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By Christine Benz and Eric Jacobson | 06-26-2013 01:00 PM

Second Quarter in Bonds: A Damage Check

Many managers are of the mind that rates have gone about as far as they're going to go for a while, so investors probably don't want to exit the bond market while their funds are down, reports Morningstar's Eric Jacobson. Plus, get an update on fund category performance in the second quarter as well as updates on fund leaders and laggards, including PIMCO Total Return.

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

After a strong start to the year, bond market performance has fallen off a cliff since early May. Joining me to provide some commentary on bond market performance is Eric Jacobson. He is a senior fund analyst with Morningstar.

Eric, thank you so much for being here.

Eric Jacobson: Hi, Christine, great to talk to you.

Benz: Eric, it's been a tough market for bond fund investors in recent months. Let's talk specifically about some of the hardest-hit categories since yields began to go up. We've seen long-government bonds hit hard, obviously, but what other categories have been affected?

Jacobson: Well, as you probably expect, the general, or more general, long-term bond category also has been clocked pretty good. For the quarter-to-date, it's down almost 5.5%.

The one area that I think a lot of people didn't really think about, if not expect ahead of time, was that inflation-protected bonds have gotten smoked pretty badly, too. They're down almost 7.9% for the quarter.

And one other area that is sort of off the big radar is high-yield municipals. They're down almost 7% for the quarter, and I think a lot of that has to do with liquidity in that space in particular.

Benz: I want to drill into muni bonds in a second, Eric, but before that, I wanted to get your take on another hard-hit bond sector, and that's emerging-markets bonds. What's going on there, and why have they been hit so hard in this recent downturn among interest rate-sensitive bond types?

Jacobson: That's another one that I think a lot of people didn't expect, because the talk of late has been so positive about emerging-markets bonds and the trends in fiscal health and so forth. But, as it turns out, there's been a lot of selling. A lot of it people believe to be of a technical nature, in the sense that the selling is begetting selling, and it's driving down prices. There is also some interest rate sensitivity there that a lot of people don't think about in the sense that emerging-markets bonds can be pretty tied to where Treasuries go on occasion.

The other thing is that, what's been going on in the market in general has been somewhat negative for commodity prices. If you look at the commodity broad basket funds, for example, they're down almost 9% for the quarter. And when you have commodity prices weakening, very often that spells problems for emerging markets that export a lot of commodities.

Benz: There's obviously been a lot of concern about slowing growth in China perhaps affecting commodities prices.

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