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By Christine Benz and Sarah Bush |

Quality Prevails Among Bond Funds in Third Quarter

Emerging-markets and high-yield bond funds were the hardest hit last quarter, while funds with exposure to Treasuries and higher-quality issues outperformed, says Morningstar's Sarah Bush.

Christine Benz: Hi, I'm Christine Benz for As stocks fell during the third quarter, high-quality bonds held their ground. Joining me to provide a recap of third-quarter bond-fund performance is Sarah Bush--she is director of fixed-income strategies for Morningstar.

Sarah, thank you so much for being here.

Sarah Bush: Thanks for having me, Christine.

Benz: A tumultuous quarter for stock investors. Let's discuss how bonds performed, but let's start by backing up and talking about the Federal Reserve's role in all of this. They backed off raising rates in September. What's the outlook for what 2015 will mean in terms of the Fed's actions? Do people think that the Fed won't act anytime this year?

Bush: That was definitely one of the big stories of the quarter--that the Fed didn't raise rates. In trying to figure out what happens from here, I think it's important to understand why the Fed hasn't raised them. They mentioned that inflation was running below their target and also that global turmoil, both financial and otherwise, is a potential break on economic growth here. So, I think that those are two factors they are definitely looking at.

As we talk to managers, I think there are more and more who think that we probably won't see the Fed raise until 2016--certainly late 2015 at the earliest. The CME has a projection around when the Fed futures suggest that the Fed will raise, and we're now looking at a very low, less than 10% probability in October and just under, I think, 40% for December. So, I think there are still a lot of questions out there about whether we're going to see a raise this year.

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