christine Benz: Hi. I'm Christine Benz for Morningstar.

Despite concerns about potentially rising interest rates, bond funds have continued to perform well so far in 2012.

Joining me to discuss some of the recent performance trends year-to-date is Eric Jacobson; he is director of fixed-income research for Morningstar.

Eric, thank you so much for being here.

Eric Jacobson: I'm glad to do it, Christine. Good to talk to you.

Benz: Eric, I'd like to start by discussing the quarter we've just closed out. It was a good quarter if you were in long-term bonds; so-so, if you were in other types of bond funds. What was going on there?

Jacobson: I think the long-term bond investors did as well as they did primarily because of what was going on in Europe, believe it or not, in the sense that there was a lot of volatility there in the political landscape, and what was going to become--what may still become--of the euro. And in those periods of uncertainty, what you tend to have, and which has continued to be the case, is people flocking to what they consider the highest quality, safest areas. So, that tends to help the Treasury market. It helped the German Treasury market as well, and it drives down yields on the long end the most, and you tend to get the best performance in those periods.

Benz: So, let's segue into year-to-date performance--that was quarter-to-date--let's talk about year-to-date. In general, I think, when you look at some of the best-performing fund categories, what you see is that risk-taking has been rewarded. Can you talk about which categories have performed best?

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